As the market rallies, I am feeling less urgency about my notes. But events of the past two days have brought me out again.
The first is news from Procter & Gamble (PG). I have steadfastly argued that the economy, the world within which real stuff trades, can be gauged by a revenue expansion at certain bell weather companies, like PG. PG recently announced revenues. When you back out currency and acquisitions, sales rose by one percent for the first quarter, versus the prior quarter. It's not great, recall we've had two consecutive quarters of more than six percent GDP declines, so it's a start.
The other event is political. President Barack Obama rather surprised me when he refused to continue negotiating with hedge funds and allowed Chrysler to go bankrupt. Until this action, I have been quite nervous about the administration's reliance on private asset managers as a solution to many of the nation's economic woes. This presidential push-back gave me a degree of confidence that he was not so enamored with Wall Street wizards that he'd do anything to keep them in the tent.
The market is still way off its highs. Since the high, October 9, 2007, the Standard & Poor's 500 has fallen 44 percent. Nonetheless, the market is way off its bottoms. Since the year-to-date low, March 6, 2009, the Standard & Poor's 500 is up 30 percent. The stock market is not the economy, but a reflection of future expectations viewed through eyes that are either hopeful or fearful. Currently those eyes are more hopeful than they were six weeks ago.
There have been bright spots in the market, particularly in the alternative energy sector, and we've actually seen a number of stocks up over 50 percent from their bottoms: Vestas, ABB, and Air Products have rallied due to interest in energy themes. Even two retail names, Starbucks and Staples, have doubled; investors are anticipating consumer spending improvements from here.
And there is some economic hope. The Institute for Supply Management surveys purchasing executives at roughly 300 industrial companies to construct the ISM Manufacturing Index. When their index is above 50, the economy is expanding. It is moving the right way. For April it was 40.1, marking the fourth month of improvement. There are 10 inputs in the index, one of which is new orders. These were at 47.2, the highest since August 2008.
As always, I give a great deal of credit for the mood of investors on the mood of the nation. President Barack Obama delivered the most boring assessment of his first one hundred days imaginable, and the nation was quite content. The latest NBC/Wall Street Journal poll indicates that 51 percent of Americans both like Obama personally and approve of his policies. The Reuters/University of Michigan Index of
Consumer Sentiment rose from 56.3 in February to 57.3 in March, with consumers citing an improvement in confidence regarding government policy.
The elephant in the room is the credit crisis. Do I like the administration's response? Not completely. Tough regulations over hedge funds and speculation are missing. But there is a mind at work. The TARP program is taking shape. Five big firms got the chance to partner with the government and purchase assets. These five are talking about big returns for themselves and for their investors (many other firms are grousing about being left out). The program has two aspects: one is to get investors to purchase debt from toxic pools and the other is to get them to purchase equity. Buying equity (actual real estate) is really pretty smart. It means that real buyers of real property will be bidding up the largely idle commercial (and other) properties that have been dragging down the entire real estate chain.
There is progress on repairing past wrongs as well. This week, at the behest of the administration, Senator Dick Durbin, a Democratic Senator from Illinois, opened Senate hearings on the question of federal sentencing guidelines for crack cocaine versus powder cocaine. Under federal sentencing laws, it takes 500 grams of powder cocaine to generate a mandatory minimum five-year federal prison sentence, but only five grams of crack to generate the same sentence. Historically, blacks have accounted for more than 80 percent of all federal crack convictions, with whites accounting for less than 10 percent. I am not the only one to have argued that this disparity is a deliberately racist policy, but the political will to remove it has been missing, until now.
Then there is the mood of the world, also important in influencing investors' appetite for stocks. America seems to be able to communicate again. Hugo Chavez can shake Barack Obama's hand. We can discuss Cuba. Secretary of State Hillary Rodham Clinton told the Senate Foreign Relations Committee Thursday that Roxana Saberi, an American reporter of Iranian extraction is in danger and on a hunger strike in prison in Iran. Iran was not outraged; President Mahmoud Ahmadinejad has appealed for a fair trial. True, the situation in Iraq is not settled to my liking. The American death toll is 18 for the month of April, the highest this year.
All in all, I'd say that it is beginning to be clear why the market has been rallying. Now we need to think about whether it can continue. Myself, I'll continue to care more about revenue improvements than earnings. I'll want to see expanded efforts to create more consumers to bolster the economy. In this, I don't care how they get their money. Welfare receipts are as good as salaries in creating spenders. I'll be watching Washington's credit crisis response closely; this is the one that could go very wrong or very right. We are approaching the 900 level on the Standard & Poor's 500, an area of technical resistance, so I'll be watching how well we work at these levels. In the meanwhile, I am grateful that the long dark winter is giving way to spring. Here in Boston, it means the world to our mood.