Thursday, October 17, 2013

The Trauma of 2008 Has Been Bullish (excerpt)

The Trauma of 2008 threatened the existence of many companies. Credit conditions froze in the commercial paper market. Banks stopped lending. The capital markets were shut to all but prime borrowers. Inventory-to-sales ratios spiked, forcing businesses to liquidate their stocks while firing workers and canceling capital-spending plans.

As a result of that searing experience, business managers remained very cautious about hiring and expanding their capacity even as their sales recovered. Many remain cautious, preferring overtime, part-timers, consultants, and outsourced vendors to increasing full-time payrolls. Rather than expanding their facilities, they've increased shifts if possible. The primary focus is on using technology to increase productivity and profitability.

This certainly explains why the current economic expansion has been one of the weakest on record for real GDP, employment, and capital spending. On the other hand, it's been one of the best recoveries in corporate profits and margins.

The bottom line is that the Trauma of 2008 has been bullish. It should continue to be so. However, let’s not get too complacent just because stocks have performed so well recently despite the shenanigans in DC. After all, the latest deal just postpones the fiscal fistfight for a few months. Earlier this month, House Majority Leader John Boehner (R-OH) said that the government shutdown isn’t a game. Kicking the can down the road certainly is a game.

In any event, maybe now we should fear that we have nothing to fear for the next few months. My concern is that the bears have stopped growling. The immediate risk is a melt-up in stock prices as investors overcome their trauma. If greed trumps fear, then soaring stock prices to new record highs might be imminent. The problem with melt-ups is that they tend to be followed by meltdowns, or at least very nasty corrections.

Today's Morning Briefing: The Trauma of 2008. (1) No serious correction since last June. (2) Bad news doesn’t faze the bull. (3) Fretting but not selling. (4) A unified theory of the bull market. (5) Near-death experience. (6) People don’t do pain very well any more. (7) All together now: “No more Lehmans!” (8) Profitable businesses running scared. (9) Investors showing signs of anxiety fatigue. (10) Subpar growth is bullish. (11) Nothing to fear but nothing to fear. (12) High flyers. (More for subscribers.)

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