August 2, 2010
*****Wanted: Upside Catalyst
*****China and U.S. Job Growth
*****35% Gains for this Stock
Corporate earnings are doing their part to sustain economic recovery and give
stock valuations some upside potential. It should also be clear, however,
that earnings alone are not enough to push stock prices higher.
We know that earnings have been driven by cost-cutting, corporate investment
in technology and steady consumer spending. But at present, none of these
catalysts have a lot of upside. Or, maybe it’s more accurate to say that
investors don’t see these catalysts as having much upside.
Strong corporate spending is the result of pent up demand as corporations
deferred spending plans during the recession. Cost-cutting made corporations
lean and mean. But without an increase in demand, the effect on earnings
growth will become limited.
Then there’s consumer spending. The consumer has done well supporting
economic growth in the U.S. And there’s even some hope that spending could
increase, if we project that a higher savings rate gets converted into
spending at some point down the line.
Still, it’s clear that the U.S. economy needs the labor market to improve.
Anecdotal evidence that a pickup in hiring is around the corner, like CEO
surveys and economist forecasts are all fine and dandy, but it seems to me
that investors won’t be satisfied until a non-farm payroll number puts up a
big upside surprise.
*****In the absence of good news on the employment front, it would benefit
the individual investor to be on the lookout for other upside catalysts.
Number One on my list is China.
After all, China just surpassed Japan to become the world’s 2nd largest
economy. And it might match U.S. GDP by 2020.
There should be no doubt that demand from China has a major influence on
global economic growth. And the U.S. economy is probably more sensitive to
China’s economy than most individual investors believe. In fact, demand from
China is part of the key to unlocking hiring in the U.S.
Chinese demand for semiconductors, computers and software has been a
double-edged sword for U.S. companies. For Intel (Nasdaq:INTC) and IBM
(NYSE:IBM), revenues from Asia and China are helping drive growth. But for
companies like Dell (Nasdaq:DELL) and graphic chip maker Nvidia
(Nasdaq:NVDA), sales to China are hurting growth.
*****Measures taken by China’s government to slow its real estate market
knocked steel and copper prices lower, and were a big reason behind all of
the “double-dip” of recession talk.
But now that inflation has slowed dramatically, real estate prices in China
have come down, and the number of non-performing loans has dropped, many
economists and strategists expect that China will ease up on its tightening
Steel, copper and shipping prices have all recovered in recent weeks in
anticipation of growing demand from China.
Unfortunately, no one is taking the potential for renewed demand from China
as good omen for the U.S. labor market. Here’s an interesting chart that
might help make the connection