Predicting the Economy’s Future: “Challenging”

As much as I would rather not spend much time commenting on the stock market, it has become such a part of everyday life (more than 100 million people are invested in the market in some fashion), and it churns through such drama every day, that I also cannot avoid it.  Lately, I have been reviewing certain companies’ earnings reports to glean some indication of where the economy may be headed in the next three to six months.  It has been frustrating work, and continues to be so, which in and of itself, is a comment on the future.  Here is what today brought:

On the tech side, after the market close, Google reported spectacular earnings for the third quarter.  I am not going to go into the particulars because Google is such a popular stock to own that it trades at a price-to-earnings ratio that is unique to its stock.  For those interested in a breakdown of Google’s earnings, Jim Goldman at CNBC.com has a fine article here.  I won’t bother examining the financial companies because they are wretched, and will be for some time to come.

Where I want to focus attention is on one of the 30 component stocks of the Dow Jones Industrial Average.  Elevator, air conditioner, and helicopter manufacturer United Technologies (UTX) reported third-quarter earnings of $1.36 per share (removing restructuring costs), beating analysts’ average estimate of $1.32.  It also raised the low end of its full-year forecast, stating that it now expects 2008 earnings between $4.90 and $4.95 per share.  The company noted that order rates were slowing, especially for elevators in North America, but worldwide heating and cooling equipment orders had increased.  In a statement accompanying the earnings report, company president and chief executive, Louis Chenevert said, “In the face of ongoing economic challenges, we continue to aggressively cut costs and restructure our business.”

The earnings numbers and statements from UTX seem to echo those of other large-cap companies.  The theme that is coming out of earnings reports thus far seems to be “current earnings are meeting expectations, but cost cutting will be necessary because no one knows how bad the worldwide economy will become.”  The other theme that has emerged is that many companies’ shares are trading right at their current reasonable value, despite the overall market drop.  For instance, UTX is trading around $49.50 [it had a big move at the end of the day today, closing a little above $52] per share, which translates into a price-to-earnings ratio of approximately 10 – right at the industry average.

Some stock market experts are pushing the notion that now is the time to buy into the market, arguing that, historically speaking, the market will recover soon.  Those experts may be right and they may be wrong.  What current earnings and stock price valuations seem to be telling us is that the market does not know what’s coming next.  And that is because just about every company that has reported solid earnings has stated that the near future will be “challenging.”  I’m dismissing companies that have reported poor earnings because they are already challenged.  I don’t know of anyone who can put a number on “challenging.”  So, to buy into the market is to buy solely on hope.  I am not commenting on whether that is right or wrong – some investors, like some of the experts, may be comfortable with that.  I prefer to wait until we begin to see a lasting uptrend.  Sure, that means I probably will not buy at the exact bottom.  I can live with that however.  What I cannot live with is having 10 to 20 percent of my investment hacked off within a matter of days, and being stuck with hoping that it will come back.

I will leave you with a list of articles that may offer a glimpse into the economic future:

• End of the Office Party is Coming
• Builder Sentiment Retreats in October
• Mortgage Rates Soar; Biggest Jump Since ’87
• Shipping Lines Sail Uncertain Seas
• Bear Market, Recession Loom Large
• No Two Bears Are The Same
• Bloomberg (October 14, 2008) Roubini Worst Recession in 40 Years, Rally’s End
• Oil Prices Slip Below $70 a Barrel