Raw Finance

The recent equity market weakness and sovereign debt fears have brought out much talk of another market collapse, or at least a significant correction.  The basis for such bearish thoughts are that the economic recovery is stalling out and that things are going to get worse again.  There is plenty of evidence that financial crises spawn deep recessions that take a long time (4-5 years) from which to recover.  There is also evidence that the economic recovery that has begun will be sluggish and choppy.  We know that significant challenges remain to shore up the financial industry and to prevent countries from defaulting on their debt, causing world markets to potentially freeze once more.  All of these things are well documented.  However, investors may be overlooking many signs that the economic recovery is coming along rather well, not due to stimulus programs, but rather good old-fashioned capital investment.  While economic figures can guide us on the future, there is no substitute for corporate earnings reports and their outlook.  Cisco Systems (CSCO) earnings report shows that the second phase of the economic recovery may be underway.

Before we get to Cisco, this morning, the Bureau of Labor Statistics reported that productivity grew 6.2 percent in the fourth quarter 2009.  But, the more significant number in that report was the increase of 1.0 percent in hours worked.  That marked the first quarterly increase since the second quarter of 2007.  While investors should not celebrate by throwing all of their portfolios blindly into equities, we can at least recognize that our economy is back from the other side of the looking-glass.

Cisco beat market expectations with an 8 percent year-on-year rise in sales to $9.8 billion in the three months to Jan. 23, 2010, following revenue falls over the past four quarters.  The company reported profits of $2.3 billion or 40 cents a share. Analysts expected $9.4 billion in revenues and profits of 35 cents a share, according to a Bloomberg survey.

Those are good numbers, but it is the accompanying statement from CEO John Chambers that holds the most insight.  He told analysts that the July quarter of last year was a tipping point and the beginning of an upturn in capital spending. The October quarter revealed an acceleration in spending and the first phase of the recovery, with the latest January quarter showing improvements across the board and the second phase of recovery.  His comments on recovery in all regions and market segments echoed those of Paul Otellini, chief executive of Intel (INTC), the world’s biggest chipmaker, last month.  Chambers said that only Japan had shown meaningful growth in the October quarter, but all five of Cisco’s regions saw flat to double-digit order growth in the latest quarter.