Taking Measure

Here we sit in the dog days of summer, but in Pittsburgh it already feels like late September is in the air. As a coach for my son’s football team, I am one of 6 who shakes his head at how easy the kid’s have it these days. When we were young, it was 90 degrees with no shade for the first month of football camp (as we remember it)!

Other issues are in the air as well. The Olympics fill the airwaves, election campaigns will start up again in a couple of weeks for the “Big One” in November, Russia has decided to take on a neighbor, and all of this we hear has some impact, with a host of many other items, on our investments.

But what impact? As of July 31st, every equity benchmark is still negative for the year, save commodities. Bond indices are flat or close to it.

By now you’ve noted via the news or the pump that oil prices, and therefore gasoline prices, are off their high by 24%. That helps. So the question being asked again is, “Are we headed up now?” I want to provide a summary for what looks to be the major considerations to this question and why the answer is, “Not yet, probably.”

5 Keys to Consider

Oil – Prices have retreated 24% from a high 3 1/2 months ago. This provides some breathing room for households and companies alike as to where there money is being spent. It also has a easing effect on inflation.

US Dollar – The dollar has posted its 5th straight week of strengthening against the euro and is at an eight month high vs. the yen. This bodes well for our purchasing power and lowering oil prices. Again, breathing room.

Bank Credit – Credit is the main component for economic expansion. Companies borrow to expand facilities, add to production, enter new markets, improve technology, and add staff. Corporate borrowing costs remain high because banks are not in good shape yet. Until they are, this isn’t a positive sign.

Real Estate – Some “experts” believe we may have reached a bottom in housing prices; others aren’t so quick to suggest this. Real Estate values in the US are a primary base measurement for other asset valuation. Until we see a bottom, other parts of the economy won’t move up. My opinion is that we probably won’t see the bottom until we approach the middle of 2009.

Corporate Earnings – Corporations meeting their forecasted earnings create confidence in future cash flows and therefore stock prices. For the 2nd and 3rd quarters of this year, earnings have already been, and are projected to be, disappointing. I think it will probably take S&P 500 companies 2 straight quarters of meeting their earning targets for confidence to return.

So, it looks like 2 out of 5 key factors are in our favor. Our youth football team is comprised of 9 and 10 year olds. Therefore this year we are allowed to attempt a kick for extra points – not a gimme as you can imagine. When one gets over the uprights I tell the offense, “All right, boys, we’ve got a streak going!” Yes, it’s one, but it’s a start.