The Week ahead

Which way shall we go?

The week ahead looks like uncertainty is going to roil. The questions that market powers ponder is whether the end of the recession is priced into the market and overpriced? The next question is why is Alan Greenspan and company sounding so pessimistic? To make matters worse, Ford Motor made a mistake that is likely to dampen the optimism of consumers.

This week, we check things in order. There are two views present in the market. The first is that the January effect will continue. The economy continues to improve and with it the prospects for corporate profits. Though the pace of increase will have to slow, the overall trend must continue.

The side that's winning right now however are the pessimists. They seem to think the market has more than priced in an economic rebound. They look at the 30-40% gain in the major market measure since the lows of September 21 and think the market is above its historical recession rebound.

The problem with this second viewpoint is they are measuring the market based on September 21, which was the sixth day in a selling panic triggered by Ossama bin Laden. This is not a reasonable point to begin analysis. A more reasonable point would be either September 10 or the point those levels were crossed in November. On that basis the recession bounce has probably not run its course.

Alan Greenspan is going to cut rates again on January 29. What worries me is what kind of economic data has him so worried. I don't think he is planning on dropping rates just to kick the economy in the pants. There has to be data, and its not very obvious, so it worries me.

Ford Motor made an enormous mistake last week. They figured out late last year that they had car sales of around 4 million units annually. They have capacity to build around 5.7 million units a year. They decided to dump four unprofitable cars and close down a lot of capacity.

This move is going to throw 40,000 people out of work and can't help consumer sentiment. The reason they woke up with 1.7 million units of extra capacity is they have been whipped on quality. To paraphrase the ad campaign, GM stepped on the gas the last few years and left Chrysler and Ford in the dust on quality. They have more models on the Consumer Reports recommended list than ever before.

What Ford should have done was cut the car lines, and furlough the workers for a while. They should have insisted on major initiatives to improve quality prior to reopening the plants. They should put quality models into production that consumers will actually want to buy. At least they didn't cut their product development budget. There is hope, but the market share they are conceding will likely go to the Japanese.

The markets will digest all this data and probably go nowhere fast next week. Boy, I'd really want to know why Greenspan is so bummed out.

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Shmuel Protter
investmenttool.com