The recovery isn’t yet a sure thing

In my 11:45 post today, “Huh? Wall Street thinks higher unemployment is good news?” I said that I was still not convinced that the economic recession was truly over. The recovery that we’ve seen signs of in the last few months could simply be inventory restocking. That’s when companies that have put off reordering for months and months because sales were so slow finally decide to restock.

But, and this is what’s critical, these companies aren’t planning on reordering in anything like normal volumes anytime soon, because their customers still aren’t buying much.

It’s tough, I mean really tough, to tell the difference between recovery and restocking. And I’ve seen signs recently of both.

But there are more signs than Wall Street wants to admit that the recovery of the last few months has been caused by inventory restocking rather than by a true upswing in end demand.

That worries me because it sets stocks up for a disappointment.

So I’m tracking the news in this area across as many industries as I can.

Last week the chip industry delivered some bad news. Digitimes reported that Qualcomm (QCOM), Altera (ALTR), and Xilinx (XLNX) have all reduced their fourth quarter orders at the foundries that make their chips. Qualcomm is projected to have reduced its orders at foundries that include Taiwan Semiconductor Manufacturing (TSMC) by 10% to 15% from third quarter levels

The reductions from Altera and Xilinx are larger, Digitimes reported. Altera has reduced orders by 25% to 30% from the third quarter and Xilinx has cut its orders by 10% to 15%.

This could be just a reflection of weakness at specific companies or in specific technology sectors. Orders from other chip makers are still moving in the other direction with Broadcom (BRCM), Nvidia (NVDA), Advanced Micro Devices (AMD), and Atheros (ATHR) all raising the size of their orders quarter to quarter.

But the question of whether the recovery is firmly in place or not is more open than any investor wants to admit on his or her bullish days.

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7 comments

• kelvinator on 8 September 2009

  There’s the question of whether the recovery is firmly in place, and then there’s the question of: even if there is a recovery underway, how strong will it be and how are stocks currently priced in relation to a weak or very slow recovery?

  I think that unless you think this is going to be a ball-out-of-the-park recovery, which few do at this particular moment, then the market may be significantly over-priced – so you have to really pick your stocks. Check out S&P’s official, as reported P/E for the S&P 500 as of the just concluding 2nd qtr earnings reports — a P/E of over 120(!):

  http://www2.standardandpoors.com/spf/xls/index/SP500EPSEST.XLS

  That opens the possibility of a lot of stock downside if the economy disappoints. I’m pretty cautious here…
• viwi on 8 September 2009

  I am not overoptimistic about the state of the world economy. Stimulus money are working everywhere around the globe, and that is the only thing that makes the numbers look better (I am trying to avoid the word “good” here). Someone goes bankrupt, or unemployment rate hits 10% (people love those round numbers), or China suddenly stops buying commodities, and we will be testing new lows all over the map within a week.
• NB on 8 September 2009

  Jim – do you rely on some leading index data from any entity (govt, businesscyle.com etc.)? The ECRI folks point to the fact that by the time a recovery will be apparent, the markets would’ve zoomed up a lot. So I was curious if you look @ data-gathering done by these or other such data providers/analyzers?

  thanks for your thought provoking columns.
• Brendan_Edmonds on 9 September 2009

  I’d still say hld out till the fourth quarter is over. By the end of November/ some time in December, you should have a clearer idea as to where the market is heading. Even still, I’m not looking towards a fantastic January, with high unemployment, increases in personal debt, forclosures, and so on. The cash for clunkers program, (and trust me, I’m all for government stimulus) was irresponsible as it has stimulated spending, but at the cost of added personal debt. There’s just not that much money out there, and as kelvinator said, stocks are WAY overpriced, especially if you compare them to previous months.

  When the recession started to hit, we were around 14000, and only a few months ago, 7000 looked imminent. Without any real positive proof of improvement, why are we heading towards 5 digits again???

  Something just doesn’t sit right, and I don’t think the bottom has really hit.
• viwi on 9 September 2009

  NB: They way I look at the current market, it has already absorbed the idea that recession is over, since there is no other way to justify high P/E’s which are more typical for much more dynamic economy.
• ellwood on 4 November 2011

  jim
  just read the news about cedc,sounds bad,do you think it wise to bail now or ride it out?
  or,double down?
  thank you,
  gerald devereaux