It no longer seems presumptuous to think that the worst is over. Financial firms are far better able to raise fresh capital, even as they take more write-downs or set aside larger loan loss provisions. Business prospects are holding up surprisingly well, especially for firms with international exposure. However, the domestic economy should soon see some improvement. Thus, we conclude that the outlook for investors is improving.
Corporate earnings demonstrate that much of the weakness in the economy is concentrated in housing and housing finance. Most everything else negative is fallout. G.E., which disappointed investors, is a good example of this point, nonetheless. Aside from a firm-specific issue with respect to its medical products division, the company performed well with its industrial product sales and suffered some write-offs in its huge financial business. That strength in manufactured products, especially in exports, correlated well with the results of Eaton, Honeywell, and other manufacturing companies. There's little doubt that the weakness of the dollar, which has greatly improved the global competitiveness of domestic companies, is helping to offset the weakness emanating from the housing industry.
Prospects are brightening for the economy in the second quarter. New residential construction has fallen well below demographic demand, suggesting little incremental drag ahead. Inventories have been in decline for several months. But mortgage availability and financing activity are improving, even as new construction is still being cut back. Therefore, the excess inventory hanging over the market should start receding more quickly in the coming months. Buyers are still holding back in the expectation prices will fall further, but that strategy will change very quickly, if inventories fall significantly. That turn could come quickly, although it likely still remains a few months off.
Equity investors are looking ahead to better conditions, however, properly so. While financial companies are still making sizeable loan loss provisions or writing down asset values, they are easily raising more capital, when they are willing to accept some dilution. Private equity firms and hedge funds are actively looking for depressed assets to buy. They'll surely get to do so from weaker firms that must de-lever. But increasingly, firms will be under less pressure to accept unfavorable terms. Thus, financial market conditions should gradually improve, reinforcing our sense that the worst is over.
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About Advisors Capital Management, LLC
Advisors Capital Management, LLC (ACM) is a provider of managed portfolios and financial services for industry professionals and their clients. As investment strategist, Dr. Lieberman oversees the company's "Portfolio Partners" investment program. Additionally, he provides guidance to the ACM Wealth Coordinators who integrate the work of financial advisors, financial planning, tax, estate and portfolio management professionals to build, protect, and maintain clients' wealth. Although the information included in this report has been obtained from sources Advisors Capital Management, LLC believes to be reliable; we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
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