Sunday, April 15, 2007

Two Solid Reasons For the Bull Market

From an interview in Barron's with Jason Trennert (subscription required):

Corporate balance sheets, by almost any standard, couldn't be in much better shape than they are right now. If anything, you could make the case that corporate balance sheets aren't leveraged enough. There is too much cash on the balance sheet, there is not enough debt. It is hard to get a recession when corporate balance sheets are this clean. No. 2, employment is generally a lagging indicator, but the employment situation is so good. The unemployment rate is 4½%. When I got out of college, full employment was considered 5½% to 6%. It is hard to get a recession when both corporate and consumer balance sheets are as strong as they are and when people are employed.

These are both very solid points. According to the Federal Reserve's Flow of Funds Report, nonfarm, nonfinancial corporate business has a very clean balance sheet. Assets are over twice the amount of liabilities and there is plenty of cash on the books. This is one of the main reasons for the large amount of corporate stock buy-backs in the the market right now. In addition, corporations are the only economic sector actually saving any money right now.

As for employment, I'm a bit more sanguine. Two months ago, construction shed 63,000 jobs. Most of these were replaced last month, but I have to wonder how often we will see this type of pattern. In addition, last months employment report showed a net loss of service sector jobs. This is an economic area that has provided strong growth for the duration of this expansion.

However, my gripes with employment are two nicks in the picture. We have yet to see a sustained loss of jobs. Instead, we have seen nicks and cuts in the overall landscape.