Stay Alert: More Signs of Trouble Ahead
Wednesday, March 5th, 2008
By George Leong, B.Comm. for Profit Confidential
The April light sweet crude on the NYSE traded close to $104.00 a barrel on Monday. Not only are oil prices trending higher, but if you add in the recent signs of a pending economic slowdown, you as an investor should be concerned.
Last week, we talked about the anemic gross domestic product (GDP) for the fourth quarter of 2007 of 0.6%, but now there is more evidence that the U.S. may be headed for a recession this year. On Monday, data showed that U.S. manufacturing activity fell in February as reflected in the Institute for Supply Management manufacturing index, which came in at 48.3. This was the lowest reading since April 2003, and a decline from a 48.4 reading in December 2007. The concern is that the sub-50% reading indicates contraction in the manufacturing sector.
According to the report, industries that struggled in February included furniture, textiles, machinery and chemical products, while areas showing growth were apparel, leather, wood, plastics and rubber, and food and beverage.
Another piece of evidence that points to a slowdown was a fall in construction spending by 1.7% in January, according to the Commerce Department. The reading represented the largest decline in 14 years. Not only was residential building impacted, but it also spread to commercial projects.
With the recent slew of bad news on the economy, the Federal Reserve will probably need to continue to cut interest rates and we expect another 50-basis-point cut to 2.50% at the upcoming FOMC meeting on March 18. Yet it may be premature to assume that the aggressive cuts will help the U.S. economy sidestep a recession in 2008.
Clearly, signs point to more troubles ahead of us, so we advise caution when buying stocks. Stay clear of cyclical stocks that depend on the condition of the economy. Also be careful of businesses that produce and/or sell big-ticket items, as consumer spending will decline with a slowdown.
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Tags: GDP, interest rates, recession, U.S. economy
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George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.
