Friday, August 27, 2010

Economic "Intel"-igence.

Remember about 6 weeks ago, how Intel (INTC) reported blowout earnings, ushering in a great earnings season and convincing investors that the so-called "recovery" was finally gaining steam?  Well, just moments ago, INTC warned on the revenue line.  Not good.

The company says it now expects revenue for the quarter of $10.8 billion to $11.2 billion.  That compares with a previous forecast of $11.2 billion to $12 billion.  Not good.

This is why data points like earnings are so irrelevant when it comes to assessing either the market or the economy.  They're backwards looking and of absolutely NO use. 

The Gross Domestic Product (GDP) estimate for the 2nd quarter was also revised much lower.  Originally, economists had it pegged at 3.5%.  Then, it came in a 2.4%.  Today, it was reported at 1.6%.  Not good.  But, "better than expectations".  Whose?  Not mine!

A common notion is that looking at prior earnings and economic data is like driving a car while looking in the rear-view mirror.  No wonder investors, even sophisticated ones, have so much trouble making money.

The market, with 4 Hindenburg Omens under its belt, and maybe a 5th today, has, in its infinite wisdom, anticipated the economic slowdown.  The reason markets are able to anticipate with such deadly accuracy is that investor liquidity and preference for risk is reflected in stock prices.  When investors are liquid or are interested in taking on risk, stocks go up.  Simultaneously, the same factors are filtering their way through the economy.

That's how the market mechanism works.  Investors express themselves both through economic actions and how they allocate resources.  However, these do not react simultaneously.  Markets are more sensitive.  One can think of the market as the proverbial "canary in the coal mine".  The canary's health indicates the economy's health.  Not that mysterious, now, is it?

Of course, not every market move is significant.  Markets can go up or down for a variety of reasons, including interest rates or the Dollar or problems with sovereign debt.  But, significant market moves, especially when they're at odds with our economic expectations, should NEVER be ignored.

This is how "Intel"-igence works.  As you understand the market's unique language, investing becomes much, much more straightforward.

Marko's Take

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