We have now seen a string of data points that indicate an improvement in the economy, with potentially more such data to come -- which is certainly refreshing news.
But after two quarters of gross domestic production contracting at a rate of 6%, if the economy shrinks only 2%, that will look like strength from a data standpoint. After a couple of quarters like we've just experienced (which are quite rare), just restocking depleted inventories could easily produce a positive GDP number in the short run.
Thus one cannot examine any of these reports in isolation. One has to take a step back and look at the whole mosaic. We don't want to become overly bearish about certain problems. But neither do we want to become overly bullish about a couple of positive bits of news.
Anything but clearThe bursting of the housing bubble and the attendant collapse of the financial system, and the money-printing/government stimuli aimed at mitigating those disasters, are creating enormous crosscurrents that will make divining the market action (as well as the news) particularly tricky.
If one wants to talk about a legitimate "green shoot" (the new favorite buzzword for signs of a recovery), I would point to a recent Wall Street Journal article in which the CEO of noted that demand for excavators in China is at a record level.
Again, that is just one nugget. But I continue to believe that the large economy most likely to recover first will be China. That leads to one of my areas of interest: commodity-oriented businesses.
I've been a fan of precious metals for reasons related to currency debasement, but lots of other companies will benefit from what transpires in China as well as from worldwide stimulus.
Small is beautifulIf stagflation is the most probable outcome (my view at this juncture), we are liable to see coming out of this period sort of a replay of the 1970s, but on steroids.
Small companies, which are usually nimbler than large companies and can grow more quickly, are likely to be the biggest beneficiaries. If we are to experience inflation/stagflation over the next several years, companies that can grow rapidly -- i.e., unit growers -- will be sought after, and small may become beautiful.
Conventional wisdom has it that, as a result of the financial system's collapse, bigger is better. But I think bigger is slower and less flexible and therefore less adaptable. I'm especially interested in small companies that are uniquely positioned or are in sectors that have the wind at their back.
That's sort of the prism through which I am viewing the landscape. I've been thinking about this for some time and wanted to pass it along for readers to chew on.