Investors Are Right To Be Skeptical
-- April 11, 2003

Today's economic news isn't quite as good as Wall Street would lead you to believe. No wonder stocks kept falling.

First, consumer sentiment is STILL extremely low. The University of Michigan's preliminary consumer sentiment reading of 83.2 in April is better than the near-decade low reading of 77.6 in March. But as recently as December, confidence was higher at 86.7 -- and we saw how quickly that disappeared! While favorable news about the war has bolstered confidence a bit, we expect this to be just a temporary improvement in confidence.

Second, the government's sales data is so contrary to industry feedback, we can see why investors aren't jumping for joy just yet. They're skeptical. The government says that retail sales were up 2.1% in March. On the other hand, chain stores are reporting a 0.2% decline in sales. The difference: The government's numbers adjust for the lack of the Easter holiday this year. But we think that they're overly optimistic in their adjustments. And we expect that consumers will continue to moderate spending in the months ahead.

Third, higher producer prices are ALWAYS a bad sign -- especially when earnings season is just around the corner! The producer price index climbed 1.5%. The prices of finished goods are now 17.4% higher than last quarter.

Higher energy and vehicle prices accounted for the majority of the index's increase. Car makers are going to get squeezed by the high producer prices and their inability to pass these costs onto consumers. They've even begun a brand new round of zero-percent financing and cash back incentives that will slam their bottom lines. Plus, energy costs are injected into a wide range of products -- anything that is made using electricity, natural gas, oil, and coal are affected -- and these higher costs will squeeze corporate profits.

Investors are right to be wary of the coming corporate earnings season. We expect to see some dismal corporate earnings news and forecasts over the next few weeks. But they also shouldn't lose sight of the real state of the economy -- no matter what the spin doctors say!

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