April 3, 2001

We'll See a Lot More Pain Before Recovery

The Fed finally confirmed what we've been warning you about for months -- the economy is very likely in a recession right now. And we believe that it will get much worse before things get any better. Right now, the impact of the falling stock market hasn't fully reverberated through the economy.

Investors have lost their shirts, but most haven't lost their jobs -- yet. Many of the highly-publicized layoff plans announced by large companies were just to show Wall Street that these companies are trying to do something -- anything! -- to increase earnings. Reason: earnings for the companies in the S&P; 500 are now expected to fall 8 percent in the first quarter.

That would be the steepest drop in profits since 1991, and the first quarterly decline in three years. Now THAT'S a sure warning sign of a recession.

Under the circumstances, layoffs won't be enough to make Wall Street happy. It needs to see earnings actually rise before stocks will stage a sustainable recovery. And that won't happen until companies follow through on their threats and ax thousands of workers to boost earnings, or slash prices dramatically to bolster demand (a tactic that will hurt earnings even more).

The economy is being hammered by news that is sure to worsen the unemployment situation. In February, factory orders fell more than expected. Auto sales fell a whopping 13% in March. And manufacturing activity slowed again in March. Then, just yesterday, the Information Technology Association of America released a study that said the demand for tech workers has fallen by 44%.

You don't need a crystal ball to see that the U.S. economy won't be recovering any time in the near future. And the only rise in stocks in the near future will be a bear-trap -- enough to pull in more hapless bulls before crashing back down again.

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