Wordly Wise: Things are not that bad

The US stock market reels. Europe cringes at the prospect of serial defaults by Greece, Portugal, Spain and Italy. Gooey oil creeps out of the Gulf of Mexico onto land. A computer glitch triggers a near-crash on stock exchanges. Rules for financial firms in the US are being overhauled. North Korea and South Korea rattle sabers.

No wonder investors' stomachs are jumpy. Yet in my opinion, things are not as bad as they seem.

The stock market correction that began on April 23 in the US has carried the Standard & Poor's Stock Index down more than 10 per cent, including dividends. A decline of 10 per cent or more occurs, on average, once every 11 months, according to Ned Davis Research Inc.

Let's examine the anatomy of this correction, looking for indications of its severity, duration and nature.

This is an international market dive. Since April 23, benchmark indexes have fallen about 11 per cent in the UK and France on a total return basis. Germany has held up slightly better, down about 7 per cent.

As I see it, Greece's problems are more of a morning-after hangover from the worldwide recession than a harbinger of new ills. The index of leading indicators in the euro region rose every month from March 2009 through March 2010, the latest month for which data are available.

So it's likely that the economies of most European countries will soon start showing more pep. Meanwhile, the recovery in the US seems to be accelerating. Corporations are reporting higher earnings, gross domestic product has risen three quarters in a row, and the leading indicators point to more improvement ahead.

Unemployment rate

I expect the US unemployment rate, 9.9 per cent as of April, will start declining soon. I think it will drop to less than 9 per cent by the autumn.

The sudden stock crash of May 6, in which the Dow Jones Industrial Average plunged about 1,000 points in minutes, only to make up most of the ground before day's end, was unsettling. Bear in mind, however, that a 1,000-point decline in the Dow today represents a loss of about 10 per cent. When the index dropped by 508 points on October 19, 1987 — now known as Black Monday — it was a loss of more than 22 per cent.

I am no more adept at predicting the stock market than many other people. To mangle an old song from a James Bond movie, "Nobody does it better, but nobody does it very well."

For what it's worth, here is my prediction: I think the current correction has almost run its course and will end within a week in the US and within a month in Europe.

My guess is that the S&P 500, which started this year at 1,115, will end 2010 ahead by 10 per cent to 15 per cent. That would put the index at about 1,226 to 1,282. During this correction, a few dozen major stocks have made big moves, and not all of them have been declines.

Austin, Texas-based Cirrus Logic Inc., which makes components for a variety of electronic devices — most notably Apple Inc.'s iPad and iPhone — is up almost 25 per cent since April 23. In the past year it has soared about 269 per cent.

Jim Cramer, host of the "Mad Money" television show on CNBC, recommended Cirrus earlier this month.

However, I haven't been impressed by the stock. Its annual revenue growth has been lackluster, and its valuations — about 24 times earnings and four times book value — are high for my taste.

LogMeIn Inc., located in Woburn, Massachusetts, is up about 19 per cent since April 23. I use the company's software several times a week to access my firm's computer system remotely. But I wouldn't buy the stock as long as it keeps trading for about 60 times earnings and more than five times book value.

On the losing side of the ledger, Baxter International Inc. has fallen more than 17 per cent since last month's high. Yet the medical-products company posted record earnings of $2.2 billion (Dh8 billion) last year.

Baxter lowered its earnings forecast for 2010. The Deerfield, Illinois-based company said the impact of the recently passed health-care overhaul bill would lower profits.

Shares of Visa were higher than $96 the day the market peaked and slid to a low of about $70 last week.

The financial reform package moving through Congress includes a provision limiting so-called swipe fees banks collect from merchants when consumers buy merchandise with debit cards. The measure might hurt the payment network companies if banks impose new fees.

Even at its lower price, the San Francisco-based company's stock is still too expensive for a value investor like me. Wake me if the shares, now trading at about $74, fall below $60.