The Economy Is Better Than You Think

05/19/2010 11:21 am EST

Focus: MARKETS

David Fried

Editor, The Buyback Letter

David Fried, editor of The Buyback Letter, says improved home sales and strong earnings reports from two key companies point to brighter days ahead.

Are we still in a recession? Are we in recovery? How long have we been in recovery, and when will we be whole again? If our national mood feels pessimistic, does that mean we aren’t yet recovered? What do you listen to when the steady drumbeat of information turns into too much ambient noise?

Simply put, we’re buying things, we’re shipping things, and homes are being bought, sold, and built.

[First,] there appears to be a new cycle in housing. Existing-home sales in March showed an annual pace of 5.35 million units—above the average estimate of about 5.3 million and up by nearly 7% from the February pace of 5.01 million. The sales pace of existing homes has grown year over year for nine straight months.

The pace of new-home sales in March was 411,000, the strongest showing since July 2009. Year over year, the pace of new home sales in America increased by 23.8%. The median sales price was $214,000—up by 4.3% from a year earlier.

[Meanwhile,] in late April, IBM (NYSE: IBM) announced that its superior cash flow enabled it to invest in the business and generate substantial returns to shareholders in two different ways.

The board declared a regular quarterly cash dividend of 65 cents per common share, which represents an increase of ten cents, or 18% higher than the prior quarterly dividend. IBM has increased its quarterly dividend over 330% since 2003.

When this latest dividend is paid, IBM will have paid consecutive quarterly dividends every year since 1916. The board also authorized $8 billion in additional funds for use in the company’s stock repurchase program.

As a broadly diversified supplier of computer hardware, software, and services, IBM is an excellent proxy for business spending and activity. When IBM increases the dividend and repurchases shares, they are feeling very, very confident!

Results for United Parcel Service (NYSE: UPS), the world’s largest package-delivery company—and for its rival FedEx (NYSE: FDX)—are closely watched because those companies are considered good indicators of how the overall economy is doing.

An improving economy boosted profits and prospects at UPS, as the company beat analysts’ estimates on first-quarter sales, citing increased demand overseas. Revenue rose 7.2% to $11.73 billion, exceeding [expectations]. Net income gained 33% to $533 million, and adjusted per-share profit was 71 cents.

In addition to strong growth in international package revenues, UPS called its US growth a "slow, measured" recovery and free cash generation "extremely strong."

IBM and UPS are not the only big guys who are feeling better right now. [First-quarter] earnings for companies in the Standard & Poor’s 500 index are expected to increase 39% from last year.

That is why the stock market has rallied over the past 12-14 months. We do not expect the stock market to rocket up another 70% or so as it has done since last spring. [But] the economy is in good shape. We don’t see any new recession in 2010.

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