A quick glance at the above suggests a picture of weak economic activity, subdued prices and labour demand and some life in the housing and consumer loan market, which could probably do with less life!

Empire State Mfg strength deceptive

The strength in the New York area was reflected in the `Empire State Manufacturing Survey'. The headline index jumped from 12.3 in December to 20.7. So far, so good. However, one has to dig deeper for bad news and one comes up with plenty.

Both prices paid and prices received were lower indicating deflationary or disinflationary conditions. Further, average workweek and new orders declined. Projecting conditions six months out, the index of general business conditions declined from 52.2 to 49.7. The index of new orders did not register much improvement either. Prices paid and received are expected to remain weak as well.

So also Philadelphia Fed Manufacturing Survey

Similar is the tale with respect to Philadelphia Federal Reserve district manufacturing index. At the overall level, the index remained flat at 11.2 compared to 11.3 in December. New orders showed some improvement.

However, the improvement is mitigated by the expectation that, six months from now, prices received would be weaker.

Further, expectation of future manufacturing activity in six months dropped from 52.2 in December to 32.6 in January.

Is rebound likely in durable goods orders in Dec?

Durable goods orders for November reported in mid-December showed a drop of 1.4 per cent against market expectations of +0.8%.

Growth in orders was revised down from 2.8 per cent to 1.7 per cent. September was better at -4.6 per cent versus a previously reported figure of -5.9 per cent whereas August was revised down to -1.1 per cent from -0.6 per cent.

Overall, weakness in durable goods orders is pronounced and entrenched than previously thought. Similar is the story for durable goods orders outside of the transportation sector as well. Here is the breakdown: November: -1.3 per cent (expected +0.2 per cent); October: +1.6 per cent (versus original 2.4 per cent and revised 1.7 per cent); September: +0.0 per cent (versus -1.0 per cent); August: -1.7 per cent (versus -1.2 per cent)

Consistent with this, it is likely that the big jump in the ISM New Orders for January would prove to be an aberration.

Investment officers damp on tech. spending revival

These reports together with the reduction in capital spending of over 20 per cent that Intel is considering for the current year are indicative of weak investment spending outlook.

A survey of Chief Information Officers by two investment houses (UBS Warburg and Goldman Sachs), reported in Financial Times suggests that the so-called PC replacement cycle is longer than the hoped-for three years. Indeed, it could be as long as five years. Further, the survey also called into question the embedded growth rates in some technology stocks.

With investment spending activity likely to remain subdued and consumers pushing themselves to borrow more (for housing or otherwise), not only is the short-term cyclical health of the US economy in doubt, but the long-term structural balance of the economy is also becoming increasingly out of alignment.

Our outlook for a further rate cut by the Federal Reserve and sharp dollar weakness is maintained.

Stocks more expensive in last three years

This is not meant to startle but to displace superficial beliefs with self-evident truths.

If one looks at the trends in overall net income for major technology companies and even an auto-major, two things stand out.

Earnings recovery is nowhere near as strong as is fondly hoped and substantially lag levels of 1999 and 2000. This suggests that their future growth rates, implied by the current share prices, need to be lowered.

Second, Standard and Poor's 500 earnings per share (EPS) estimates for current and next year are over-optimistic considering that they are higher than EPS in 1999 and 2000 when overall earnings were double/triple the levels of 2002.

The following tables tell their own story. I use them as examples to make my point that price-earnings ratios have moved higher because prices remained and remain elevated while earnings have plummeted. The gap between historical average price-earnings ratios and current ones is explained by `denial' and unjustified optimism. US stocks are some distance away from redemption.

Global losers to turn winners?

Given this backdrop, the decision of Goldman Sachs of the US to invest in the preferred shares of Sumitomo Mitsui Financial Services deserves more than a passing glance.

It signals the confidence of a foreign buyer in the Japanese financial system and on Japan, in general. It suggests that banks are becoming open to solutions that they would have shunned a long time ago.

It sets other banks thinking as to what they should be doing. If they do not do, they open themselves to the possibilities of nationalisation. They cannot complain then. They could have followed Sumitomo Mitsui.

It suggests that the FSA is winning the battle of minds over banks.

We believe that the pieces are falling into place in Japan gradually with structural reforms and monetary easing likely to play in unison in the new fiscal year.

Facing a similar prospect if it does not take any action soon, Germany might bite the bullet. There are some encouraging signs in January but nothing substantive yet.

However, if these tentative signals coming from the government are translated into specific action, one could witness the two countries cast in the Anglo-Saxon media as economic laggards stealing a decisive march over the US — the putative and increasingly fragile leader of the 1990s.

(The author is responsible for Global Economics and Asset Allocation in Credit Suisse, Asia-Pacific. The views are personal. Address feedback to anantha@nageswaran.com)

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