Economists Embrace the Bull

GOOD MORNING. Good Morning: Stocks in Asia closed higher today; U.S. futures are pointing to a lower open.

Are economists ready to join the bull market stampede? With the stock market at 13-month highs following yesterday’s big rally, traders seem to be betting that economy is healing quickly. And economists may be coming around to the bullish side too.

According to Blue Chip Economic Indicators, a monthly survey of top economists, forecasters have raised their projections for 2010 GDP for a fourth straight month. The U.S. economy should expand 2.7% next year, the Blue Chip report said, an upward revision from the 2.5% growth rate expected a month ago. Economists still expect growth next year to be less than the typical post-recession bounce, and the forecasters made their predictions before a report last week showed the unemployment rate had jumped to 10.2%, a 26-year high.

Still, bullish signs have cropped up in other recent reports. Fewer banks tightened lending standards for businesses and consumers in the past three months, according to the Federal Reserve's latest survey of loan officers, indicating that the credit crunch may be easing. Roughly 15% of banks said they imposed stricter standards on loans, about half the percentage that tightened credit in the prior three-month period through July. Consumer credit looked horrible in September—dropping $14.8 billion, worse than consensus forecasts. But the previous two months saw upward revisions in credit of $13.7 billion, points out Barclays Capital economist Theresa Chen, “painting a considerably brighter picture than the headline would otherwise suggest.”

Of course, deflation still poses a threat to a recovery, and the markets may not move higher without more support from retail investors. Investors have been flocking to bonds and other fixed-income investments this year and the trend continued last week. Bond funds had estimated inflows of $10.2 billion, on top of $11.2 billion the week before, while equity funds had outflows of $2.6 billion. Economist David Rosenberg of Gluskin Sheff describes this phenomenon as a “remarkable” testament to the resolve of the “twice-bitten thrice-shy general investing public.” The 60% rally in the markets have been driven by hedge funds and other institutional trading, he points out. But unless mom-and-pop investors get back to equities and provide a level of support, the fast money could take stocks down just as fast as they’ve driven the markets higher.

IN OTHER NEWS:

Americans’ bellies may have suffered from the recession right along with their wallets. Analysts expect Weight Watchers (WTW) to report earnings of 64 cents a share after the market closes today, down from 67 cents a share in the same quarter a year ago. Revenue for the quarter is expected to be $318.17 million, down 9.8% from last year, and sales are expected to be down 10% for the current year, compared to 2008.

Other weight control companies are facing similar challenges. “The overriding statement over the last year from weight loss companies is, it’s more cyclical than they expected,” says Scott Van Winkle, an analyst with Canaccord Adams. Consumers cutting back on spending across the board may feel they can diet on their own without paying for products or services from these companies, Van Winkle says.

Nutrisystem (NTRI) reported third-quarter results on October 27 that were better than expected, but still well below the year-ago quarter; the company’s sales are expected to be down 24% this year compared to last. Medifast’s (MED) October 29 report showed year-over-year revenue growth, driven in large part by expansion in the company’s Take Shape for Life direct sales segment. In that division, consumers become “Health Coaches,” train others in the company’s system and sell products.

Weight Watchers has introduced some cost-cutting measures, the most notable being a reduction in trainers working in the classroom meeting program. In a note on Sunday, Michael Binetti, an analyst with UBS Investment Research, wrote that the cutbacks could backfire, given that the program generates the majority of Weight Watchers’ revenue. The New-Year’s-resolution-driven first quarter of next year will be a crucial opportunity to demonstrate a return to sales growth for both Weight Watchers and other diet-plan businesses.