Another sign of the business cycle top

February 23rd, 2007

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In our previous article, Where are we in the business cycle?, we explained why we believe that Australia is probably at the peak of the business cycle. We also believe that the United States is also at the peak too. At the top of the business cycle, we will often be bombarded with reports about companies making record profits, even beyond analyst expectations. Consequently, share prices may rise as a result.

Do not be deceived.

In a business cycle peak, company profits as a whole are as good as it can get. If you expect the profit trend to continue and pay a premium price for stocks in anticipation for higher earnings next year, chances are, you will be disappointed.  It is now time to hunker down in your bunker in preparation for the economic downdraft. If you must stay invested in stocks, avoid outright cyclical stocks (see What to avoid at the peak of the business cycle?). Instead, choose companies whose earnings are more robust in the face of an economic slowdown and can survive through the tough times?even then, in such a pessimistic economic environment, even their stock prices will be depressed. Above all, avoid companies who are heavily laden with debt.

Already, we see another big warning sign: More US firms fail to meet Wall St’s earnings forecasts.

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