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When the stock market is enduring as much trouble as it has been lately, it pays to remember that there are still many positive catalysts that are in place and working to buoy securities prices.
Let's take a few moments to consider the top candidates:
- A Friendly Fed: The current U.S. Federal Reserve under Chairman Ben S. Bernanke is the most accommodative in history and is likely to keep short-term interest rates at or near zero for the remainder of this year. Occasionally there will be rumblings of an increase – as there was in The Wall Street Journal last Monday, but they are likely just smoke screens.
- Strong Capital Currents: Stimulus money and low interest rates continue to seep into the U.S. economic system. This capital is flowing much more slowly than expected, but the current will remain reasonably robust for another five years, as legislated last year. The government-provided stimulus package is largely responsible for the improvements in gross domestic product (GDP), factory-capacity utilization, retail spending and employment. The downside is that the longer the stimulus takes, the more it costs as interest fees stack up. One estimate suggests that for every $1 in stimulus, we're now getting only 20 cents of impact in the private economy.
- Contrarians Rule: Investors, the general public and the media are pretty morose about the market, and they are not flocking to move their money from certificates of deposit (CDs) and U.S. Treasury bills into stocks. The consensus is usually wrong, so this negative sentiment is a positive.
- A Strengthening Foundation: Economic fundamentals – the foundation of any recovery – are improving, as many more companies are reporting earnings growth than last quarter, and forward estimates are still being revised higher.
- Deflating the Bubble: Technically, the correction that has played out in recent weeks has taken froth off the market and created an "oversold" condition. And as I mentioned last Monday, stocks are now resting at a level that can be considered support.
In short, there are many reasons to expect stocks to advance. They really have a lot going for them.
However the big joke this year will come in the form of irony: While stocks rose last year despite lousy fundamentals, this year stocks will weaken despite improving fundamentals.
Why would that happen? Last year, investors were early to sniff out the gains that would be made in corporate fundamentals as the stimulus package and low interest rates worked their magic. Now investors are sniffing out the possibility that what you see is what you get – a subpar recovery plagued with subpar job growth and rising risk of sovereign debt failures.
Why should U.S. investors care about Europe's sovereign debt? It's actually pretty simple. Europe's burgeoning debt troubles are causing a mass exodus from the euro, and that money is going into U.S. dollars. As the dollar rises, our companies' exports become more expensive – and that inevitably has the effect of undermining the overseas profits of our multinational corporations.
In other words, if the dollar keeps rising, we'll discover that U.S. corporate earnings may well have peaked in the 2009 fourth quarter. Or we could find that they didn't actually peak, but will grow a lot more slowly, which is just as bad.
That's probably why the shares of major U.S.-based international companies such as The Coca-Cola Co. (NYSE: KO) and Colgate Palmolive Co. (NYSE: CL) have stalled lately. They're on a treadmill: No matter how much their business improves in the United States, it's being undermined and offset by the same amount overseas.
When you sum it all up, you can see that there are many positives (fundamentals, technicals, cheap money and fiscal stimulus) and one gigantic negative (a rising dollar). Since stock prices appear to be stuck, we have to conclude that the dollar is right now the biggest influence on share prices at present.
So until Europe gets its act together and regains investors' confidence, it looks like the dollar will keep rising and that, in turn, will keep pressuring American stocks.
One group that seems to have the fighting spirit is the U.S. small cap sector. They are battling with their downtrend from the mid-January highs, and appear to be trying to break higher.
Small-cap bulls must make a decisive move above the 595 level on the Russell 2000 or they will lose credibility. The bears know this, and will not yield this level easily. If the bulls are successful, the next stop for the Russell will be 615. They will probably fail, but it's nice to see some vigorous exertion, for once.
Checking a little deeper into the ranks of the Russell 2000, it appears that the upside effort is being carried primarily by small-cap regional banks such as New York Community Bancorp Inc. (NYSE: NYB), Whitney Holding Corp. (Nasdaq: WTNY), based in New Orleans, Susquehanna Bancshares Inc. (Nasdaq: SUSQ), based near Philadelphia. Maybe there's a World Series/ Super Bowl connection. All three are in definite short-term uptrends.
News and Related Story Links:
- Wall Street Journal:
Fed to Bare Tightening Plan - Money Morning News Category:
Jobless Recovery
- InvestorWords.com:
Oversold - Money Morning News Category:
Debt Bomb - Money Morning News Analysis:
As Greece's Woes Demonstrate, the Fuse Has Been Lit on the Global Debt Bomb - Money Morning News:
One Indicator That's Unquestionably Bullish
Overall, a good article. But Jon is not considering a factor of influence that is greater than the USD verses the Euro. The US's largest trading partner by far, making up more than all of its other trading partners combined, is Canada. The USD has been consistently falling in relation to the Canadian Loonie. There have been blips of strength by the USD against the Loonie over the last 2 years, but if you graph it, (I know Jon likes his graphs) you should find that the Loonie has continued to show strength against the USD. That does not hurt the US exports. The biggest threat to the US economy will be the lack of ability of the US government, to be able to borrow at reasonable rates in order to finance its deficit. The largest lender to the US has been China. China had to continue to lend to the US in order to support the USD until China divested itself of its USD reserves. Now that China's reserves of USDs is reduced, and the US has pissed off China by selling $3.5 Billion worth of armaments to Tiawan, you can count on China not lending the US any substantial amounts in the future. The only saving grace that I can see for the US economy is the huge gold reserve that the US government owns. As the gold price soars, it only makes sense that it will be easier for the US to pay off its debt by liquidating the highly priced reservses of gold. But it must be careful when doing this. When Russia found itself in a similar situation about a decade ago, the massive sale of its reserves flooded the gold market and drove down the gold price, in fact, reducing the value of the very thing that Russia was using as a value currency.
need to show how to pick stocks for call or put opts. do not send me to an expensive news letter either. someone in this world has to be a good samaritian. thanks
try ken trester thats who im looking at and just get quarterly 2 start
This is all great stuff, but it ignores the "500 pound gorilla," namely our continued occupation of Iraq and Afghanistan for ideological reasons at a cost of over $200 billion dollars per year in direct charges alone.
Our economy has taken a serious hit; we can not continue to squander this much money on ideological pursuits without long term damage to our economy and endagerment of the nascent recovery. Obama must be told there will not be a true recovery, with meaningful job creation, until the DOD exploits are brought under rational control.
I fully support US security; who doesn't! But this $200 billion scam is hurting not helping, witness the comments by returning Afghan veterans that 70-80% of the Afghans want us out, irrespective of Talaban, chaos, or whatever may follow our departure.
Oops
"CHANGE" OR IMPROVEMENT?
So, stimulus has helped employment. Hmmm. If so, why are the unemployment numbers still not improving along with all the stimulus dollars kicking-in? This has been a principal public complaint about the various stimulus bills and bailouts in 2008-2009.
The first thing the voters need to be willing to do before our economy can significantly improve is to replace every single politican who was in office and voted for ANY kind of Federal Stimulus legislation. They ALL must go because they have demonstrated they can not be true independents and are inclined to conform to party dictums or whoever is calling the shots (Goldmann Saks). A new opportunity for beginning real change would be November 2010 Midterm Elections. Suggest voters reinstate divided government.
IMMEDIATE THREAT: INFLATION OR DEFLATION?
One growing concern with me, and a distinct minority, is the possibity of deflation. The core CPI reportedly was only up 1% in the year from Jan '09-Jan'10. Continued low or even negative CPI going forward might indicate that credit deflation (in all financial assets and real estate) is far from over, since massive stimulus and Federal spending has not resulted in any growth in inflation. Credit is still very tight and there is alot of bad debt still out there (e.g. home loans).
Deflation is not widely recognized as a potential threat to your money, but it really is if it becomes a trend. This is what the FED appears to be trying to avoid, even at the risk of higher inflation in a few years or so. Often, it is what you don't expect which kills you.