Stocks enjoyed another plus week, closing one of the better Marches of the past 80 years. It seems like ages since volatility has been this low, and there have been many complaints about complacency and listlessness. Yet those concerns may be misplaced if indeed we are enjoying the second leg of a normal bull cycle. Low volatility in a bearish phase does suggest complacency, to be sure, but in a bullish phase it serves more to keep expectations in check.
Jon D. Markman
Article Index
Fastest Recovery Ever Could Push Corporate Profits to Record Highs in 2010
Sometimes we get a little carried away talking about esoteric subjects like bulls, bears, supply, demand, moving averages and the like. But if you just want to focus on something real, then look at corporate profits. When they're rising from a low, that's good; when they're flat-lining or declining, that's bad. Pretty simple.
Much of the rally of the past year has been in anticipation of a profit recovery. And now that recovery is actually coming in a bit better than bulls expected, which is why they are able to elbow bears so effectively. ISI Group now figures that corporate profits will clock in at +38.8% for the first quarter (year over year) of 2010, then +42.4% in the second quarter, +36.8% in the third quarter and then +30% in the fourth quarter (against harder comparisons). That would put profits in 2010 up a record 36.1% overall.
To read more about how corporate earnings will shape the market click here.
Much of the rally of the past year has been in anticipation of a profit recovery. And now that recovery is actually coming in a bit better than bulls expected, which is why they are able to elbow bears so effectively. ISI Group now figures that corporate profits will clock in at +38.8% for the first quarter (year over year) of 2010, then +42.4% in the second quarter, +36.8% in the third quarter and then +30% in the fourth quarter (against harder comparisons). That would put profits in 2010 up a record 36.1% overall.
To read more about how corporate earnings will shape the market click here.
What's In Store for U.S. Stocks in Light of Greece's Tragedy?
The recent month of February was quite interesting for U.S. stocks, because while the Dow Jones Industrial Average rose 2.6%, it didn't exactly take a direct route to those gains: There were eight separate triple-digit moves in the Dow, both up and down.
At the root of that volatility were political and economic developments that challenged the rationale for the huge rally out of the March 2009 low. Bulls were basically rethinking their beliefs that the home-price plunge had abated, employment was on the verge of a big turnaround, governments could cut taxes and boost spending without end, and that interest rates would remain at zero for years.
I had prepared subscribers for much of this turmoil. Back in early November, I highlighted signs of trouble in the market for government debt well before the troubles in Dubai and Greece came to a head. In December, we started a dialogue on what to expect as the U.S. Federal Reserve withdrew liquidity from the economy and lifted interest rates. The upshot was a series of letters detailing why you should expect the first nine months of the year to trade flattish with a lot of volatility.
At the root of that volatility were political and economic developments that challenged the rationale for the huge rally out of the March 2009 low. Bulls were basically rethinking their beliefs that the home-price plunge had abated, employment was on the verge of a big turnaround, governments could cut taxes and boost spending without end, and that interest rates would remain at zero for years.
I had prepared subscribers for much of this turmoil. Back in early November, I highlighted signs of trouble in the market for government debt well before the troubles in Dubai and Greece came to a head. In December, we started a dialogue on what to expect as the U.S. Federal Reserve withdrew liquidity from the economy and lifted interest rates. The upshot was a series of letters detailing why you should expect the first nine months of the year to trade flattish with a lot of volatility.
Which Stocks and Sectors Will Shine as Market Fear Subsides?
A lot of my commentary lately on the markets has been relatively short-term oriented. Today let's take a moment to pan back and consider the weekly perspective, which is rather benign, even positive.
From this point of view, stocks are broadly recovering from their most oversold condition since March of last year -- and the release of the energy stored up then persisted at near-full strength for three months.
To find out which stocks are positioned for profit, .
From this point of view, stocks are broadly recovering from their most oversold condition since March of last year -- and the release of the energy stored up then persisted at near-full strength for three months.
To find out which stocks are positioned for profit, .
Where's the "Big Money" Headed Now?
The remarkable week that just concluded actually began on February 12, which was two Fridays ago. Stocks plunged in the opening minutes of trading that morning as investors' faith in the global economic recovery was shaken. In China, policymakers again tightened monetary policy in a fight against rapid credit growth and fast rising asset prices. In Europe, which is plagued by concerns over the bailout of deeply indebted Greece, a report showed economic growth slowing dramatically.
For a few minutes, it looked like all of the prior week's advance would be lost and stocks were preparing to plunge into oblivion. But then, encouraged by a positive retail sales report, buyers swamped the tape -- focusing their attention on smaller, riskier companies, particularly in the technology sector. And off we went for the next six sessions.
To find out where the "Big Money" is headed now, click here.
For a few minutes, it looked like all of the prior week's advance would be lost and stocks were preparing to plunge into oblivion. But then, encouraged by a positive retail sales report, buyers swamped the tape -- focusing their attention on smaller, riskier companies, particularly in the technology sector. And off we went for the next six sessions.
To find out where the "Big Money" is headed now, click here.
Latest Report Shows the Jobless Recovery Still Endures
Stocks have staged surprise rebounds after seemingly poor payroll reports half a dozen times in the past year. But the one time that there was better-than-expected job news, on Dec. 5, the market tanked. Go figure - it's a great example of how upside down the logic is on Wall Street.
To help us interpret the jobs report of last week, I turned to my favorite independent labor analysts, Philippa Dunne and Doug Henwood. Here's their view of the latest numbers, which they considered the most positive in months - despite the many problems highlighted by the latest jobs report.
To help us interpret the jobs report of last week, I turned to my favorite independent labor analysts, Philippa Dunne and Doug Henwood. Here's their view of the latest numbers, which they considered the most positive in months - despite the many problems highlighted by the latest jobs report.
U.S. Joins Global Parade of Countries Plagued by Debt Bomb
The most important fundamental development of the week was not any of a slew of economic reports at all but the new federal budget proposal released by the White House. And it was a doozy: The Obama Administration proposed to spend $3.8 trillion, with $1.6 trillion on the equivalent of the national credit card.
Investors did not overtly seem to mind today, but they will. It is almost mind-numbing to think we've gone from the surplus that President Clinton left President Bush to the trillion-dollar hole we're in now. There is nothing good about the scenario of bone-crushing debt, as we have seen repeatedly throughout the world recently in places like Dubai, Greece, the United Kingdom and Japan. The fact that the U.S. dollar has managed to hold its own despite representing a country deeply in hock is only testament to the weakness of every other major developed-world government.
It's ironic in fact that plenty of emerging-market countries are managing their books far better than the United States and Europe. They include Chile, Azerbaijan, Angola, Ukraine and Romania -- all with debt at less than 15% of national GDP, while we are knocking on 60%!
Investors did not overtly seem to mind today, but they will. It is almost mind-numbing to think we've gone from the surplus that President Clinton left President Bush to the trillion-dollar hole we're in now. There is nothing good about the scenario of bone-crushing debt, as we have seen repeatedly throughout the world recently in places like Dubai, Greece, the United Kingdom and Japan. The fact that the U.S. dollar has managed to hold its own despite representing a country deeply in hock is only testament to the weakness of every other major developed-world government.
It's ironic in fact that plenty of emerging-market countries are managing their books far better than the United States and Europe. They include Chile, Azerbaijan, Angola, Ukraine and Romania -- all with debt at less than 15% of national GDP, while we are knocking on 60%!
How to Profit From the "Road Map to Recovery," Regardless of What Lies Ahead
Getting both sides of a bear market and recovery right is the biggest test that investors face because it requires doing an about-face on a winning strategy.
The ideal investor would have sold in October 2007 when stocks were making new all-time highs, then stayed out of all subsequent rallies during the worst bear market in seven decades, and then bought back into the market at its once-unimaginable low after not just the wheels of the economy had fallen off, but seemingly the engine, doors and steering wheel as well.
Also, the ideal investor didn't just need to recognize those inflection points, but make the most of his observation by exiting in full in October 2007 and re-entering with guns blazing in March 2009. That is even harder. The most common scenario would be to exit partially and enter partially.
Recognizing that only the most prescient investors will get these inflection points exactly right, I have focused my long-term research since the 2000 bear market on paying as much attention as possible to the message of the ticker tape rather than economics or fundamentals when it comes to these calls.
The ideal investor would have sold in October 2007 when stocks were making new all-time highs, then stayed out of all subsequent rallies during the worst bear market in seven decades, and then bought back into the market at its once-unimaginable low after not just the wheels of the economy had fallen off, but seemingly the engine, doors and steering wheel as well.
Also, the ideal investor didn't just need to recognize those inflection points, but make the most of his observation by exiting in full in October 2007 and re-entering with guns blazing in March 2009. That is even harder. The most common scenario would be to exit partially and enter partially.
Recognizing that only the most prescient investors will get these inflection points exactly right, I have focused my long-term research since the 2000 bear market on paying as much attention as possible to the message of the ticker tape rather than economics or fundamentals when it comes to these calls.
Investment News Briefs
With our investment news briefs, Money Morning provides investors with a quick overview of the most important investing news stories from all around the world.
Dodd's Departure; Cybersitter Files Suit; ADP: Service Sector Added Jobs in Dec.; Harley's Hogs to Rumble in India; GMAC to Post Record Loss; Markman Calls Dow Surge
Dodd's Departure; Cybersitter Files Suit; ADP: Service Sector Added Jobs in Dec.; Harley's Hogs to Rumble in India; GMAC to Post Record Loss; Markman Calls Dow Surge
- U.S. Sen Christopher Dodd, D-CT, said yesterday (Wednesday) that he will not seek re-election in November, potentially altering the debate over financial reform. Dodd, who is chairman of the Senate Banking Committee, in November released an 1,136-page draft bill for reform that would create several new protection agencies, increase regulation of credit agencies and derivatives, and alter the role played by the U.S. Federal Reserve in the financial system. However, analysts say that without having to worry about re-election, Dodd is likely to be more willing to compromise on objections raised by Republicans and the financial services industry." Even if Dodd wanted to get tougher, he does not have the votes to do it," Jaret Seiberg, an analyst with Concept Capital, told The Wall Street Journal. "That means compromising to get the Dodd-Shelby-Frank Financial Reform bill enacted."
U.S. Stocks Will Reward Optimistic Investors in 2010
I have been surprised to see the air thick with pessimism in recent weeks. Not so much the stock market, where the sentiment indexes show the bulls dominating the bears by slightly more than 52%. But among the general public.
An NBC/Wall Street Journal poll last week found that 55% of all Americans feel the nation is heading the wrong direction. This is the highest level since January of this year - when the financial crisis was red hot and U.S. President Barack Obama was just entering the White House! That's amazing.
A recent CNBC "Wealth in America" report found more negativity. Negative sentiments were expressed about the economy, stocks, home values, and wage growth. Faith in institutions like the U.S. Federal Reserve, the U.S. Treasury, and the financial sector were very low. President Obama's approval rating has fallen below 50% for the first time.
However, Merrill Lynch & Co. Inc. researchers picked up on this theme, and said in a recent note to clients that 2010 would be the year we exit the "pessimism bubble."
And I couldn't agree more. In fact, there might not be a better time to buy stocks.
An NBC/Wall Street Journal poll last week found that 55% of all Americans feel the nation is heading the wrong direction. This is the highest level since January of this year - when the financial crisis was red hot and U.S. President Barack Obama was just entering the White House! That's amazing.
A recent CNBC "Wealth in America" report found more negativity. Negative sentiments were expressed about the economy, stocks, home values, and wage growth. Faith in institutions like the U.S. Federal Reserve, the U.S. Treasury, and the financial sector were very low. President Obama's approval rating has fallen below 50% for the first time.
However, Merrill Lynch & Co. Inc. researchers picked up on this theme, and said in a recent note to clients that 2010 would be the year we exit the "pessimism bubble."
And I couldn't agree more. In fact, there might not be a better time to buy stocks.
The Recovery is Picking Up Speed, Setting the Stage for Big Gains in the Next Year
Do you hear a rumbling, a honking, the smell of new carpet in the air? If so, it's all a result of the biggest surprise of the past month: the rise of U.S. vehicle sales, which was supposed to have ended with the "Cash for Clunkers" deal over the summer.
And it's a very positive surprise.
The U.S. auto industry may be beleaguered, beaten, bruised and battered, but it is still extremely important to this country. If it can get rolling again, shocking the skeptics, then a lot of good things will happen.
When car sales rise, auto factory production rates rise, causing more car parts to be ordered, more steel and rubber and glass ordered and more advertising purchased. This leads to more people being hired in manufacturing, product planning and marketing, and all ancillary industries. A stronger auto industry will make the U.S. economy start to spin faster on its axis in ways no one is expecting. You cannot overestimate the importance of the improvement of this key industry, and yet I really don't think that investors are really onto it yet.
And it's a very positive surprise.
The U.S. auto industry may be beleaguered, beaten, bruised and battered, but it is still extremely important to this country. If it can get rolling again, shocking the skeptics, then a lot of good things will happen.
When car sales rise, auto factory production rates rise, causing more car parts to be ordered, more steel and rubber and glass ordered and more advertising purchased. This leads to more people being hired in manufacturing, product planning and marketing, and all ancillary industries. A stronger auto industry will make the U.S. economy start to spin faster on its axis in ways no one is expecting. You cannot overestimate the importance of the improvement of this key industry, and yet I really don't think that investors are really onto it yet.
Markman on the Markets: Historic Bull Run in Bonds Points to Higher Prices for U.S. Stocks
A sluggish month in the stock market has equity investors worrying about what's next.
But those equity investors would feel so much better if they'd just spend a little time studying the credit markets. And with good reason: The bull market in credit that continues to rage in the face of this stock-market lethargy leads us to one simple conclusion.
Stock prices have to head higher.
Indeed, independent analyst Brian Reynolds tells us that if stocks were trading at the same level as credit, the Standard & Poor's 500 Index would already be at 1,350 - 22% above where it closed on Friday.
For those who argue that the market has already rallied a great deal, or too much, let me just note that the S&P 500 would have to rise by another 41% just to get back to the level of three years ago. The key thing that bulls have in their back pocket is that investors are still trying to get used to the idea that the sky hasn't fallen - and have not yet priced in the prospects for a 25% increase in S&P 500 profits that we are likely to see in 2010.
But those equity investors would feel so much better if they'd just spend a little time studying the credit markets. And with good reason: The bull market in credit that continues to rage in the face of this stock-market lethargy leads us to one simple conclusion.
Stock prices have to head higher.
Indeed, independent analyst Brian Reynolds tells us that if stocks were trading at the same level as credit, the Standard & Poor's 500 Index would already be at 1,350 - 22% above where it closed on Friday.
For those who argue that the market has already rallied a great deal, or too much, let me just note that the S&P 500 would have to rise by another 41% just to get back to the level of three years ago. The key thing that bulls have in their back pocket is that investors are still trying to get used to the idea that the sky hasn't fallen - and have not yet priced in the prospects for a 25% increase in S&P 500 profits that we are likely to see in 2010.
Was Friday's Trading the First Sign of a Carry Trade Reversal?
Although it's too early to know for sure, Friday's action suggests we could be seeing the earliest stages of a carry trade reversal. Remember that hedge funds and other highly leveraged institutional investors have been borrowing here in the United States at ultra-low interest rates, selling the dollar short, and using the proceeds to snap up stocks, bonds, and gold.
Stocks rocked and rolled on Friday as traders reacted to a better-than-expected jobs report for November. Payrolls dropped just 11,000 and the unemployment rate fell to 10%. The consensus was expecting a payroll drop of 100,000 and the unemployment to remain at 10.2%. Sure, employers still made cuts. But by all indications were on the cusp of a job market turnaround.
An initial early morning blast took small cap stocks up as much as 3% before sellers emerged. The main concern was that a strong economy will force the U.S. Federal Reserve to drop its easy money policy that has it purchasing some $3 billion in mortgage-backed securities (MBS) per day while keeping short-term interest rates pegged near zero. The futures market now pegs the probability of an interest rate increase by August 2010 at 100%.
Stocks rocked and rolled on Friday as traders reacted to a better-than-expected jobs report for November. Payrolls dropped just 11,000 and the unemployment rate fell to 10%. The consensus was expecting a payroll drop of 100,000 and the unemployment to remain at 10.2%. Sure, employers still made cuts. But by all indications were on the cusp of a job market turnaround.
An initial early morning blast took small cap stocks up as much as 3% before sellers emerged. The main concern was that a strong economy will force the U.S. Federal Reserve to drop its easy money policy that has it purchasing some $3 billion in mortgage-backed securities (MBS) per day while keeping short-term interest rates pegged near zero. The futures market now pegs the probability of an interest rate increase by August 2010 at 100%.
Is Government Debt the Next Crisis to Strike?
While American investors were busy enjoying their Thanksgiving dinners, global markets were shaken by word that Dubai asked for a payment holiday on the $59 billion it owes via its investment vehicle, Dubai World. The move, which comes as oversized bets on Persian Gulf real estate sour, was considered a default by the major rating […]
With T-Bill Yields at Zero, it's Time to Beware of the "Bond Bears"
There is some interesting action unfolding in the dark corners of the credit market.
Although this exploratory sojourn takes us fairly far afield from our regular stomping grounds in the equity markets, it could have important implications for our investments. So grab a thinking cap, and let's go exploring.
First, let's have some context. As you know, governments around the world have unleashed tons of stimulus spending over the last year. Against a recessionary backdrop, it's no surprise that tax revenue has plummeted while fiscal deficits have soared.
Although this exploratory sojourn takes us fairly far afield from our regular stomping grounds in the equity markets, it could have important implications for our investments. So grab a thinking cap, and let's go exploring.
First, let's have some context. As you know, governments around the world have unleashed tons of stimulus spending over the last year. Against a recessionary backdrop, it's no surprise that tax revenue has plummeted while fiscal deficits have soared.
- FACEBOOK COMMENTS