Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

The Real Story Behind the Market’s Rise

Monday, April 30th, 2007
By for Profit Confidential

The global bull market shook off the late February jitters and resumed its charge with renewed vengeance. Once again, it is being led by the speculative frenzy in Shanghai and Shenzhen. Just to show you the enormity of the speculation in stocks traded in Renminbi in the mainland exchanges, the Shenzhen Composite increased threefold over the last 12 months. In comparison, the “hottest” U.S. index, currently the Dow Jones Industrial Average, gained a rather paltry 15% over the same period.

The 15% gain was enough to decisively take the DJIA above the major top of January 2000. In the recent months, the same feat had already been accomplished by the NYSE Composite, while the more racy indices such as the Russell 2000 made new all-time highs back in late 2004. On the other hand, a few major U.S. indices are still either marginally or substantially below their 2000 all-time highs, namely the S&P 500 (3.8%), the NASDAQ Composite (50%), and the NASDAQ 100 (60%).

Whether a given global market or particular index already bettered the historical 2000 highs or has still more to go, the gains following the 2000-2002 collapse have been worldwide and immense. Even more amazing and unusual is that the huge gains in stocks were racked up concurrently by commodities, real estate, and collectibles — essentially hard assets that do best during inflationary periods rather than during periods of low and declining inflation like 2002-2007.

During the previous explosive boom in commodities, which took the CRB Commodities index from 185 in August 1977 to nearly 335 by November 1980, the DJIA gained only 8.5% and the S&P 500 gained a more respectable 43%. Trying to justify or explain

the world’s broadest ever bull market in virtually all tradable assets, both optimists and sceptics agree on one thing — it has been driven by the global liquidity in borderless markets and economies.

The credit, and eventually the blame after this bubble bursts, must go to the major central banks led by the U.S. Fed and the Bank of Japan (BOJ). Facing the prospect of the 2001-2002 recession turning into a depression, they hammered down the risk by setting interest rates close to the zero level. In fact, the BOJ still keeps it benchmark interest rates below 1%, offering institutions no-brain trades of borrowing in Japan and investing in countries with much higher interest rates.

  • Still worried about the economy? Become an elite charter member of George's DAILY PROFITS and you could...

    TRIPLE YOUR MONEY IN A MONTH!

    George gave us the $2.8-billion IT infrastructure provider, up 4,745.20%; the $1.8-billion advertising agency, up 1,295.44%; and the $762-million business software company, up 1,213.19%.

    Only charter members can follow George daily.

    Learn how here!

Cheap and easy money probably revived the global economy more vigorously than the central bankers had expected. The result has been strong multi-year growth in earnings and operating margins across a broad range of industries, in contrast to the narrow based boom in the “new economy” industries of the late 1990s.

Growing cash hoards on balance sheets triggered unprecedented growth in private leveraged buyouts (LBO) and corporate acquisitions. Managements of cash rich companies, trying to fend off buyout barbarians, added to the frenzy by massive share repurchases, often enlarged by new borrowings. Reducing the number of outstanding shares has provided an extra kick to per share earnings growth, boosted share prices and P/E ratios, making re-leveraged public companies less enticing for LBOs.

The latest statistics on private LBOs, mergers, and corporate share repurchases suggest that 2007 will probably exceed the record breaking 2.7 trillion worth of LBOs and mergers done in 2006. The resulting shrinkage in public share float, more than anything else, is the reason why the stock market is capable of climbing the proverbial wall of worry. The wall created by the collapsing housing and related sectors, the meager 1.3% growth in GDP, while inflation remains stubbornly above the Fed’s target, and other long ignored factors such as doubling of the U.S. deficit and the war in Iraq.

It would be hard to argue that LBO partnerships, hedge funds, or conventional mutual funds are much worried by developments in the U.S. economy that would normally deflate high stock valuations. As an example, the U.S. Equity Mutual Funds as a whole now hold only 3.7% of their assets in cash, the lowest ever cash reserves held!

 

VN:F [1.9.22_1171]
Rating: 0.0/10 (0 votes cast)
VN:F [1.9.22_1171]
Rating: 0 (from 0 votes)

This is an entirely free service. No credit card required.

We hate spam as much as you do.
Check out our privacy policy.

Tony Jasansky - Technical Analyst, Stock TraderTony is the developer of a proprietary general gauge called Marketmetre that tracks several fundamental and technical indicators. A hardcore technical analyst and avid follower of corporate insider market trades, over the past quarter century Tony’s Marketmetre has successfully called every major market move. Tony writes a monthly column in Profit Confidential.

The Great Crash of 2014

A stock market crash bigger than what happened in 2008 and early 2009 is headed our way.

In fact, we are predicting this crash will be even more devastating than the 1929 crash…

…the ramifications of which will hit the economy and Americans deeper than anything we’ve ever seen.

Our 27-year-old research firm feels so strongly about this, we’ve just produced a video to warn investors called, “The Great Crash of 2014.”

In case you are not familiar with our research work on the stock market:

In late 2001, in the aftermath of 9/11, we told our clients to buy small-cap stocks. They rose about 100% after we made that call.

We were one of the first major advisors to turn bullish on gold.

Throughout 2002, we urged our readers to buy gold stocks; many of which doubled and even tripled in price.

In November of 2007, we started begging our customers to get out of the stock market. Shortly afterwards, it was widely recognized that October 2007 was the top for stocks.

We correctly predicted the crash in the stock market of 2008 and early 2009.

And in March of 2009, we started telling our readers to jump into small caps. The Russell 2000 gained about 175% from when we made that call in 2009 to today.

Many investors will find our next prediction hard to believe until they see all the proof we have to back it up.

Even if you don’t own stocks, what’s about to happen will affect you!

I urge you to be among the first to get our next major prediction.
See it here now in this just-released alarming video.