I want to stay on the topic of third-quarter corporate earnings for the simple reason that it is earnings season and the stock market is reacting positively to the numbers. Stock market investors are still reticent to go long the market in a meaningful manner, because of the investment risk inherent in the European debt crisis. With the main stock market averages’ breakout from their recent ranges, the technical perspective is improving. We’re not out of the woods yet, but stock market trading action is getting much better.

In the Industrial Goods stock market sector, there have been some real standouts on the earnings front. This is a sector that can be heavily influenced by interest rates and trends in the U.S. dollar. The Farm and Construction Machinery sub sector in particular is benefitting tremendously from the lower U.S. dollar trend and is harboring some serious moneymaking large-cap companies, the brands of which you most certainly are familiar with.

AGCO Inc. (NYSE/AGCO) has been a stock market darling since the March 2009 low, posting a gain of approximately 200% up until the stock market’s recent correction. The Duluth, GA-based agriculture equipment manufacturer (selling brands like “Challenger,” “Fendt,” “Massey Ferguson” and “Valtra”) is booming right now, posting third-quarter earnings that beat consensus by $0.12 per share. Revenues came in above Street analyst expectations and the company guided 2011 earnings per share and revenues above current visibility. The company is saying that higher grain prices are going to drive farm equipment sales higher through to the end of the year and that higher profit margins are expected across the board.

Another well-known equipment maker, which is one of my stock market benchmark companies, is Caterpillar (NYSE/CAT). In the previous quarter, stock market investors sold the stock all the way down to $70.00 a share from $110.00 after the company reported results that were just shy of consensus (see Stock Market Leaders Under Pressure—Dividends to Become the Market’s New Best Friend). The stock wasn’t helped either by terrible stock market conditions due to weak sentiment.

In its latest quarter, however, Caterpillar’s business picked up considerably and the company reported outstanding earnings growth of 44% to $1.14 billion. Third-quarter revenues grew 41% to $15.72 billion and the company increased its full-year view.

Caterpillar is one of the few large manufacturing companies that’s hiring (5,000 alone between June and September) and the company’s business is booming in developing economies that need construction equipment. Mature economies are now going through a replacement cycle, which is also helping the bottom line.

AGCO and Caterpillar are but two large equipment manufacturers that no doubt contributed to the surprise gain in the non-auto/aircraft portion of durable goods orders in September. The latest data showed a marked demand increase for computers, primary metals, fabricated metals, heavy machinery, and electrical equipment. All these industries are benefitting from interest rates that are low and a weaker U.S. dollar.

Both these companies make great products that are benefiting from a strong business cycle in agriculture, construction and mining on a global basis. A weaker U.S. dollar against a basket of world currencies is certainly helping the bottom line, but, on balance, I view these businesses as doing very well on their own.

Since June of last year, the U.S. dollar index (a measure of the value of the U.S. dollar versus a basket of foreign currencies) has been in a marked downtrend, fostered by a monetary policy of reduced interest rates and rising money supply. This is helping U.S. large-caps that have major international businesses and it’s contributing to the earnings outperformance with many of these companies. It’s pretty clear in my mind that a weaker U.S. dollar as a policy is helping corporations and that stock market investors should see some significant dividend increases in 2012. The primary U.S. dollar trend has been recently put on hold by the debt crisis in Europe, but once this is dealt with (hopefully sooner rather than later). I expect the U.S. dollar to resume its weakness, which will help domestic gross domestic product (GDP).

The stock market now has some positive momentum, which I think can produce a decent gain before the end of the year. In my view, monetary stimulus is beginning to work and a generally weaker U.S. dollar is being very helpful. I have no problem with the U.S. dollar continuing in a downward trend, as this will go a long way towards helping the manufacturing and export sectors, as well as stock market investors who have been sitting on the sidelines in an otherwise lackluster market.

It’s great to see big, brand-name U.S. corporations reporting great numbers. It’s a trend that I think will continue going into 2012, as long as interest rates and the U.S. dollar stay low. I hate to admit it, but Federal Reserve policy on the U.S. dollar seems to be working.

What a difference a couple of months make!

If we think back to early August of this year, we can remember several days in which the Dow Jones Industrial Average fell 400 to 500 points in a single day. As the stock market continued to deteriorate, stock advisors started throwing in the proverbial towel and turned big-time bearish.

At the beginning of October the Dow Jones Industrial Average hit a low of 10,404, a level not seen since September 2010. The stock market’s poor performance in the period from August to late September created the highest amount of stock advisor bears since March of 2009 (The Strongest Indication Yet That Stocks Are Short-term Oversold).

And, as usual, at the depth of pessimism, the Dow Jones Industrial Average turned up. Stocks moved higher; we are now in striking distance of Dow Jones 12,000. Hopefully, my readers followed the guidance here in Profit Confidential…we’ve been writing for weeks that the bear market rally that started in March of 2009 had yet to finish its business (Four Reasons Why Stock Prices Will Bounce Higher Now).

The action of the Dow Jones Industrial Average and the action of benchmark stocks (see “Michael’s Personal Notes” below) are often referred to as leading economic indicators. And this brings me to the “granddaddy” leading benchmark stock, Wal-Mart Stores, Inc. (NYSE/WMT), a component of the Dow Jones Industrial Average.

If we look at Wal-Mart’s stock today, we see that the stock is pennies away from breaking to a new price high for 2011. Wal-Mart’s benchmark stock is telling us that low-end retail sales are good in America. Why wouldn’t they be? With the unemployment so high, the middle-market retail stores are suffering as consumers cut their spending and shop the lower-end retail stores like Wal-Mart and Target Corporation (NYSE/TGT).

But if we look closer, we will see just how accurately Wal-Mart’s benchmark stock is predicting the future. The benchmark stock is telling us that sales at low-end retail are brisker than any other time this year; but if we look at the long-term price chart of Wal-Mart’s stock, we see the stock is far from hitting its all-time high reached back in early 2002.

For technical analysis junkies, Wal-Mart stock hit a high just under $65.00 a share in the first quarter of 2002, the peak in a classic head-and-shoulder pattern. In the fourth quarter of 2008, Wal-Mart’s stock made a run at its price high, but failed. The first shoulder was formed. Now, the stock’s making a second run at its price-high, which I believe will fail, and the second shoulder of the pattern will be carved out.

The action of Wal-Mart’s stock falls in squarely with the economy and my bear market prediction. The Dow Jones Industrial Average has been in a bear market since March of 2009. We won’t break to new stock market highs with this rally, but we will get high enough to lure more investors back into the stock market, which is exactly what the bear wants.

Michael’s Personal Notes:

Maybe the economy isn’t in that bad a shape after all…

Visa Inc. (NYSE/V), the world’s biggest consumer payment network, reported last night that its third-quarter profit beat analyst expectations. Visa reported a profit of $880 million for the three months ended September 30, 2011. Business is so good that Visa is buying back its own stock in addition to boosting its quarterly dividend by a whopping 47%.

Visa can be looked at as a benchmark stock that gauges economic growth. Benchmark stocks are the stocks of companies that are dependent on the sale of goods or services to either consumers or business. Common sense dictates that, when the world’s biggest credit-card company is seeing profits rise, it’s a good indication of economic growth, not contraction.

The more products or services consumers buy, the more profit for benchmark stock Visa—a good indication of economic growth.

I have written several times that stock advisors, equity analysts, and economists turned too bearish on the economy too fast when the stock market started to plunge this past August. They overreacted.

Yes, I’m personally bearish on the long-term outlook for the economy for the many reasons that I often write about on these pages. I believe the government and Federal Reserve are limited in their next moves should the economy start to contract again. But the economy isn’t collapsing today. The economy will slow over the next few months. Higher profits at benchmark stock Visa are proof that the economic growth isn’t coming to a halt…just quite yet.

Where the Market Stands; Where it’s Headed:

A few points here, a couple of points there, and all of a sudden the Dow Jones Industrial Average is up three percent for the year. Add a dividend yield of 2.5% and, presto, stocks have retuned about 5.5% in 2011—multiples of returns that investors are getting on 90-day U.S. T-bills.

But it’s not over yet. As I have been writing, the bear market rally will continue to move higher against the backdrop of extreme pessimism amongst investors and stock advisors and better-than-expected third-quarter corporate earnings.

The Dow Jones Industrial Average has inched up only 130 points away from 12,000 level—an important psychological point I believe the bear market rally will soon pass through.

What He Said:

“For the economy, the message from retail stocks is quite clear: Consumer spending, which accounts for roughly 70% of U.S. GDP, is in jeopardy. After having spent like ‘drunkards’ during the real estate boom years, consumer spending is taking the same trend as housing prices, slowing down faster than most analysts and economists had predicted. As news of the recession continues to make headlines in the popular media, the psychological spending mood of consumers will continue to deteriorate, lowering earnings at most high-end retailers and bringing their stock prices down even further.” Michael Lombardi in PROFIT CONFIDENTIAL, January 28, 2008. According to the Dow Jones Retail Index, retail stocks fell 39% from January 2008 through November 2008

Microsoft Corporation (NASDAQ/MSFT) presented muted results after its fiscal first-quarter revenues were only marginally above estimates, while its earnings were in-line. The stock has been a disappointment over the past decade, becoming viewed as a boring technology play with limited growth and a lack of vision.

While the stock market has seen some impressive gains from other key tech companies, Microsoft has been a laggard—but that could change soon. I’m not saying it will become one of the top stocks in the stock market, but Microsoft could become more attractive to the growth investor.

Whenever a company comes up with a new and potentially huge product, it does so with the help of many other companies. This is where Microsoft comes in, as it will be riding the coattails of Nokia Corporation (NYSE/NOK) while it rejuvenates itself to battle for smartphone and cell phone supremacy. Investors in Microsoft could be in for some fast and easy profits.

Just ask the early investors in Apple Inc. (NASDAQ/AAPL). I’m not saying Microsoft will be similar, but the alliance with Nokia may yet prove to be the trigger needed to jumpstart the stock.

Based on my past experience, I can say that not all of the companies involved will see an immediate boost, but often the stocks of these companies can make excellent long-term investments if purchased at the right price and time. And the time for buying Microsoft is now.

That’s exactly what I’ve found with this rebound opportunity. The stock market always provides opportunities and Microsoft appears to be one. However, note that this is not a specific buy recommendation; just an example of an opportunity out there.

Microsoft has seen its stock do absolutely nothing for the past decade in the stock market where it has been dead money for investors, while other stocks have made enormous returns.

But the time appears to be ripe for Microsoft to break out of its sleep as a boring, former high-flying technology stock that needs a kick to drive up the share price and attract buyers. The company needs to generate the excitement it once had when it showed up at trade shows. Selling its operating system is not enough, as PCs are becoming relics.

The big money is in the mobile market. Eventually PCs and laptops could be a thing of the past only found in museums for your kids or grandkids to see. Remember the typewriter? Take a trip to the Smithsonian and you’ll see one on display. The same could happen to PCs and laptops in less than a decade and even as early as a few years. The advent of the tablet computer is the first step towards the demise of the PC and laptop.

Microsoft took another step forward with its $8.5-billion acquisition of Skype, which was approved in the United States in June 2011 and is awaiting approval in Europe from the competition bureaus. The addition of Skype communication application will strengthen the product offering in the new Nokia “Windows” phone. Microsoft will provide the Windows software to develop a high-power, next-generation Nokia smartphone to compete against the likes of Apple, Research In Motion Limited (NASDAQ/RIMM), Samsung, and the recent acquisition of Motorola Mobility Holdings, Inc. (NYSE/MMI) by Google Inc. (NASDAQ/GOOG). Trust me, Google knows what it is doing, as it will flood the market with “Android”-powered Google-based Motorola phones. Doesn’t the Nokia-Microsoft alliance make more sense?

Just imagine the opportunities for Microsoft given the size of the global cell phone market. There are estimated to be over five billion cell phone users, according to the United Nations. That is a lot of phones, so the battle for market share will be intense.

The demand for smartphones will continue to grow rapidly, as we see more and more content and applications move to the mobile phone. Mobile broadband is becoming more significant. There are estimated to be over one billion broadband subscribers in 2010, according to the International Telecommunication Union. This is why smartphones are becoming more critical products and why Microsoft needs to be there.

In a few years, there’s a chance that Microsoft may become one of the top stocks for growth investors.

Another interesting stock in technology is China-based iSoftStone Holdings Limited (NYSE/ISS), which you can read about in Selective Tech Investing the Key to Success. Add it to your list of the top stocks to look into in this area.

Stocks may be looking to go higher, but you also need to be careful and make sure you have proper risk management in place. Read my How to Survive During This Economic Chaos article and out how you can protect your portfolio.

Former retail superstar Gap Inc. (NYSE/GPS) is now largely dead money for the time being, as the company works to try to turn its sinking ship around.

The stock market has punished Gap for its results. The competition is extremely high in Gap’s space and the company is beginning to become a dinosaur as far as popularity among the youth, who no longer want to wear Gap apparel, but instead wearing trendier clothes from the likes of Aeropostale, Inc. (NYSE/ARO), American Eagle Outfitters Inc. (NYSE/AEO), and Hollister.

For the five-week period ended October 1, Gap reported more disappointing results after a four-percent decline in its key same-store sales. With the debt crisis in Europe and jobs at risk in the U.S., there has been a decline in consumer demand. But, for Gap, it has more to do with the company no longer appealing to the youth crowd than the debt crisis and other problems.

Now with the third-quarter earnings, watch the retailers closely, especially what they say about what to expect during the holiday shopping season that traditionally begins with Black Friday on November 25, the day following Thanksgiving.

Yet, in spite of weak consumer confidence, which came in at a disappointing 48.5 in September, consumers are continuing to spend, albeit at an anemic rate.

The headline Retail Sales for September saw a rise of 1.1%, better than the 0.6% estimate, while the core number excluding autos surged an impressive 0.6%, well above the 0.3% expected. You have to feel somewhat encouraged that consumers are still spending in light of the issues. What we want to see is a rise in spending on non-essential goods and services, specifically big-ticket items.

My economic analysis leads me to believe that consumers will continue to think hard before spending. It will be really tough for retailers in Europe given the debt crisis, as consumers cut back on spending.

The S&P Retail ETF (NYSE/XRT) is around the midway point of its 52-week range, as the stock market stalls after upside moves.

In my view, it’s essential to look for same-store sales growth in retailers that sell non-essential goods. Increases here mean that consumers are spending on goods and services that are non-essential. These include electronics, appliances, furniture, autos, and other big-ticket items. Watch for the Durable Goods Orders report next Wednesday.

The best stocks in the retail space continue to be the discounters and big-box stores.

But, as I have said on numerous occasions, we need to continue to see jobs created and for the housing prices to halt their slide and reverse to the upside. The surge in housing prices was a catalyst in the consumer spending boom leading up to 2008, when homeowners borrowed heavily on their surging home values to spend excessively on travel, renovation, and other big-ticket items. Unfortunately, this is no longer the case, as home prices have plummeted and homeowners are fighting hard to keep their homes.

Retail growth will be more sustainable once jobs and housing recover.

I talked about the negative impact of weak consumer confidence on the stock market and the rest of the economy in Stock Market, Housing Market, GDP Growth: It’s All About Consumer Confidence.

The problem is that a country without strong jobs creation is very concerning, as I discussed in SOS—America Needs Help.