About Those Billionaires at the
White House & Bye, Bye Euro

US economyThere’s so much to say this morning, or at least so much I have to say about different economic and financial events unfolding:

President Obama met with Bill Gates and Warren Buffett at the White House yesterday to discuss, among other things, the economy. Obama also has a “business” summit upcoming with some 20 business leaders (heads of General Electric Co. [GE/NYSE], Google Inc. [GOOG/NYSE] and other big companies) to discuss economic growth. Dear Mr. President, you are asking the wrong people. Over 70% of jobs in this country are created by small businesses with less than 50 employees. Don’t ask the billionaires for advice, ask the small businessperson. First thing they will tell you: they can’t borrow money from the banks to expand their businesses. That’s one of the biggest problems. Big companies can access capital, but small businesses are having a very difficult time of it.

Spain needs to raise over $200 billion next year. Moody’s Investors Services said this morning that they are reviewing Spain’s credit rating. That means the cost for Spain to borrow money will rise. Spain has the highest unemployment rate of the euro countries at 20%. First Greece, then Ireland; now it is a toss-up between Portugal and Spain for bailout applications. Italy is not far behind and could be in greater trouble because of its political instability. Why do I mention all this? Because the euro will keep sliding against the U.S. dollar amid repeated national debt crisis amongst the euro countries. The U.S. dollar has strengthened lately, not because the U.S. is getting economically stronger or because our debt is declining, but because the euro continues to weaken.

The Washington-based Business Roundtable said yesterday that optimism amongst U.S. CEOs is at its highest level since 2006. No kidding. Large American corporations are collectively sitting on more cash in the bank than ever before. They can also borrow billions more dollars at interest rates that are at record lows. Payrolls have been slashed. Profits are rolling in. Why wouldn’t CEOs be optimistic? But we need to remember that optimism doesn’t necessarily lead to investments in plant/equipment and more employees. Most people I talk to are still in a cautious mood after the American credit crisis of 2008. They need more time to heal, which means the U.S. unemployment rate will remain high.

The U.S. Commerce Department reported that Tuesday sales at U.S. retailers rose 0.8% in November after a 1.7% increase in October. Looks like the last quarter of 2010 will be the strongest in terms of consumer retail spending since the recession began. Hopefully my readers heeded my advice (going back as early as the summer) to look at retail stocks. The Dow Jones U.S. Retail Index is 23% since July of this year.

Michael’s Personal Notes:

The bond market is getting crushed and rising long-term interest rates have become a real concern. The bellwether 10-year U.S. Treasury Note yielded 2.4% just as recently as early October. Today, the same bond yields 3.45%—a jump of 44% in less than three months! The five-year U.S. Treasury Note yield surpassed two percent for the first time in months yesterday.

U.S. long-term interest rates are rising rapidly, and this can mean one of three things, or a combination of the three: the economy is expected to grow over the next five years at a more rapid pace than previously expected; inflation is expected to rise; and/or foreigners want more return on the bonds they are buying to finance America’s debt.

The sharp rise in long-term bond yields is of great concern. I’m surprised not to have seen more coverage on this topic on the popular financial Internet sites or business newspapers.

Fellow editor Anthony Jasansky issued an alert this morning saying his proprietary stock market indicator has flashed a sell signal for stocks. Although I think the sell signal is premature, if long-term bond yields continue to rise over the next few weeks, it will spell “problems” for the stock market.

Where the Market Stands; Where it’s Headed:

My Christmas wish came early this year. Yesterday, the Dow Jones Industrial Average ploughed through to a new 52-week high. I had been writing on these pages for weeks that the Dow Jones was poised to break on the upside, past its previous 52-week high achieved in early November.

If we look backwards, the Dow Jones sits this morning at its highest level since September 2008. The Dow Jones is up an unprecedented 78% from the bear market low of March 9, 2009. The past 22-month period has been one of the best on record to make money from in the stock market. Unfortunately, the majority of investors missed this rally, as the distaste for stocks they acquired in the first quarter of 2009 lingers on today. There is very little mention in today’s business newspapers about the Dow Jones breaking to a new 52-week high. It’s certainly not front-page news.

For 22 months, I’ve been saying we are in a bear market rally that would take stocks higher in the immediate term. But going into 2011, I’m very cautious, as I continue to see long-term interest rates rising.

What He Said:

“A Stock Market’s Obituary: It is with great sadness that we announce the passing of the Dow Jones Industrial Average. After a strong and courageous battle, the Dow Jones fell victim to a credit crisis and finally succumbed on Friday, October 3, 2008, when it fell decisively below the mid-point between its 2002 low and its 2007 high.” Michael Lombardi in PROFIT CONFIDENTIAL, October 6, 2008. From October 6, 2008, to November 27, 2008, the Dow Jones Industrial Average experienced one of its biggest two-month losses in history.