All Good Economic News, So Why Am I Bearish for 2011?

bear stock marketImportant economic news and my analysis to share with PROFIT CONFIDENTIAL readers:

Jobless claims in the U.S. declined to 407,000 last week, according to the Labor Department, the lowest level since July 2008. My take: The economy is clearly improving. If the jobless claims are falling, then the unemployment rate for November 2010 will fall. (President Obama and Fed Chairman Bernanke will be happy people when those November unemployment numbers come out!)

Consumer spending in the U.S. rose in October for a fifth consecutive month according to the Commerce Department. My opinion: I’ve been telling my readers to get into retail stocks. Now you see why. The chart of the Dow Jones U.S. Retail Index led the rise in consumer spending.

Also from the Commerce Department, wages had their biggest monthly gain in October since May of this year. The U.S. personal savings rate rose in October to 5.7% from 5.6%. Consumers are making marginally more money, retail sales are rising and consumers are saving more; a great three-way combination. During the real estate boom that ended in 2006, the savings rate of Americans was negative.

So, with all the good economic news continuing to flow down the pipeline, why am I bearish going into 2011? More specifically, why do I keep calling the market action since March 2009 a bear market rally, as opposed to a new bull market?

The stock market is a leading indictor. With stocks rising so aggressively in 2009, the market foresaw the positive economic and corporate news of 2010. So, what happened in 2010, with the economy getting better and corporate America returning to profitability, was no big surprise.

But going into 2011, I believe the stock market smells a rat. And that rat is higher interest rates. Quietly, almost undetected, interest rates are rising. The yield on three-month U.S. T-bills is literally up 30% in a matter of weeks. The yield on the bellwether five-year U.S. T-bill is rising steadily. Mortgage rates are rising, too.

The stock market doesn’t like rising interest rates. And that’s what I’m concerned about going into 2011. Though it is not polite to say, as a country, we need to thank the European countries like Greece, Ireland, Portugal and Spain for their fiscal mismanagement.

If it were not for the euro being under so much downward pressure, our greenback would be in a free-fall, which would result in interest rates in the U.S. rising even faster than they are presently rising.

Hence, going into 2011, my biggest concern, and what I believe will be the biggest surprise for investors, are higher interest rates…which are a big negative for the stock market. And that’s why we are still in a bear market rally in my opinion.

Michael’s Personal Notes:

The next time you read the popular Internet financial sites or the business newspapers and see that the stock market is down because of the problems in Europe with Ireland, remember the facts:

According to the World Bank, the combined Gross Domestic Product (GDP) of Greece and Ireland for 2009 was $556 billion. The GDP of the United States in 2009 was $14.256 trillion. Ireland’s debt woes have very little impact on the U.S. But I’m sure the profits the bond traders have made shorting Irish bonds have been quite spectacular.

Where the Market Stands; Where it’s Headed:

Thanksgiving weekend 2010 is behind us. Black Friday is behind us. Back to work. Wall Street opens this morning with a stock market that wants to go higher. I’m looking for the bear market rally in stocks that started in March 2009 to continue moving up through to the end of 2010.

Enjoy the rally in stock prices while it lasts!

What He Said:

“The Dow Jones Industrial Average, the S&P 500 and the other major stock market indices finished yesterday with the best two-day showing since 2002. I’m looking at the market rally of the past two days as a classic stock market bear trap. As the economy gets closer to contraction, 2008 will likely be a most challenging economic year for Americans.” Michael Lombardi in PROFIT CONFIDENTIAL, November 29, 2007. The Dow Jones Industrial peaked at 14,279 in October 2007. A “sucker’s” rally developed in November 2007, which Michael quickly classified as bear trap for his readers. By mid November 2008, the Dow Jones Industrial Average was at 8,726.