Big Blue to the Stock Market’s Rescue

“Profit Confidential” Column, by Michael Lombardi, CFP, MBA

The stock market yawned last week when Intel Corporation (NASDAQ/INTC) reported earnings substantially higher than analyst expectations. The stock market was asleep when better-than-expected earnings came out from JP Morgan Chase & Co. (NYSE/JPM).

But “big blue” was a different story.

Yesterday, IBM (NYSE/IBM) reported a stronger-than-expected increase in fourth-quarter 2009 profit and it raised its profit target for 2010. And the stock market loved it, with the Dow Jones Industrial Average up 115 points yesterday to a new record high closing for 2010.

But there is more to the story.

Aside from its paltry two-percent gain yesterday (after the news of its better-than-expected earnings), IBM stock is up 91% since its November 2008 low. The stock’s price chart is like a straight line up from November 2008 to today.

And considering IBM stock trades at only 12 times this year’s expected earnings, one could hardly call the stock overpriced.

A stock like IBM is why I believe the bear market rally that started in March 2009 has more legs left. Institutional investors love companies like Intel, JP Morgan and IBM that have already reported better-than-expected earnings. Other companies like General Electric Co. (NYSE/GE) still have to follow.

As the bellwether stocks (as they are referred to) continue posting better profits, mutual funds, investment funds, money managers and institutional investors start to get the feeling that the recession is over. Instead of sitting on the sidelines with cash while the general stock market indices continue to climb, and so as not to disappoint their clients, these big boys start buying stocks, pushing the market higher.

That is exactly what the bear market wants: Lure investors back into the stock market before taking their money away.

Let’s face it. Bull markets end in a euphoria of speculation (like the tech boom of 1999/2000 or the general stock boom that ended in October 2007 with stock trading close to 25 times earnings). Bear markets end in exhaustion and with great values abounding. When the stock market hit a multi-year low in March 2009, stocks were far from the extreme valuations you see at bear market lows.

So the story, or least my story, goes on. The bear market rally will continue moving stocks higher for now. And we should all have fun and make money while it is happening. Because once the bear market rally is over, the bear will have a few big surprises for us.

Michael’s Personal Notes:

It is very important for my readers to see what’s going on economically around the world as these events will eventually affect America. At one time, when the U.S. was a creditor nation, the world followed in its footsteps. Now that we have lost our manufacturing base and we have become such a big debtor nation, it is a different story.

Inflation in Britain is surging. Yesterday, it was reported that consumer prices in December 2009 were 2.9% higher than one year ago. While officials were quick to dismiss the one-month “blip” in inflation numbers by saying the country has experienced 13 years of low inflation, 2.9% inflation is an alarming rate. Can inflation become a problem in the U.S. as well? Yes, I’ve written many times about this threat. Interest rates that are low, surging debt, expansive fiscal stimulus, and a collapsing currency — a recipe for disaster.

The Bank of Canada decided yesterday to keep interest rates unchanged in Canada, but the central bank said it was planning to toe this line only until July of this year. Does that mean higher interest rates in Canada this summer? Could be, and the U.S. may not be far behind.

Where the Market Stands:

There is not much else I can say about the stock market that I haven’t already said in my lead article today, “Big Blue to the Stock Market’s Rescue.” The Dow Jones Industrial Average starts this morning up 2.85% for the year and only 275 points away from Dow Jones 11,000.

What He Said:

“You’ve been reading my articles over the past few months and have seen how negative I’ve become on the U.S. economy. Particularly, I believe it’s the ramifications of the faltering housing sector that are being underestimated by economists. A recession doesn’t take much to happen. It’s disappointing that more hasn’t been written on the popular financial sites and in the newspapers about the real threat of a recession happening in 2007. I want my readers to be fully aware of my economic opinion: I wouldn’t be surprised to see the U.S. economy in a recession sometime in 2007. In fact, I expect it.” Michael Lombardi in PROFIT CONFIDENTIAL, November 13, 2006. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.