Who would have ever thought it?
I’m talking about the stock market’s ability to pull a winner out of the hat for 2010. This is a year we started with all kinds of dire predictions from analysts and stock market advisors. (Lucky my PROFIT CONFIDENTIAL readers were not listening to them!)
Today, we sit with the Dow Jones Industrial Average a paltry 70 points away from breaking to a new 52-week high. Do I think it will happen? Yes. My loyal readers know I have become increasingly bullish on stocks since the March 9, 2009, low.
Are Dow Jones Industrials going to 38,820 as predicted by Jeffrey Hirsch, editor in chief of the Stock Trader’s Almanac? No, I’m not quite that bullish on stocks.
My message for the majority of 2009 and 2010 has been unchanged:
The severity of the Great Recession caused corporations to sell non-core operations while reducing payrolls. As this was achieved, profitability at companies was restored. The economy has been improving, consumers are loosening their purse strings and companies are posting good profits again—something the stock market loves.
We need to remember that consumers have gone from a negative savings rate at the onset of the recession to a personal savings rate of five percent to six percent. The profits that companies are making are not being re-invested in plant, equipment or new hires; rather, corporations are being very cautious with their money, preferring to increase their bank balances over investing their funds. Corporate cash in the bank sits at a historic high. This is very positive for the stock market.
Just to name a few, Microsoft sits with over $40.0 billion in the bank. Google has $30.0 billion plus in the bank. GE holds over $100 billion. All told, almost two trillion dollars is stored away in corporate coffers.
The biggest risks—what keeps me awake at night—are the collapse of the U.S. dollar and the rising debt of the United States. Given the changing political landscape in America that we are all waking up to this morning, maybe, just maybe we can see finally see a tightening of government purse strings.
So far now, the market moves higher. No, it’s not a bird, a plane or even Superman; it is a rising stock market given strong corporate profits, rising consumer demand…stocks suddenly become an attractive investment again.
But for 2011 and beyond, I’m not so bullish, as I see interest rates needing to rise to support the anemic greenback and to fend off the inflation the Federal Reserve’s actions of the past three years will create.
Michael’s Personal Notes:
The American Bankruptcy Institute said yesterday that 132,173 Americans filed for bankruptcy in October. By the end of this year, some 1.6 million Americans will have filed for bankruptcy, about 100,000 more than in 2009.
In the face of record personal bankruptcies, relatively high unemployment and a depressed housing market, the stock market continues to rise. Why? Because the stock market is only concerned with two things: corporate profits and interest rates.
If interest rates are low, corporations can borrow money at low-interest costs, reducing their expenses, which results in higher corporate profits. More importantly, interest rates being low make equities more attractive for investors than other forms of investment, increasing the demand for stocks.
The majority of U.S. corporations that were caught off guard by the severity and suddenness of the Great Recession sold non-core assets and reduced payrolls. This resulted in higher profits and rising stock market prices.
The market doesn’t care about the state of the regular consumer unless consumer spending affects sales at corporations. So far this year—and again despite the record high personal bankruptcy rates and a high unemployment rate—consumer spending has been rising, not declining. Just look at auto sales. Figures to be released today will likely show that October sales for the large automakers were at the highest level in over a year.
Where the Market Stands; Where it’s Headed:
The Dow Jones Industrial Average opens this morning up 7.3% for 2010. Add in a dividend yield of about 2.6% and, all of a sudden, 2010 looks like a 10% up year for stocks. Not bad not bad at all, considering the pathetic housing market.
I continue with the belief that the bear market rally that started in March of 2009 is alive and well. In long-term bear markets, bear market rallies like the one we have been experiencing can run up to two years…we’re five months away from the two-year mark.
What He Said:
“The Real Threat to the Economy: U.S. retail sales are falling, the producer price index is crashing, house prices, car prices are all falling—and no one is talking about deflation but me. Fed governors are still talking about inflation—they’ve got it wrong. There’s no need for me to get into the dangers of deflation, as I’ve written about them (many times) before. Let’s just put it this way: deflation is about the worse economic state a country will experience. The risks to the U.S. economy in 2007 are greater than I’ve seen in years.” Michael Lombardi in PROFIT CONFIDENTIAL, November 15, 2006. Michael was one of the first to warn of deflation. By late 2008, world economies were embedded in their worst state of deflation since the Great Depression.