Stock Market Likes Something It Sees Ahead

Tourism is down sharply in Europe this year. The high price of gas and a tougher economy at home are keeping American vacation travel lower than in recent past years. The hotels in Italy are feeling the pinch, so are the restaurants. The funny thing is that most of the major hotels here are owned by big American corporations; hence, softer travel by Americans overseas ultimately hurts companies back in the U.S.

Business headlines in newspapers in Europe about the American economy carry the same negative news stories the major papers back home carry these days. The question I get most often on this trip is: “Michael, when will the U.S. economy turn around?”

My fundamental problem about the bad news U.S. economy is this: I don’t think the economy is in as poor shape as the popular news stories and economists lead us to believe. Sure, U.S. home prices are down, but what about the boom that preceded the bust? Yes, the banks are taking big write-offs, but what about the billions they made when times were good?

Today, I read a story on the stock market on the Internet that said that the market was in pre-crash mode. We have “The New York Times” sending an e-news alert to its readers saying inflation at the wholesale level is running at the fastest pace since 1981. Lots of negatives out there…

But, in my humble opinion, we are far from the end of our economic stability. In fact, I believe that things are much better than they appear, economically. Here’s the way I see it:

— Inflation is not a problem. If it were, gold bullion prices would be rising, not declining. The possibility of deflation in this country is a bigger problem than inflation.

— Oil prices have fallen substantially from their high. If you look at our inflation numbers, most of the “inflation” was coming from oil prices. The stock market loves lower oil prices. Anything below $125.00 U.S. per barrel is “acceptable” to the stock market.

— The government is ready to step in at any time to stabilize the financial system. It stepped in to bail out Bear Sterns and it is ready to help Fannie Mae and Freddie Mac. Interest rates are very low and the Fed is ready to pump money into the system as needed. Ben Bernanke is doing a great job in my opinion.

Most importantly, the Dow Jones Industrial Average, an average of the stock prices of 30 of the world’s biggest corporations, is up 8.4% in less than 45 days. The stock market is a leading indicator… and it certainly likes something it sees ahead. Dear friend, the collapse of our economic stability is greatly over-exaggerated.