Making a Case for the Bulls

“The Financial World According to Inya” Column,
by Inya Ivkovic, MA

Far as today’s economy and markets are concerned, things can clearly be viewed, and cases made, for both the bulls and the bears.

Why? For starters, investors are on edge. After what was most likely a once-in-a-generation type of stock market rally in North America, everyone is worried about what is coming up next. The bears argue that the black hole in the U.S. government’s balance sheet, the weakened dollar, and erosion of an average American’s wealth after the real estate market caved in will do us all in sooner rather than later. The bears, in contrast, believe that the recovery is gaining serious traction, as the demand for goods, services and resources increases around the globe and domestically.

But who is right and who is wrong? Or, are both sides right? Or, are both sides wrong? Can such clear distinctions even be made? I believe that there is validity behind both what the bulls and what the bears have to say. Personally, I am more bearish. But in this and tomorrow’s article, I’ll try to argue both sides and leave the decision as to whose arguments carry more weight to our readers.

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If I were a bull, here are the arguments I would use to support my bullish outlook. Firstly, there is much faith in the S&P 500 companies’ profits in 2010. Thomson Reuters analysts have come out with forecasts of corporate profit increasing by 27% from the third quarter of 2009 to the third quarter of 2010. Having in mind all those merciless jobs cuts to battle the recession that have resulted in rather significant savings, corporate profits in 2010 could even be higher.

Secondly, not just the Federal Reserve, but G20 nations are still supporting the ultra-low-interest-rate environment. In turn, reduced interest rates are helping banks get their battered balance sheets back in order and hopefully start lending more to help out the severely damaged real estate markets around the world at relatively low costs to homeowners and new homebuyers.

Thirdly, commodity markets are also pulling their weight. Prices in the futures markets indicate the supply is relatively tight, which supports higher prices for most commodities, particularly base and precious metals. Granted, most inventories are still high. However, the costs of maintaining those inventories are comparably low, so the net value still works in favor of higher prices.

Surprisingly, bulls also argue that, while the U.S. consumer has been brought to his knees, he has not been flat out defeated. Significant jobs have been lost, for sure. But consumer confidence, bulls argue, has survived, supported by U.S. government spending programs, such as “cash-for-clunkers.” Predictions are that consumer spending will increase by about two percent on an annualized basis for the last quarter of 2009, which explains the predictions that the U.S. economy might sport a growth rate of 3.4% in 2010.

Finally, economic stimulus is still at work and there are still quite a few billions left to spend. Bulls also argue that, while the government is strategizing how to repair its own balance sheet, it is not yet done injecting cash into the U.S. financial systems. There are also rumors that some of the cash returned under TARP will be put back to work, but those are only rumors at this point.

Certainly, the bulls make a fine case with interest rates that are low, financial and credit systems flush with money, commodity and equity prices holding their own, corporate profits advancing and the U.S. consumer not surrendering after all. Building on this foundation, real estate markets could recover sooner rather than later and return some of the lost wealth to Americans, many of who need it badly after losing their jobs and having bleak prospects of finding new on=es.

But what of the case for the bears? Do bears have reasons to growl? You bet! But more on that in the next editorial issue of PROFIT CONFIDENTIAL.