The Biggest Worry for the Stock Market

By Michael Lombardi, MBA — Today’s Profit Confidential column

What a day for the stock market yesterday.Just between Apple, Yahoo!, Goldman Sachs and Johnson & Johnson, the market got $11.4 billion in earnings announcements Tuesday. Quarterly earnings reports have been very strong this season.Maybe the market should be higher?Yes, this stock market should be higher. Payrolls have been slashed, overhead has been cut and interest rates are at historic lows. Companies have become very profitable again. (Funny how it works: the stock market doesn’t care about a high unemployment rate unless the unemployed are pushing down corporate revenues — and that’s not happening anymore.)
The stock market is a leading indicator, predicting events six to 12 months out. And what I believe the stock market is worried about right now is higher interest rates ahead.Yesterday, the Bank of Canada, while setting its key lending rate, made it very clear that higher rates are in the cards. In Canada, interest rates are expected to start rising as early as June.In the U.S., a survey by Bloomberg indicates that the U.S. Federal Reserve will raise its key interest rate from the current 0.25% to 0.75% by the end of this year. An interest-rate increase of 50 basis points might not seem like much on the surface, but keep these
points in mind.The bellwether 10-year U.S. bond continues to trade just under the four-percent level, while the popular 30-year fixed mortgage is higher today than it was a year ago, continuing to inch higher each passing day — indicators that we could be looking at higher short-term interest rates than the Bloomberg survey predicts. In fact, according to the Mortgage Bankers Association, the 30-year rate for mortgages is expected to go to six percent by the end of this
year — up from 5.2% today.Every one-percent increase in interest rates can add as much as 19% to the total cost of a home, according to Christopher Mayer, a professor of finance and economics at Columbia Business School.

The bottom line is that even small interest-rate increases will have a substantial impact on corporate earnings. The bear market should hurry up, push stocks higher, and get more investors back into the market while it can!

Michael’s Personal Comments:

I’m tired of getting embarrassed about my computer screen at work and don’t know what to do about it anymore.

Let me explain.

We have an open-concept policy at our office, so my door is literally always open unless I’m on the phone or in a meeting. My computer screen can be easily seen by the many people in the office who walk by. I’m also an AOL customer.

Here’s my problem.

I’m on my e-mail all day long. When you move from the AOL main page to your e-mail account, the transition page, also known as a “waiting page,” has ads on the right-hand side. Lately, those ads have been of overweight women modeling lingerie.

I don’t want to look at oversized women wearing lingerie on my computer screen. Imagine the comments I get from staff walking by peeking at my computer screen! They have no idea that these are legitimate ads on AOL — they think I’m surfing for big women in
silk, lacy bras and panties!

So, how do I resolve this problem? I’ve written AOL to complain, but I doubt a response will be forthcoming. Petty, maybe. But I just don’t want to look at these ads on my computer screen. Help!

Where the Market Stands:

The Dow Jones Industrial Average opens this morning up 6.6% for the year. The bear-market rally that started in March 2009 is alive and well.

What He Said:

“Investors have been put into an unfair corner. Those that invested in stocks because they got caught in the tech boom (1999) have seen their investments gone. Now, those that have leveraged heavily to play the real estate game, because it is the place to be (2005), could
see the same fate as the stock market investors. Thanks again, Mr. Greenspan.” Michael Lombardi in PROFIT CONFIDENTIAL, May 27, 2005. Michael started warning about the crisis coming in the U.S. real-estate market right at the peak of the boom, now widely believed to be 2005