Uncertain Times for Investors…But Money Still Being Made

These are very trying and uncertain times for investors. On the one hand, profits of public companies are rising sharply and short-term interest rates have been near zero for years. These are two very strong and positive forces for pushing stock prices higher.These are very trying and uncertain times for investors.

On the one hand, profits of public companies are rising sharply and short-term interest rates have been near zero for years. These are two very strong and positive forces for pushing stock prices higher.

The S&P 500 companies expect to report earnings this year 18% higher than 2010. The Fed may not raise short-term interest rates now until the spring of 2012—which will mark a historic 40-42 months that the Federal Funds Target Rate has been near zero. We have to go back to the 1940s to see a period when interest rates remained so low for so long.

On the other hand, investors are terribly worried about the economy. Small business is struggling, as the days of easy bank lending have disappeared, unemployment rate is rising, and the housing market is getting worse. About 8.7 million Americans lost their jobs in 2008 and 2009. In the past two years, we’ve recovered less than two million of those jobs.

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Then there is the whole debt issue. The Federal Reserve made major purchases of U.S. Treasuries in 2010 and 2011. The last time this happened was during World War II. Back then, the U.S. needed money to fund the war. Today, it’s an economic war our government is fighting.

The fine-balance issue is: when will too much debt tip us over and make us no better than countries like Greece, Portugal, Spain and Italy who are all fighting sovereign debt issues?

When I look at all this, I think that stock prices will continue to rise in the immediate term, simply because corporate earnings are there and because monetary policy is so accommodative. But a little further out in 2011 and into 2012, if employment doesn’t improve drastically, the U.S. could face severe debt, inflation and currency problems.

Hence, I continue to be immediate-term bullish on stocks. But, short- to long-term, I’m very concerned about the U.S. economy.

Michael’s Personal Notes:

You know they’re getting desperate, when…

This morning news comes that Italy now requires short-sellers of Italian securities to divulge even their smallest positions. Unfortunately, for this economist, it’s too late.

On June 24, 2011, I predicted in PROFIT CONFIDENTIAL that Italy would be the next country to fall victim to the bond vigilantes. Events this weekend put Italy’s sovereign debt issues front and center in Europe. Trades in Italian bonds are tumbling. The stock prices of major Italian banks are falling quickly.

Austerity measures in Italy, I predict now, will be a bigger problem for Italians than it was for the Greeks. The Greek Prime Minister survived a confidence vote and got his government cuts through. Italian Prime Minister Silvio Berlusconi already leads a much divided government. Getting through government expense cuts in Italy will be very difficult because of its increasing political uncertainty.

Will the European Economic Community have enough money left for the inevitable bailout of Italy? Germany, when will you realize that joining the euro was a mistake and that you either need to pull out of the euro and go back to your own currency or demand that the weaker countries remove themselves from the euro?

Where the Market Stands: Where it’s Headed:

The Dow Jones Industrial Average opens this morning at 12,657, up 9.3% for 2011. This morning, there is downward pressure on the prices of U.S. bank stocks that have exposure to the mounting sovereign debt issues in Europe, specifically Italy right now.

I believe that this bear market rally still has life left…that it will continue to climb the “wall of worry”…that a shot at Dow Jones 13,000 is a real possibility.

What He Said:

“There is no mixed signal about this: foreclosures in the U.S. will continue to rise, the real estate market will get weaker, and the U.S. economy will get weaker. Smart investors should seriously consider unloading their stocks of consumer-products companies that produce nonessential goods.” Michael Lombardi in PROFIT CONFIDENTIAL, March 12, 2007. According to the Dow Jones Retail Index, retail stocks fell 42% from the spring of 2007 through November 2008.