Following earnings stock look to economy but Fed still there

[jon]

A big week of earnings that saw corporate profits rising as 75% of the results topped expectations. From what we can see the gains are in the 10% range, much better than the 7.7% anticipated. Anticipation of the results as well as the results themselves rallied stocks higher in a nice July move that led to some breakouts on the major indices.

There are more earnings to come, but the market definitely has the gist of Q2 profits at this point. There is more key economic data out this week including the ISM, personal income and spending, factory orders, and the employment report. The market will need something else to drive it from here, and the economic outlook and earnings potential, as always, will drive stock prices.

So, that leaves the economy versus the Fed and oil prices with respect to stock prices. Thus far the economy is holding on quite well but the Fed is not going to stop. It is likely to keep raising as long as it can until something significant happens that makes it clear it should stop. That is always too late to stop, but that is the Fed’s way: raise rates at the first sign of a sustainable recovery but don’t stop raising until you see the slowdown. The combination of oil prices and Fed tightening rates as well as money supply is powerful. If the Fed continues the market will at some point freeze up. At that time it will start distributing and leaders will break down on strong volume.

The big question is the when. Whether caused by the Fed, energy prices, both, or something else entirely, it will happen. It always does because every rally eventually ends. For now the market is showing continued positive action as it rides the wave of the solid earnings in the summer rally. As long as it continues to show good price/volume action, leadership, rotation, and can hold the recent breakouts it is in good shape. Kind of like saying as long as the sun comes up it will be a sunny day. The point is the market has been showing solid action as it moves higher. Sure volume is low overall (it is summer after all), bullishness is high, and new highs have struggled to hold their gains even as the indices hit 4 year highs. That hardly sounds like a perfect situation, but we have said before that the market is hardly ever perfect, and if you wait for perfection you will miss all of the action.

Again, the market is showing no sign of trouble right now but it is on final approach to a typically troublesome time for stocks, i.e. late summer into September. Last year the market did its selling in July to August and then rallied when stocks are typically weak. On this run it looks as if NASDAQ has another 3 weeks or so of upside. That is a very general observation based on typical historical moves; as always the market will show us the signposts as to where it is going. As of Friday they are still indicating a healthy move underway. That keeps us looking for new positions in strong stocks to play that move because regardless of what we believe, the market ahs the final say. We will continue to look down the road a bit and watch for developing problems, but we need to invest according to what the market is showing us as opposed to what our intuition, our gut feelings, or the calendar suggests.

[VJW]

Originally Posted by jon

as always the market will show us the signposts as to where it is going.

Here’s a BIG signpost for ya:


10,952.18 – DJIA close on November 7th, 2000 (election day)

10,683.74 – DJIA close yesterday, August 2nd, 2005

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[pennywise]

Jon, excellent review. Keep up the good work, please. Very helpful. The Kiplinger Washington Letter indicated a cooling in 2006. With the 30 year bond coming out they hope to stop the mortgage craziness. It is thought that when housing starts trouble that consumers will stop spending. I am not sure. We have 78 M baby boomers who are offset by 78 M gen Y's. I think that will balance the spending and savings. However, the baby boomers are in PEAK SPENDING AND SAVINGS YEARS (they are spending). Thus, my conclusion is we can profit if we remain frugal and invest wisely. The price of oil is an issue, but with the new energy bill and the change in daylights savings time should decrease consumption. I am optimistic on fuel cells.

[VJW]

The market for the 30-year bond is likely to be pretty thin if the fed follows through with it’s intentions, as bonds decline in value as interest rates rise.

Remember that the 30-year bonds were withdrawn from the market because the Clinton administration was running federal surpluses and paying down the Reagan/Bush federal debt. The re-issuance of the 30-year bond puts a LIE to the claim from this administration that they will cut the federal deficit in half.

Greenspan is crazy, as now he is claiming that it’s the bond market (!) that is putting the kibosh on his efforts to “tighten credit and restrain inflation”. He claims that the longer the bond market keeps long-term rates historically low, the more he is going to raise interest rates ! This is EXACTLY BACKWARDS from the fed policies that have been followed for the past decades, where the federal reserve normally viewed higher bond yields as a basis to RAISE short-term interest rates and lower bond yields as a basis to be concerned that the national economy was tanking.

Over the same time period that the Fed has raised the Fed funds rate target from a 46-year low of 1% up to 3.25%, the yield on the benchmark 10-year Treasury bond declined from 4.7% to below 4% last month, and has subsequently risen back to 4.3%, which is still lower than where it started.

Greenspan (as well as the rest of the Fed and this administration) are in DENIAL. The bond market sees nothing but bad news coming down the road, which is why they are reluctant to give much of a return on the longer-term bonds, yet Greenspan and the Bushies want them to raise the yield ?????

Ever try to push on a string ?

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[pennywise]

Okay, todays stock market movement is ridiculous. What they are doing is testing and making excuses for it. We broke the highs and passed, now we have to see how many sellers are out there before we can move on. In September, after labor day we will see the truth when the "big boys" come in to play from summer off. I do think the interest rate has been set and I like the fed and the IMF to tell me what direction things are going. All else is gossip and rumors. Such fickle MEN, thought it was women who could not make up their minds. On that note, have you seen that credit rose by 14.5 Billion to 2.146 Trillion. What are these idiot peers of mine doing? There is definetly trouble brewing and it will be good for us. These people cannot pay their bills so deflation is bound to happen. Not good for investors, but for frugal people like us - we will profit. I will save on the low prices and continue to invest in my dtr name. I do not plan on inheretance for her because she will own it all. I have to transfer money to her to protect it as my spouse and I age. Health care is a crisis in America. I do not intend to pay for what others get for free. As soon as she turns 18 the house will be transferred to her name. She is being educated. And if she takes it all and I go to a nursing home on the government _ Good it is what I intend. If the Kennedy's can pass it, so can I. I want my dtr to have a good life. This is how fortunes are made - intergenerational.