Politicians Suck
The market lost its early gains yesterday and the indices finish red. The decline was mild and followed a very bullish session on Tuesday. Volume was lower than I expected given the high volume session from AAPL.
Despite the dull session, I am still bullish. It looks like SPX is consolidating at 1332 resistance before its next move, which should be a rally to new highs.
The market is only a few days into earnings season, but thus far the results have been quite mixed. Corporate profits, and to a certain degree, revenues, grew at an above average pace. But margins and management guidance have generally disappointed.
Currently, operating margins for businesses are at an all time high; so it really isn't that surprising that current spreads between sales and expenses show contraction. But it is alarming that management of major U.S. corporations are not optimistic about the economy, which should be beyond the recovery phase and well into a growth stage by now.
Part of the reason why this recovery has taken a flat trajectory is that our bank system is still screwed. Despite all the bail outs, free money and cheap debt, major banks continue to struggle. In fact, without reserve adjustments many banks would have reported negative earnings. For example, Bank of America (NYSE: BAC) had a $9 billion loss on a GAAP basis in the second quarter.
The U.S. economy cannot recover until the banks are fixed and begin to lend money. And more importantly, the lack of improvement in the financial complex creates uncertainty, and that spooked investors, which resulted in a sideways stock market this year. Even hedge fund powerhouse, and bullish financial investor, John Paulson, sold most of his funds bank holdings (BAC, C, CIT) before July.
I still think the market goes higher in the near term. But a longer lasting ascent will require more than just corporate earnings growth. In order for investors to feel confident investing and move the market along in another bullish phase big changes are needed. The government needs to resolve the debt ceiling. It is pathetic that law makers cannot compromise over something this big. Also, the employment situation in the U.S. is abysmal. The U.S. should seek real stimulus policies, the kind where streets and bridges are built, not monetary easing.
If no structural changes are made to our economic system the market can still make another run higher but it will be through inflation or dollar devaluation.
Send comments anytime editor@trademasterstocks.com
