What We Know, and What We Suspect
As we discussed yesterday, recent weakness was a dip to be bought. But we should also understand that anticipating more upside is really about anticipating the news flow, and investor reaction to that news.
Of course, I didn't know that Portugal would get a great response to a bond auction, thereby lessening worries that debt problems were spreading. I also didn't know that Wells Fargo would upgrade the financial sector on renewed dividends and "superior" earnings growth.
But at the same time, the conditions are in place for a constructive resolution to most of the problems facing the stocks market. We knew banks were getting close to dividend payments. And one look at the yield curve shows you that banks could/should be making money.
*****In terms of European debt, we've seen Greece, Ireland, now Portugal and possibly Spain come into focus. The reaction to Greece was the worst, for sure. But that's because it was first.
The reaction to Ireland's banks wasn't nearly as severe. It also wasn't a surprise. Portugal and Spain are even less of a surprise. They've been mentioned as potential problems since Greece nearly collapsed a year ago.
Ultimately, the willingness of Germany to lend, and other nations like Japan and China to buy indebted nation bonds has trounced the bears, eased the worries and left stocks in position for a relief rally.
*****Now, I don't want to sweep these debt concerns under the rug. Debt problems will hamper growth for years to come and that bailout money has to be repaid. And when you're talking about a country with very little growth, the funds to repay loans come at the expense of what little growth there is.
The Bank of Ireland (NYSE:IRE) alone needed a $114 billion bailout. Ireland’s entire GDP is $222 billion (in 2009). It's worthwhile asking how one bank could get indebted to the tune of 50% of GDP. (Just imagine Bank of America being $5 trillion in debt!) It's also worthwhile wondering how that money will ever get paid back.
Of course, these are long-term problems, much like inflation, Fed policy and unemployment. Right now, so long as these issues are being "managed" they are not weighing on the stock market.
*****The Producer Price Index (PPI) for December rose 1.1%. That's the biggest gain in 11 months. But of course, if you strip out the things we need most, food and energy, prices only rose 0.2%, which is in-line with expectations.
The Fed has suggested that companies are not able to pass on higher costs to consumers. The PPI number bears that out. Prices will not rise until we see wage inflation as the unemployment rate falls. That could take a while...
In the meantime, keep watching oil as a leading indicator for stock prices.
*****One final note. 2.87 million homes were served with notice of foreclosure in 2010. And it's estimated that foreclosures may jump another 20% in 2011. Sounds bleak, but this may actually mark the peak of foreclosures. No doubt, that would be a very good thing.
Let's also keep an eye on the homebuilders, REITs and commercial real estate stocks. These are about the last beaten down stocks and should have a pretty good year.
*****As always, send your questions and comments to dailyprofit@wyattresearch.com.
