Don’t Bet Against the U.S.

Before May, there were plenty of investors wondering if the stock market had gotten too far ahead of the economy. Sure, stock valuations themselves have stayed within historic norms, supported by strong earnings growth.

 

But with unemployment stuck at persistently high levels, ongoing imbalances in the economy, and record high budget deficits, it’s reasonable to wonder how long earnings growth can continue. Now, after the debt issues with Greece have revealed some serious dissension in the European Union and questions about the future of the euro as a currency, we’ve seen an abrupt reversal. 

At last week’s lows, the S&P 500 was down 9.6% from its highs. Oil prices are down 20%. 

How Much for the Island?

Investing in gold is often called a “fear trade.” In times of crisis, it’s believed that gold will hold its value, and even rise, while the value of paper currencies and other assets fall.  

 

If you bought SPDR Gold ETF (NYSE:GLD), which seeks to track the price of physical gold, 2 years ago, you’d be up around 36%.   

 

The S&P 500 is down around 15% during that time.   

 

You probably already know that gold hit a new all-time high yesterday at $1,200 an ounce. And even though other traditional measures of fear – like the volatility index (VIX), bonds and even stocks – didn’t move much today, the move in gold can’t be ignored.  

Memo to EU

“It was the last wish of the Icelandic economy that its ashes be spread over Europe.”   

 

I wish I could take credit for that gem.   

 

Flights are grounded once again in Europe as more ash from Iceland’s unpronounceable volcano drifts over the continent.  

 

Europe is providing a major downer for the stock market these days. It’s not the grounded flights, however. It’s debt problems with Greece (again), and potentially Spain, Italy, Portugal and Ireland

Bullet-Proof

The stock market rally that started on February 5th, 2010 appears to be absolutely unstoppable. Bullet-proof. However you want to say it, there seems to be very little downside to stock prices, even after a strong rally.   

 

Now, we are not surprised. I’ve been relentlessly bullish here in Daily Profit. Sure, I may point out some discrepancies once in a while, maybe even shoot a few holes in the financial media’s neat and tidy explanations, but I’ve had us focused on upside targets for a year now, and there’s one main reason: earnings.   

 

This time last year, it was brutally obvious that analysts were seriously underestimating the earnings potential for bank stocks, even after the government changed the accounting rules to encourage profitability.   

 

And in subsequent months, analysts continued to lowball earnings estimates. Companies kept beating them, and the market kept rallying.   

Oil Pushes Higher

Few numbers have been released with as much fanfare and anticipation as last Friday’s Nonfarm Payrolls number. Is it any wonder that the number was pretty good? Are we surprised that economists across the board are hailing the addition of 162,000 jobs in March as definitive evidence that the economic recovery is picking up steam? 

Employment increased at the fastest rate since March 2007. And it wasn’t all Census workers, either. Government hiring accounted for 39,000 workers. That means private companies hired 123,000 people. 

Employment numbers will continue to look good, as Census hiring will continue into June. But we’re going to need to see continued solid growth from private sector employment.

Greece’s Debt Faux Pas

This morning, I find myself wondering how long investors can continue to support cash raising activities. That’s probably not the best way to pose the question. Perhaps after I set the stage, the question will make more sense. 

Yesterday, Greece started selling 7-year bonds to raise cash to cover its debt issues. The yield was to be 6%. But then, Greece got greedy and tried to drop some 12-year notes on the market.  

 

Now, Greece was warned not to try and add supply to its offering because the market wasn’t ready for it. So I don’t know what Greece was thinking when it decided to ignore this advice and float the 12-year notes. But Greece will pay the price. Nobody wanted the 12-year notes. Investors only bought about half of what was offered. That drove the yield on the 7-year notes to 6.3%.