Google and China

The financial media is jumping to the conclusion that recent weakness for stock prices is related to the ongoing Greek bailout saga. But considering that Greece would prefer to have the IMF involved in its bailout plans because emergency loans would be cheaper, I’d suggest we need to look elsewhere for the real cause of the recent mini-sell-off.  

 

The Indian rate hike is certainly a more likely candidate. Not because India’s economy is driving the global economy, but because this move is another sign that central banks around the world are ending their stimulus policies.   

 

India’s move comes a full month ahead of the next scheduled central bank meeting. The timing suggests that perhaps inflation is becoming problematic. And it also raises the possibility that India will hike rates again when it meets next month.   

 

Don’t underestimate the significance of Google’s (Nasdaq:GOOG) possible exit from the Chinese market. 

Sovereign Wealth Fund and Commercial Real Estate

The AP is reporting that China has trimmed its holdings of U.S. Treasury’s by $5.8 billion in January. I’m sure members of the doom and gloom economic faction will point to this as solid evidence that the U.S. is losing its ability to fund spending and is inching ever closer to default.   

 

In my opinion, this line of thinking is completely unrealistic.   

 

China still holds $889 billion in T-bills. It’s clearly not “dumping” American debt. And as I discussed last week, there is evidence that China is moving to more direct investments in the U.S.  

 

China’s state-run investment company, the China Investment Corporation (CIC), is already involved in a buyout offer for shopping mall owner General Growth Properties (NYSE:GGP) through Brookfield Asset Management (NYSE:BAM)

Anniversary, Part II

I suppose it’s fitting that futures should be down on the morning of the one-year anniversary of the stock market bottom last year. Perhaps stocks will put in a similar reversal today, but even if they don’t, I think we can take a little selling in stride.   

 

Oil prices are down a bit today as the dollar strengthens. We should note that the dollar and oil have moved higher in tandem lately, proving that there is more to the strength in oil prices than its relationship to the U.S. dollar.   

 

Expectations for the global economic recovery and a subsequent rise in demand for oil are part of it. But I also think that investors are slowly realizing that there is very little upside for production levels in non-OPEC countries.   

 

A recent article about Mexico bears this out…

Rooting for the Underdog

What a great Super Bowl game! I have to admit, I was pulling for the
Saints, but mainly because of what the Saints mean for that city. I’m
sure we all remember the horrible aftermath of hurricane Katrina. The
very existence of New Orleans was in question. The Saints considered
moving, and I recall suggestions that only the French Quarter be saved
and made into a corporate convention amusement park.

Of
course, that would have been an absurd commercialization of a proud and
rich heritage. That New Orleans has come back to resemble the city it
was before Katrina is nothing short of miraculous, and now the people
of New Orleans have a Super Bowl trophy to crown their achievement.
Congratulations, New Orleans and the Saints.

It’s
tempting to extend the metaphor of New Orleans to the United States as
we rebuild after the financial crisis. Of course, I have no doubt that
we will recover. But there will likely be no single event that crowns
the recovery like the Lombardi Trophy does for New Orleans.

And
besides, we’re investors. It is our desire to be properly positioned
for a growth in stock valuations, all the while avoiding the pitfalls
of overvalued stocks and worsening economic conditions.

Clearly,
investors have been pondering the potential of weaker economy as some
stimulus policies end, Europe faces debt problems and China moves to
slow its economy. Bloomberg reports that investors pulled $9 billion
out of global equity funds during the last week of January. And
investors have bet heavily on an extended sell-off as evidenced by huge
volumes of put option activity.

At the same time, 73% of
S&P 500 companies have beaten 4th quarter earnings expectations.
That’s the best performance since 1993. Strong earnings, coupled with
the recent 7.3% decline, have left the P/E for the S&P 500 at 18,
down from 24. The forward P/E, based on future earnings expectations,
is below 13.

Earnings this Week

There’s no doubt that there are investors who believe that current
valuations for stocks and an improving economy offer money-making
opportunity. It’s also true that there are plenty of investors who feel
the exact opposite and are selling stock. And for the last three weeks,
the sellers have been winning.

The fact that stocks couldn’t
hold a 1% gain after a stellar 4Q GDP number on Friday is a little
worrisome. That was a lay-up for the bulls, and still, stocks finished
the day with losses.

Volume has been stronger on the down days
lately, and the S&P 500 is now well below its 50-day moving
average, a common measure of support. I expect we’ll see stocks bounce
before Dow 10,000 is breached to the downside.

But at the same
time, there’s nothing magical about Dow 10K. Just because it holds on
the first test or two doesn’t make it an important line in the sand.
The Dow is just 30 stocks. Far more important is the S&P 500. And
interestingly, there is an important support point at 1064 on the
S&P 500. And 1071 actually lines up with Dow 10,000 nicely.

“Burn the Hands”

Yesterday, stocks recovered a little from last week’s sharp sell-off. A little time over the weekend to reflect on the true potential of the "Volcker Rule"

(the name given to the new banking regulations proposed by the President on Thursday) to become law probably helped. 

Stocks gained slightly even though December home sales dropped a worse than expected 16%. That’s a pretty bad surprise, but stocks shook it off. That suggests to me that last week’s sell off may have been a bit exaggerated.

As an aside, I’m not sure why there was concern that Fed Chief Bernanke wouldn’t be re-confirmed to his post. Sure, Geithner might be on the way out, but that’s no big deal. I see zero percent chance that Congress would let Bernanke go at this point. 

*****Fourth Quarter earnings have been good so far. I read that 70% of companies reporting have beaten expectations. But many of the surprises have been met with selling, like IBM (NYSE:IBM) and Google (Nasdaq:GOOG).  

DJIA, Nasdaq, S&P 500 Up in Morning Trading

Both the Nasdaq and the S&P 500 are hitting new recovery rally highs today. Part of the reason for today’s strength is the better than expected construction numbers released this morning. 
The 0.8% gain in construction spending for April was the biggest gain in nearly a year. And it was far better than economists’ expectations of a 1.5% drop.

Where the S&P 500 is headed next

Treasury Secretary Tim Geithner is having his "Lucy" moment today. Yes, he’s got "a lot of explaining to do …" 
He’s speaking before Congress today to answer questions as to how the Public-Private Investment Program will actually remove toxic assets and protect taxpayer money at the same time. Also up for explanation is how the remaining $110 billion in TARP money is enough to fund any future bank rescues. 
I don’t envy Geithner one bit. That’s because there’s no way he can adequately answer these questions:

S&P 500 Support

I have never seen a company more determined to make itself universally reviled than AIG. It truly boggles the mind that anyone at AIG, especially those in the financial products division that lost $62 billion on credit default swaps in the fourth quarter alone, could think they should receive a bonus. 
I don’t care what the contract says – if you’re party to losing $62 billion in a three-month span, you get no reward. Sorry. And if you even have to ask if bonuses can be paid with bailout money that’s keeping your business going, your moral compass is seriously out of whack.