The Paycheck to Paycheck Economy

Oil held steady on Monday. So did stock prices. Whether we actually get a rally, it’s clear that the market is waiting for the Senate to pass the stimulus bill and is eager to hear Treasury Secretary Geithner’s plan for dealing with banks’ impaired balance sheets. 
I have to think that the stimulus plan is priced in to a large degree. The contents of the bill have been circulated. We know, basically, what the strengths and weaknesses of the bill are.

Short-covering rally or the real deal?

So, on Friday I made the rally call. The Dow Industrials were up 217 points. Now, after a conversation with TradeMaster strategist Jason Cimpl, I’m a little nervous about stocks following through. 
Jason believes Friday’s rally was short-covering. His indicator? Oil. 
Oil prices fell Friday, while stocks rallied across the board. As you know I expect stocks to rally in anticipation of the stimulus bill and then next banking measure. It is my opinion that investors perceive these initiatives as help for the economy in recovering from recession. Not a cure-all, just help. 
If investors see light at the end of the tunnel, oil should rally too. After all, production has been cut. And despite growing reserves, oil will rally when it appears the economy will get back to growth.

50%+ from Treasury Bills

The headline at Bloomberg reads “Stocks in U.S. Climb on Speculation Job Losses to Spur Action on Stimulus”. Apparently, the employment news is so bad that it’s actually good because it means the government will have to do something about it. 
Sounds a bit backwards, right? Shouldn’t investors wait until there are actual signs of improvement before they start plunking their money down? 
Makes sense – if financial markets were rational. But of course, they’re not rational. If they were, it would be very difficult to make money on stocks. Fear and greed move stock prices. And that’s why investors like Warren Buffett say they’re greedy when others are fearful, and vice versa.

Testing 1,2,3 Testing

Stocks gave up their early gains yesterday. As I’ve been saying, I don’t think we see much upside until earnings season is closer to the finish line. It looks as though a vote on the stimulus bill may not come until next week. That could give us a double-whammy of upside catalysts.
The Dow Industrials is below support at 8,000. But the S&P 500 is above its support at 825. It seems highly likely that the S&P 500 will test those levels today. It’s important to understand that support is often expressed as a range rather than a specific number. Just because an index or stock moves below support doesn’t mean it’s crashing.

Did the Rally Start Without Me?

Yesterday I told you I was starting to see bullish signs. Stocks have been holding steady through earnings season. And that suggests that the stimulus bill and the bad debt bank/nationalization plan have the potential to be positive catalysts for earnings expectations (and hence stock prices). 
I went on to say that my best guess as to timing was sometime next week, as earnings season starts to slow down.
Of course, the stock market seems to delight in its ironic sense of humor sometimes. The Dow Industrials rallied 140+ points yesterday afternoon. And it’s tacking on some more today.

What a Game! Politickin’ the Stimulus Bill; Reader Mail

That was one of the best Super Bowl games we’ve seen in a long time. There were some costly penalties on both sides of the ball, but in the end, both teams made some phenomenal plays. Congratulations go to the Steelers for their sixth championship ring. And equal congratulations go to the Arizona Cardinals for turning their first ever Super Bowl appearance into a great game.
*****There are rumblings that Senate Republicans may not pass Obama’s massive stimulus bill. This may be politicking, as the GOP clearly wants to show that it has some teeth. But there’s a lot of pretty ridiculous spending included, too. $300 million for sexually transmitted diseases jumps to mind. I hope the GOP is successful in stripping out the fat.

A “blunter” approach to China; Will GDP get “worser”?

*****Q4 GDP numbers are out today. The U.S. economy shrank at a 3.8% annual rate. Sounds bad. But it wasn’t as bad as economists were expecting. They were looking for a 5.4% decline. 
Stocks are down in response, even though this is better-than-expected news. Many analysts were expecting Q4 GDP numbers to be horrible, and possibly the worst that we’d see. So since the number wasn’t as bad as expected, we can perhaps think that stocks are down because of a perception that the worst GDP number is yet to come. That’s the bearish argument.

Slogging Through; Foxes in the Henhouse

Here’s a quote that sums up the way stocks have been trading better than anything else I have read. It’s from Diane de Vries Ashley, who’s a managing partner at Zenith Capital Partners. She said: "There’s a semblance that there’s not a solution but a working and workable means by which to plow your way out of this…[t]here’s no magic solution. It’s a slog. If you have a market that is reacting well to the kind of slog they see, hallelujah." 
A slog. That’s perfect. Paulson has attacked the toxic asset problem from a couple angles now. Of course, none has been a perfect solution. Balance sheets at many banks are still overwhelmed by deteriorating assets.

Q4 Earnings on Steel: AKS, NU, X + Bank Nationalization

It seems we’re getting just enough decent earnings reports to keep things interesting. And of all the unlikely suspects, US Steel (NYSE:X) is near the top of the list. 
It goes almost without saying that steel should not do well in a global recession. But US Steel beat Q4 revenue expectations handily. (Earnings per share is not comparable due to a bunch of one-time items.)