Game Back On?

Daily State of the Markets 
Monday Morning – February 14, 2011

Instead of a clichéd play on Valentine’s Day, this morning’s theme is based the literary genius of Wayne’s World. In what could easily be seen as my warped little view of the stock market, I’m of the mind that the temporary focus on the happenings in Egypt can be equated to pulling the nets off the street to let the cars go by. But now that Hosni Mubarak has finally seen the light (and had his reported $70 billion cash hoard in Swiss banks frozen in the process), it would appear that it’s “game back on” for the stock market bulls.

In talking to lots of folks who make their living in the stock market lately, one theme continues dominate the overall view: This thing just can’t keep going up – can it? While I too will agree that a pullback of modest proportions would seem to be likely in the near term (after all, stocks are up nearly 6% year-to-date and have popped +12.6% from the end of November) and have opined that just about anything could be the “trigger” to get a brief bear party started, I think it is vital to understand the game that is being played at the present time.

Although the U.S. economy clearly has issues to deal with going forward, not the least of which is the ability to maintain the current momentum and maybe create some jobs in the process, the real game that is going on at the corner of Broad and Wall has to do with asset allocation. From a big picture standpoint, it appears that the U.S. has suddenly become the best house in a bad neighborhood. And as such, investors continue pour dollars into the U.S. stock market because there just isn’t a very good alternative at the moment.

Look around the globe for investment alternatives and you’ll find that unless you are willing to get VERY specific from a sector or country standpoint, the U.S. looks to be the safest stock market game in town. The economy is growing. The Fed is friendly. The government continues to spend, spend, spend in order to keep things moving forward. Earnings are growing at a healthy clip. Those consumers that have jobs are adjusting to the new economic reality and have rediscovered their love affair with the mall. Inflation is low. Tax increases have been postponed. Valuations are not excessive (note that I did NOT say they were cheap, either). And perhaps most importantly, money is flowing into the U.S. stock market. So, in short, what’s not to like?

Compare and contrast this scenario to that seen in Europe. Sure, Germany is looking good and we are seeing a rebound in some of the PIGI’S. But do you really want to bet that everything will be hunky dory in Europe all year? Next, I guess you could bet that Japan will suddenly break out of its 20-year malaise. Then there are the emerging markets, which have clearly led the world out of the economic abyss and into a better place. But with food prices soaring and the economies of China, India, Brazil, et al becoming a little overheated, it looks like it’s “game back on” in terms of the inflation battle. And don’t look now, but the Emerging Market funds are continuing to see outflows for this very reason.

So, until the next big problem comes along (and on that note, do yourself a favor and stop trying to figure out what it will be) or interest rates become an issue for the stock market (think > 4% on the 10-year), it might be best to simply enjoy the current game because if last week was any indication, it appears that it is indeed “game back on.”

Turning to this morning… Other than Japan’s GDP coming in a bit better than expected and the rebound in Asia based on the Mubarak news, there just isn’t much happening in the early going.

On the Economic front… We do not have any economic data to reveiw before the bell and there isn’t anything of significance on the calendar today.

Thought for the day: You miss 100% of the shots you don’t take…

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell…

• Major Foreign Markets:
  • Australia: +1.06%
  • Shanghai: +2.53%
  • Hong Kong: +1.28%
  • Japan: +1.13%
  • France: -0.06%
  • Germany: +0.26%
  • London: -0.30%

   

• Crude Oil Futures: -$0.27 to $85.31
• Gold: -$1.60 to $1358.80
• Dollar: lower against the Yen, Euro and Pound
• 10-Year Bond Yield: Currently trading at 3.653%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: -0.95
  • Dow Jones Industrial Average: -1
  • NASDAQ Composite: -0.95

Wall Street Research Summary

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