Stocks Reach A 5-Year High As Earnings Season Starts Positively

by: Louis Navellier

The stock market began last week with a downdraft over concerns about the opening days of the earnings announcement season, plus growing concerns over the debt ceiling debate and a potential government shutdown. However, positive sales guidance by Alcoa (NYSE:AA) kicked off the earnings season with a bang. Then, news that China's exports surged 14.1% last month helped reinforce the emerging view that the global economic recovery is intact. As a result, the S&P 500 closed the week at a five-year high.

Wall Street Is Turning from Bonds to Stocks in Early 2013

Lipper reported last week that investors poured $18.3 billion into the stock market via ETFs and mutual funds in the week ending January 9. When global funds are included, the figure rises to $22.2 billion, the best weekly gain since September 2007 and the second highest week since this data series began in 1996.

For most of the last four years, hedge funds and individual investors have favored bonds over stocks, but that preference could be shifting. At 1472, the S&P 500 is now 121% above its early 2009 lows and just 6% below its all-time (2007) high of 1565 - even though many investors still remain on the sidelines.

Part of the recent surge is due to avoiding the threatened 40% tax rates on dividends after the "fiscal cliff" was narrowly averted on New Year's Day. In addition, we always see new pension funding in the New Year, and an improving global economy, is also helping propel many global markets higher in 2013.

As the earnings season begins, analysts are expecting a major slowdown, but I think they will be proven wrong. Going into 2013, analysts' consensus forecast for the fourth quarter of 2012 and first quarter of 2013 were only 3.1% and 1.5% growth, respectively. In other words, Wall Street expects flat earnings.

Last week's earnings reports - though few in number - started off earnings season with a ray of hope. In addition, as economist Ed Yardeni has shown, the consensus estimates over the last year have tended to bottom out just as the first earnings report start to come in. Then, we usually see some positive surprises.

Regarding Wall Street's latest worry - the impending debt ceiling and a potential government shutdown - I believe that the GOP leaders in the House know they will get blamed for any shutdown, so they do not want to risk facing angry voters who aren't getting their Social Security checks. As a result, I expect another last minute deal to be cut - likely in the dead of night - to avert a potential government shutdown.

Meanwhile, Back in Washington, Jack Lew Rides to the Rescue

Now that the silly idea of a "trillion dollar platinum coin" (to avoid the debt ceiling) is dead, I suspect the President's team will use some other creative method to avoid negotiating with the House over spending cuts. On Friday, the Democratic leaders in the Senate gave President Obama approval to raise the budget deficit ceiling by "executive decree" if he cannot get Congressional approval. Specifically, Harry Reid, Dick Durbin, Chuck Schumer, and Patty Murray told the President, "We believe you must be willing to take any lawful steps to ensure that America does not break its promises and trigger a global economic crisis … without Congressional approval, if necessary." Clearly, Obama's team is trying to find a way to bypass the House.

Meanwhile, I have to say I am shocked by President Obama nominating Jack Lew as the next Treasury Secretary. After all, Lew is former Chief Operating Officer of Alternative Investments at Citigroup* (NYSE:C) - heading the division that effectively "blew up" that company with the kind of leveraged debt instruments that sunk Bear Sterns and Lehman Brothers but did not sink Citigroup because it was deemed "too big to fail" and was subsequently loaned $45 billion by the federal government. Let's hope he doesn't "blow up" the federal government the way some of his investment schemes blew up at Citigroup.

I believe another problem with Lew's resume is his time as Director of Office of Management and Budget (from late 2010 to early 2012). Senator Jeff Sessions of Alabama, the top Republican on the Senate Budget Committee, claims Lew told the Senate Budget Committee that Obama's 2012 budget "would not add to the debt of the United States" even though that budget added another $1.3 trillion dollars in debt.

If Jack Lew is confirmed (which will likely happen due to the Democratic majority in the Senate), our trillion-dollar annual deficits are almost guaranteed for another four years, resulting in a continued decline of the dollar and a new wave of inflation, since most commodities are priced in U.S. dollars.

Stat of the Week: While China Surges, Our U.S. Trade Deficit Rises

On Thursday, we learned that China's exports surged 14.1% in December. Then, on Friday, we learned about the other half of that trade when the Commerce Department said that the U.S. trade deficit surged 16% to $48.7 billion in November, up from $42 billion in October, due largely to a 3.8% rise in imports.

This news came as a big surprise to most economists who are now scrambling to downgrade their fourth quarter GDP estimates, since a higher trade deficit subtracts from GDP growth. However, as Ed Yardeni wrote last Tuesday, fourth quarter GDP can't be all that slow when you consider that (1) private payrolls rose an average 180,700 per month last quarter vs. 139,700 in the third quarter; (2) auto sales ran at a 15.1 million annual rate last quarter, up 11.6% year-over-year, and (3) December's non-manufacturing (service sector) PMI surveys were positively soaring, indicating decent fourth-quarter GDP growth rates.

I'd say the best news last week was that U.S. crude oil imports are anticipated to fall to a 25-year low in 2014. Specifically, the U.S. Energy Information Administration predicted that net imports of liquid fuels, including crude oil and petroleum products, would fall to about six million barrels per day in 2014, the lowest level since 1987 and less than half their peak levels of over 12 million in 2004 through 2007.

As the dollar declines, due to Washington's ongoing fiscal mismanagement, the trade deficit problem will improve. A weak dollar makes our exports more attractive to foreign markets. In addition, our emerging energy independence will make us less reliant on energy imports, thereby reducing our trade deficit.

Meanwhile, across the pond, there is also some encouraging news. On Thursday, Spain's 10-year bond yield broke under the 5% barrier, closing at a 4.88% yield after offering 7.7% back in July 2012. Also on Thursday, Italy's 10-year bond yields closed at 4.15% after yielding 7.2% a year ago. Obviously, the European Central Bank (ECB) has restored confidence in the Spanish and Italian bond markets. Another indicator is that the ECB left its official key interest rate of 0.75% unchanged for the sixth month in a row.

Disclaimer: Please click here for important click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.

Disclosure: I am long C. Alcoa is mentioned, but we don’t own it.Citigroup is also mentioned, and we are long with no intention of selling. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.