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  • In Defense Of Pumping Up The Stock Market

    Let's say that the most outlandish critics of the Fed are right -- that the Fed's number one priority is boosting the stock market. After all, Bernanke himself said the first thing he checks in the morning are futures prices on the S&P 500.

    Maybe pumping up the stock market isn't such a bad idea? Bloomberg's Tom Keene highlighted this chart.

    (click to enlarge)
    US gross private domestic investment

    It shows corporate America's unwillingness to invest. If spending had followed the trend it would have meant billions of job-creating projects.

    My theory on why companies haven't invested? They haven't had to. By cutting costs and sucking on the tit of low rates, executives have watched the S&P 500 rise 148% since the 2009 lows. That kind of rally gives CEOs job security and makes for some fat bonus payments. Shareholders are happy too.

    Despite the rally in stocks, the S&P 500 is still trading at a reasonably low P/E. Just on a normalization, prices of stocks can continue to rise without earnings growth (something we've certainly seen over the past year).

    P/E - green, S&P 500 - white

    What happens when P/E gets closer to the long-run average of 18-20? For one thing, shares will no longer rise unless companies can boost earnings. Executives will feel the pressure from stockholders to stop playing it safe and build earnings. What's one way to do that? By making investments in new infrastructure and equipment.

    The stock market always demands more and if Bernanke can pump it high enough, shareholders will demand that businesses start spending. The sooner we get there the better.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jul 10 10:37 PM | Link | Comment!
  • How The Decline In The Japanese Nikkei Could Change Everything

    The last time Japanese stocks were hit with a tsunami of selling and a meltdown like today, it was because the island was literally hit by a tsunami and had a nuclear meltdown.

    It's too early to draw conclusions about the drop in the Nikkei but waking up to this chart is a shock for the US stock market bulls.

    (click to enlarge)

    When I went to bed the index was up 1.6% and I was thinking to myself 'this thing is an unstoppable machine'. Seeing the drop (which was 9.15% high-to-low) is a reminder that the risks are always two sided.

    The question is: Will the people who missed the 80% rally in Japanese stocks buy the dip and keep the bull market going?

    If this were a 3-4% decline, I would say 'yes', without hesitation.

    But a 7.3% drop is frightening. Only 10 times in the 50 year history of the Nikkei has it fallen more than 7%. The magnitude of the decline is enough to change the psychology of the market.

    The first thing to watch is if it will spread and continue. So far the answer is: kinda. Nikkei futures are down 1.6%, European stocks are down more than 2% but S&P 500 futures are down only 0.9%. I would be surprised if US stocks don't fall significantly more than that but also be on guard against a reversal (higher) later in the day.

    There really isn't a good reason for the decline. People are pointing to Bernanke and the China HSBC PMI -- c'mon. When there is no visible reason for a decline, people worry more; it feels like there is something you don't know. It's difficult to buy in that situation and much easier to clear out.

    I mapped out a strategy for trading the eventual correction/turn in the Nikkei two weeks ago.

    When a market 'goes parabolic' there is no telling when it will stop. But like shares of Apple, it will end eventually. When it does, that will be the turning point for the yen. If investors dump Japanese shares and go overseas, yen crosses will take flight once again. If they scramble back into bonds, it shows that the game hasn't changed and the yen crosses could be DOA.

    What we have so far is jumbled. Japanese bonds sold off hard early in the day and then turned around to close higher. Treasuries sold hard yesterday but are rebounding. I'll be keeping a close eye on bonds today because bonds almost always tell the story first, and best.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: DXJ, FXY, EWJ, NKY, Japan, Forex, Nikkei, Yen, Bonds
    May 23 9:25 AM | Link | Comment!
  • What The World's Best CEO Sees In The Global Economy

    Cisco shares are up 11.6% today after quarterly earnings.

    CEO John Chambers has been there since 1995 -- in tech industry terms that's like leading a company for a century. In that time he has navigated CSCO through some incredibly difficult environments and made it into one of the biggest companies in the world.

    But solid leadership and blockbuster quarterly results aren't why he's my favorite CEO -- it's because his company has a great view of the global economy and he isn't afraid to share it. He also has a track record for honesty on the economy, rather than talking his book.

    Here is what Chambers said after earnings:

    • "I like the trends in the United States" and he expects a "continued slow, steady recovery"
    • "Barring a surprise, the U.S. economy is going to continue to recover at this pace"
    • Demand was weak in southern Europe and China
    • Business in Northern Europe is starting to "bottom out"
    • China should remain sluggish for several more quarters
    • Q3 orders from the Americas grew 7% y/y, orders from Asia up 1%, Europe, Middle East and Africa little changed

    Short version: Strong dollar, possibly stronger Canadian dollar, weak euro, weak Australian dollar.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    May 16 1:08 PM | Link | Comment!
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