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Market Update 7/26 Earnings, Goldilocks, New Highs

|Includes:AAP, Apple Inc. (AAPL), CAM, CPA, CXO, FFIV, GILD, LAZ, LVS, MU, PXD, WLL

Regular readers of this blog know I have been bullish for a very long time and believe we have now entered a promising phase in the secular bull market that I referenced back on June 21st called a "Goldilocks ''scenario.

What are we seeing that brings me to that conclusion.

  • Accelerating earnings,
  • Stable global interest rates and prolonged low volatility.
  • Economy that is not too hot, not too cold

The past few weeks have only served to strengthen this argument and, if anything, in my view slanted the odds to the upside. Using views from my recent Secular Bull market article, my "base" case target for the S&P is 2000 and the bullish view with an S & P target of 2100 by year end. Going out to Mid 2015 - my target is S & P 2275.

Many assumptions for sure and of course a number of things could happen in between, but for the sake of playing the "game" those are my thoughts and I will add --- they could prove to be conservative.

These "calls" are more of a "game" and "nice to hear", However, it's much better to take a look at individual stock selection which I deemed to be more important than ever this year. To date it has produced some nice gains and interesting surprises.

Earnings have been the focal point of my bullish convictions and in my view 2Q earnings are coming in better than expected and the earnings growth of 7-9% I mentioned earlier in the year seems to be playing out..

Per Thomson Reuters, the "forward 4-quarter" estimate for the SP 500 this past week was $127.07, exactly the same as past week. The SP 500 "earnings yield" also remained flat at 6.42% versus last week's 6.42%. But, (this is the important takeaway) the year-over-year (y/y) growth rate on the forward estimate rose to 8.85% versus last week's 8.51%.

With that share buybacks are continuing, dividends are increasing - although not at the same rate as last year, but very respectable.
A sampling of individual stock highlights this week.

(NYSE:CPA) continues to go higher after its breakout , up $12 since 7/15 , and has a 2.5% div.

(NASDAQ:AAPL) is on its way to a triple digit number, after a stellar earnings report.

(NYSE:PXD) has gone from 220 to 233 since i mentioned it here last week ..

Keep an eye on (NYSE:CXO) & (NYSE:WLL) in the same space as (NYSE:PXD) they are buys on weakness..

(NASDAQ:MU) that story isn't done yet.

(NASDAQ:FFIV) Back to back quarters of beating estimates and raising EPS forecast.. Stock has broken out and looks to be headed to the mid $120's

(NYSE:LVS) $73 is inexpensive at these levels , they have a 2.5% yield and catalysts..

(NASDAQ:GILD) huge earnings , and a lot to look forward to ... its not expensive @ $90

Old tech continues to do well (NASDAQ:MSFT), a new high (NASDAQ:INTC) a new high , (NASDAQ:CSCO)

(NASDAQ:FB) growth continues 50% in fact - many still disbelieve --They didn't believe in (NASDAQ:GOOG) either.

(NYSE:LAZ) a beat on both the top & bottom line - a breakout here as well and has a chance to trade into the upper 50's also has a 2.5 % dividend

Looking at the major averages ---the Dow 30 made a new high last week, Dow transports did the same and now the S & P has joined the party , with a new high on Wednesday @ 1987.

As I have mentioned before -----IF the market dose have any pullback or corrective action it WON"T be because of earnings. Using that as your backdrop any weakness in a name that has produced good earnings , raised guidance , etc. is a potential candidate for purchase..

Case in point ----(NYSE:AAP) has come down on worries about a competitors guidance , I use that kind of 'fear" to my advantage, where I recently added shares. -- totally oversold and in my view their recent acquisition makes them a $150 stock .. Now we can connect the dots in this story as (NASDAQ:ORLY) O'Reilly Automotive in the same space, just reported a beat on both the top & bottom line an reaffirmed their guidance going forward..

The message is still the same, avoid the noise (The Fed, interest rates , Russell 2000 commentary, Ukraine, Gaza, volume too low ,VIX too low ," the bond market is telling us something' , etc) -it's a distraction, instead watch what is happening in select stocks as highlighted above. Speaking of the RUT and all of the media attention it is getting - Its amazing that no one stops to consider that the trading in the RUT may just be in a "self correcting" mode as the S & p continues higher? It has happened before and its not that unusual. Instead the 'talk' is the (RUT) will lead the entire market lower.

ON the global front

China's PMI of 52 was much stronger than expected, beating the highest estimate from 21 economists and representing the second-highest reading since 2011 and the highest since January 2013. Chinese confidence also hit a record high, driven by rising sentiment in smaller cities, according to a Boston Consulting Group survey. The outlook also is improving in Europe, where flash PMIs came in better than expected and Germany's Services PMI hit a 3-year high. More evidence of a globally synchronized recovery against a backdrop of very accommodative central banks-this is bullish.

Perhaps this served as the backdrop for this weeks action as the S & P crawled to another new high. That follows the Dow theory buy signal recorded last week .

Food for thought (more bad news for the naysayers) as many continue to say that we are in the 'late" stages of this economic cycle.

Consider this:
Average hourly earnings growth of 4% tends to mark the "late" stage of an economic expansion, and that metric is currently running at only 2%. Moreover, when wage growth did hit 4% in the last three cycles, the expansion still lasted another two years on average. And in the last two recoveries, wages didn't't begin to re-accelerate significantly until the unemployment rate declined to around 5.5%. It's at 6.1% after falling fairly rapidly over the past 12 months, and an expected increase in the participation rate (I'm not counting on that) could moderate its rate of decline going forward.

In addition, the number of long-term unemployed has been falling rapidly-another source of downward pressure on wages. All this suggests wages may continue to grow at a subdued pace, potentially helping the current expansion to easily last another 3-to-5 years.

Strategas Research also observes that in years in which large caps have returned at least 5% more than small caps, as is the case so far this year, the broader market has had a median price return of 20% in the following year. If that holds true - what does it say about the folks that continue to trumpet that the Russell 2000 will lead the entire market lower.

And for those that say this bull market has run its course and is over. (yes, more evidence to the contrary and even more bad news for the naysayers)

Since the 1930s, no bull market has ever ended without a recession, and there are no signs one may be imminent.

From time to time I like to review the secular themes that I suggest are in place to fuel the market higher in the longer term. the ever shrinking budget deficit that no one seems to be talking about.

For those that may have missed this, the current recovery in the only one in history to coincide with zero growth in federal spending. All while Federal revenues have been increasing, which is typical during recoveries. Spending hasn't increased in the last 5 years, while revenues are up by almost 1 trillion.

Spending as a percent of GDP is down under 20%, back down to the average of the last 20 years.

A weak economy simply does not generate the kind of growth in tax revenues as we have seen. Corporate tax receipts have increased at an average annual rate of almost 16% in the last four years of this recovery. Now with earnings on the rise at 7- 9 % , its' simply not indicative that a recession is looming around the corner, and neither is the end of this bull market.

Result: the federal deficit has collapsed from just over 10% of GDP four years ago to under 3% of GDP. No one expected this turn of events back in '09 or '10, as everyone was calling for massive trillion dollar deficits as far as they could see. -- at the moment this is a very positive and welcome development.

The earnings presented by Corporations thus far in the context of a secular bull themes and the price action of the market presents THE backdrop that one should be using to make their investment decisions.

Best of Luck to all !!

Disclosure: The author is long AAPL, FFIV, CAM, AAP, GILD, LAZ, MU, LVS, CPA, CXO, WLL, PXD.

Additional disclosure: I am long numerous equity positions - all of which can be seen here on my Instablog."It is my intention to present an introduction to these securities and state my intent and position. It should be used as a 'Starting Point' to conduct your own Due Diligence before making any investment decision.