SeriousBull

Look for Interim Rally ahead of earnings.

Tags: Economy + investing + Markets + Stocks

We have entered earnings season and we expect a rally because most analyst have reduced earnings bogies.  Favored sectors continue to be Energy, Metals, Basic Materials, Natural Gas, Agricultural Commodities, Chemicals, Farm Machinery and Steel. Consumer Durables, Consumer Goods, Retail, Autos, Airlines, Builders, Lumber, Furniture & Furnishings and Luxury goods are expected to continue on the wain. Financials probably have bottomed unless credit card defaults pile on greater mortgage foreclosures. 

More likely there will be more bad debt write-offs and more capital reserve replenishment by banks and brokers. Because of their internal demands for capital it will be late this year or next before credit has any hope of assisting any recovery. The financial industry is trying to survive and they continue to hoard the interest rate cuts made by the Fed to increase their profitability. As stated earlier, this will precipitate a consumer led recession. Making the contraction spread through most all sectors of the global economy as adjustments to lower demand are made.

The decoupling argument that Asia will not go into a Recession while North America does promises some hope. There are a lot of Petro and Surplus Trade dollars that are searching for a place to get the best return.  Arguably, the US is cheap and getting cheaper, but the bottom has not been reached and the BRIC countries (Brazil, Russia, India and China) look more attractive for capital investment. Moreover until after the reality that we are a DEBTOR nation sinks in, we are unlikely to openly invite Arab and Chinese investment in the US.

Moreover, Energy and Oil prices continue to rise exerting pressure on US domestic growth. The Bank of England has just cut its interest rates and the EU almost certainly will as well as Deflation looks more likely than Inflation in the near term. Bonds are going lower and the herd instinct for safe-haven will one day soon become a stampede away from ridiculously priced debt. Besides International investors are willing to finance the US deficit for only some limited time. As soon as any practical alternative comes about, look for the run for the door to begin. So be careful. Bonds are a time bomb just waiting to implode. At this point investors should pile on the short end and bide their time. If we have Inflation short term investors will get paid. If we have Deflation, it will likely be a US event and make the Dollar the favored carry trade currency. This will usher in a Japan like elongated recovery more like a U interspersed with short-lived market rallys for a long sideways range bound market dynamic favoring those who are proactive to market change. Those who are not will first lose in equities and then in their bonds.

April 16, 2008 - Economy, Markets