05-02-2011 Market Commentary

By Eddie Katz Gluskin Sheff - On a very near-term basis, and despite my long-standing macro concern list, which has not gone away, it does look like the market is set to rise further. The technicals are suggesting as much, though I do await what Walter Murphy may have to say on the matter. I had said before that a breakout to new highs led by higher volume would be an important technical signpost. Well, we achieved that Holy Grail Wednesday---both in level terms and with respect to the change. This is not about throwing in the towel, it is an acknowledgment of what the market internals are flashing at the current time from a purely tactical and technical standpoint. Citi - Barring a margin collapse, though, stocks do not appear poised for a bear correction. Corporate margins are not doomed to crater precipitously since that only occurs when recessions emerge and that is not our base case scenario. As such, the S&P 500 is not likely to undergo a bear market (since stock indices often track major margin movements) unless exogenous shocks destabilize financial and economic conditions. (Editor's note: exogenous shocks haven't exactly been uncommon over the last decade...just saying.) Nonetheless, stocks could be vulnerable to pullbacks as margin fears step up. Business Insider - The odds of a "clean" debt ceiling hike -- which is to say, one that's not attached to any spending cuts or deficit targets -- seem slim-to-none. According to The Washington Post, more and more Democrats are joining the GOP and opposing Obama on this question. Despite the fact that it needs to be done to continue operating government, and the fact that the public would scream bloody murder if the full implications of it were realized, the debt ceiling vote is wildly unpopular, and you can be sure that any politician who votes for it will get hammered for it in the 2012 election. Of course, the real story on the debt ceiling fight is this: The GOP wants austerity now because it weakens the economy in the runup to the election. The question is how much blood they can draw, and how much spending Obama has to give Barron's - There is nothing more damning of the Fed's policies than the assessments of the currency and precious-metals markets. The U.S. Dollar Index fell nearly 5% in April to its lowest level since July 2008. Gold continued to climb, settling up another $25 Friday, at $1,556.40 for the active June Comex contract. All manner of risk assets also have risen, from junk bonds to emerging markets to small-cap stocks, all notching new highs. The Dow industrials also tacked on 4% in April—nearly as much as the decline in the Dollar Index. So, in real terms, the gains have been less than meets the eye. Still, the well-heeled can make the Fed's cheap-money policies work for them, whether by buying gold—better yet, silver—or leveraged mortgage real-estate investment trusts yielding in the mid-teens, or any other risk assets. The middle class is stuck with earning zilch on bank deposits while the value of their home continues to fall, their income stagnates and prices they pay continue to rise. Perhaps Bernanke will have to answer questions about that at his next news conference. Conclusion - We continue to contend that as long as Bernanke is at the helm with QE2 in effect, risk assets can fly. But what happens in July when the patient is pulled off the medication? Think about this for a minute. Since late 2008, there have been $700 billion of TARP funds to buy “troubled assets”, $1.2 trillion in QE1 & QE2, an increase of $300 billion for the European bailout fund and $500 billion of cash injections from the Bank of Japan after the Fukushima earthquake. We don't have any PhD's on staff, but $2.7 trillion created out of thin air (although our staff CPA said that technically these are just debits on a spreadsheet that never actually make it into fiat currency) clearly has had an effect on all asset classes. For a point of context, the US GDP is only $14.4 trillion and the total US market capitalization is $14.6 trillion. Now, we're not implying that all of these “debits” went straight into the stock market, but we are trying to prove the point that if efforts this large didn't result in a positive outcome then we would probably be advising you to invest in guns, canned goods and generators. So for the time being, let's enjoy the ride while it lasts...but we need to remember we're going to have to take the training wheels off sooner or later.