(By Scott Martindale) After an almost straight-up run for the first three quarters of the year, stocks are no longer making it quite so easy of a decision to stay long. Nevertheless, the bulls seem to be holding strong in their conviction. Apple (AAPL) has been a leader throughout, but even during that recent 5-day stretch when money was pulling out of Apple, it hasn't necessarily gone to cash–it's just shifting to other sectors, including cyclicals like Caterpillar (CAT). Moreover, the Dow Jones Transportation Average has been strong.
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This continues to suggest to me that the downside is limited—so long as the Bernanke-driven supply of free money continues. As a reminder, although there is currently no quantitative easing program in place, the Fed launched "Operation Twist" last October whereby it sells $400 billion in short-term Treasuries in exchange for the same amount of longer-term bonds in an effort to depress yields on longer-term bonds (while maintaining ultra-low short-term rates) with the intent of incentivizing consumer and business to borrow and spend by pushing down interest rates on loans and mortgages.
This program is scheduled to end in June 2012. Because all stock market gains since the March 2009 V-bottom have occurred during Fed stimulus programs, it is quite possible that the market will stall or even selloff in June when Operation Twist ends. But for now, the stage is set for further gains.
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Individual and institutional investors as well as corporations are all still sitting on historically high reserves of cash. As fear stays low, the cash has been finding its way into the markets, including corporate stock buybacks and acquisitions.
Earnings season kicked off last week, and so far the number of companies beating earnings estimates and giving positive guidance has been quite high. For example, Seagate Technology (STX)–Sabrient's top pick in its "Baker's Dozen" top stocks for 2012—just gave a fine report, and Wednesday it hit a new 9-year high and finished the day up nearly 4%.
Reported revenues are harder to manipulate than earnings, but the year-over-year consensus estimates on top-line growth are not very challenging as analysts have been quite conservative. So, I expect more good news this season.
That leaves European sovereign debt issues and growth concerns in China as the main things that could derail the bull train.
As for Europe, it is now Spain that has emerged front and center, so when Spanish bond rates rise, the markets get more fearful. Since early March, the 10-year yield has risen from 5.0% to 6.0%–with 6% seemingly the dividing line between manageable and unmanageable debt payments. On Monday, the yield rose above 6% and stock markets sold off. On Tuesday, yields fell and markets rose spectacularly. (For comparison, U.S. 10-year notes yield about 2% and Germany is near 1.7%.)
Still, although the ECB has kept the liquidity spigot open to Spain's advantage, many observers believe that there is no avoiding an eventual bailout of Spanish banks, and they say that Italy (with a GDP 50% larger than Spain's) will be close behind. No doubt, Germany has benefited from the EU in that the weaker economies can't devalue their currencies against the Deutschmark like they used to, since they all use the euro now. But the flipside is that Germany is responsible for supporting the bailout of their EU brethren.
As for China, last week the country reported weaker year-over-year GDP growth of only 8.1%–down but still quite robust. Of course, the Chinese government will do everything in its power to avoid a hard landing scenario, but also with a measured effort to prevent it from overheating. Perhaps the biggest threat in this regard is a potential real estate bubble.
Of note, China is the subject of this month's edition of The MacroReport, which is a monthly co-publication of Sabrient Systems and MacroRisk Analytics, providing an in-depth analysis of the macroeconomic trends in focus territories. The MacroReport offers a unique combination of global market commentary and analysis with specific actionable ideas.