You're Not Hearing the Reasons Why Stocks Will Rise
Stock-Markets / Stock Markets 2010 Mar 28, 2010 - 08:31 PM GMTBy: DailyWealth
Frank Curzio writes: It's not difficult to find a bearish opinion on the market these days...
After all, the S&P 500 is up more than 70% from its March 2009 lows. The Russell 2000 index of small-cap stocks is up 100%. As of Tuesday, the market was higher 27 out of the last 30 days. It's only natural for the market to take a break.
On the housing front, about 25% of U.S. homeowners are underwater on their mortgage, according to housing research firm First American CoreLogic. That means 25% of U.S. homeowners owe more on their loans than their homes are worth. Plus, foreclosures continue to hit the market at a record pace.
Also... the government's reckless spending is set to push our federal budget over $1.4 trillion this year. That's more than 10% of GDP, the highest level since World War II. And that amount does not include the $938 billion health care bill signed by the president this week. Also, unemployment is near 10%. If you take into account part-time workers looking for full-time jobs, unemployment is about 17%. This is near a 16-year high.
All this is why many of the smartest – and most vocal – analysts I know are highly bearish on stocks. But there's one thing you aren't hearing from these guys... And it's the reason I think stocks will continue to rise:
American companies are enjoying some of the best conditions in decades.
The largest 500 American companies (excluding financial companies) hold almost $1.2 trillion in cash, or more than 10% of assets. That's the largest amount since the 1960s. This cash can be used for investments, to increase dividends, or to acquire weaker competitors if the market pulls back.
Interest rates are also at record-low levels. So companies can borrow at next to nothing and invest in cheap assets... like real estate, which is down more than 30% across the country.
The government still has two-thirds of the $787 billion stimulus money to spend over the next 18 months. In the past two months, it has used the cash to increase lending to small businesses, give people money to buy homes, and extend unemployment benefits.
Millions of Americans are also contributing to higher corporate profits. The employed are working harder than ever... People are scared of getting laid off, so they're working more hours for no additional pay. Workers are also afraid they won't be able to find a new job with unemployment at 16-year highs, so they're staying put even at lower salaries. For businesses, this means higher output and increased productivity... which leads to higher profit margins.
Inventory levels are also low. "Inventory" is simply the stuff sitting around that companies haven't sold. After piling up a lot of inventory in 2007 and 2008, companies cut back on production. Inventory levels fell by 70% for some companies. Today, with the economy growing again, production must come back online. That's why manufactures like Boeing and Caterpillar are increasing production (and hitting new 52-week stock price highs).
Finally, American citizens have $3 trillion in money-market accounts earning next to nothing in interest. As the stock market continues moving higher, investors will seek more return. And if companies use their $1.2 trillion in cash to raise dividends, we'll see some cash on the sidelines flow into large caps with strong balance sheets like Verizon, McDonald's, and Altria.
The bears will tell you the rebound in stocks is coming on weak trading volume... meaning institutional money ("big money") is not coming into the market.
But a recent study by Standard & Poor's suggests this is normal. The study showed over the past four bull markets since 1987, money was slow to come into equities in the first year. In the second year, more inflows occurred.
Sure, we will see inflation from low interest rates and reckless government spending. The rich and middle class will see massive tax increases to pay down our huge debt levels. And we may get the 5% to 10% pullback everyone is predicting. But I see any pullback as a short-term buying opportunity.
As long as interest rates are near zero, companies are flush with cash, and productivity is surging, stocks will move higher. I predict at least the next two quarters of earnings will be strong. That means stocks will continue upward for at least the next six months.
I was bullish on stocks in March 2009. And when many analysts and money mangers started to get bearish last fall, I disagreed with them. I've been pointing to the factors I just outlined as reasons to continue to disagree with them.
As I mentioned in my January 4, 2010 essay, the government's all-out spending and stimulus efforts will be harmful over the long term... but these sorts of things take years – not months – to play out. That leaves plenty of time for stocks to head higher.
Good investing,
Frank Curzio
Editor's note: Frank Curzio is the editor of Penny Stock Specialist, the newest stock advisory at Stansberry Research (DailyWealth's publisher). To learn about Frank’s latest idea – a tiny Chinese company "backed" by the world's most powerful retail organization – click here.
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