Friday, October 9, 2009

Blowing The Top Off

On strength in the health care and technology sectors, US equities managed to finish one of their best weeks of the year with a strongly positive session. IBM led the Dow to new 52-week and 2009 highs, while the S&P finished just .17 short of its high for the year, set back on September 22 (1071.66). The NASDAQ also closed within shouting distance of its 200 closing high, just 7 points short of 2146.30, also the close on September 22.

The major indices closed higher every day this week except for the Dow, which posted a 6-point loss on Wednesday. This sets up an interesting scenario for the first big week of earnings season. A number of highly-traded stocks report next week, including Charles Schwab (SCHW) on Monday; Intel (INTC) and Johnson & Johnson (JNJ) on Tuesday; JP Morgan Chase (JPM) on Wednesday; Citigroup (C), Cypress Semi (CY), Goldman Sachs (GS), Google (GOOG), IBM (IBM) and Nokia (NOK) on Thursday; and Bank of America (BAC) and General Electric (GE) on Friday.

Dow 9,864.94, +78.07 (0.80%)
NASDAQ 2,139.28, +15.35 (0.72%)
S&P 500 1,071.49, +6.01 (0.56%)
NYSE Composite 7,015.54, +24.87 (0.36%)

Advancing issues beat decliners, 3942-2445, though the gains were not as broadly-based as earlier in the week. New highs beat new lows, 482-45. Volume was significantly below the levels of the rest of the week, but nobody seemed to care, with stocks soaring, even on a day in which the markets decoupled from the dollar trade, which was strengthened through intervention by the Bank of Japan and some veiled comments from the Fed Chairman, friendly uncle Ben Bernanke.

NYSE Volume 4,310,388,500
NASDAQ Volume 1,900,588,625

Due to the strong dollar, moves in the commodity markets were muted, though oil managed to gain 8 cents, to $71.77. Gold kicked back from its three-day record run, losing $7.70, to $1,048.60. Silver relinquished 13 cents to close at $17.69.

Considering the conditions in the market, it was something magnificent to see the Dow soar to a new closing high, but the US economy appears to be something of a coiled spring, about to explode with growth in all directions. Companies have cut the workforce to the bone while recovering from the worst financial crisis since the Great Depression. While there are still voices of macro-economics who believe that our debt levels are too high (they are) and the banking sector too weak (probably not in comparison to the rest of the world) to promote significant expansion, companies and investors are not convinced. Most of the working population is working, though this latest recession and the accompanying stimulus may have created an even larger underclass of unproductive cretins living off the earnings of the producers.

The big fear is that unemployment stays at elevated levels for too long a period. The government, by its actions such as extending unemployment benefits and increasing welfare payments only serves to exacerbate the condition, and washington must reign in its own profligacy. Otherwise, the massive spending the feds have thrown at the problem will create an ever more severe economic crisis in which the government cannot meet the demands of the people it is sworn to serve.

It's likely a very positive development that the dollar exhibited some strength and that bonds have sold off, increasing yields. If anything, the market, especially bond yields, will telegraph the next Fed move to raise interest rates, which seems to be coming sooner rather than later, and would be a good sign of real recovery and strength.

What most economics fail to include in their calculations are the robust dynamics of the US economy and the magic of innovation, which usually serves as a spur to both economic and job growth. The government jawboning about clean and green energy is a step in the right direction, but the markets will be the ultimate arbitrageur of what works and what doesn't. New products continue to come to market, and that builds economic activity more than any feeble weak-dollar trade ever could.

The US economy appears poised to break out into a new era of prosperity and the market is forecasting that development. As trite and cliche as it may sound, those who say that it's a mistake to bet against the US economy are probably dead right.

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