Insights & Advice

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Back to the Future, again

Once more into the breach, the bulls say, as they assault the 10,000 level on the Dow. Will we fail or succeed? If we can hold above that level it may provide the psychological boost we need to entice more investors into the market. I say we will hold the higher ground.

The last two weeks stocks have consolidated, exhibiting greater volatility with the S&P 500 correcting roughly 7%. It appears that correction is just about over as investors are once again ‘buying the dip’ on the back of increasingly good news on the economic front.
“But a 10.2% unemployment rate isn’t bullish,” argued a client in Sheffield on Friday.

“It is and it isn’t,” I countered.

Remember that unemployment is a lagging indicator while the stock market is a forward looking entity. Often unemployment can continue to rise well after the economy begins a recovery. So while the headline number of 10.2% was bearish, the underlying rate of decline in new jobs continues to ease from month to month. That’s positive, indicating that employers are no longer laying off workers en masse as they were a year ago.

The economic indicators that look forward (called leading indicators); things like new manufacturer’s orders for consumer goods, capital goods, materials, building permits, the spread between long and short term interest rates (the yield curve) and consumer expectations are all moving in the right direction. The S&P 500 index is also a leading indicator and you know what’s happened there over the last six months.

You may not agree with it, but the government’s stimulus package appears to be working. Just this week an extension of the first time home buyer credit combined with a new $6,500 credit for existing home owners/buyers has been introduced. The President, responding to Friday’s unemployment rate, also said that he is planning even more stimulus efforts in the form of road/bridge investment, more tax cuts for businesses to create jobs, boosting credit to small businesses, more support for exporters and other measures. The bottom line here is that the government has bigger pockets than we do so don’t bet against the success of their efforts to stimulate the economy.

Sure, you can worry that these efforts will be inflationary down the road, or that the money we are spending will eventually pauper this nation or any number of other scenarios; but right here, right now, the government cares about one thing—getting unemployment down to manageable levels in time for the election in 2012.

Speaking of inflation, have you noticed the prices of gold and silver lately? Since my column “All that Glitters,” precious metals have been on a tear. In a recent conversation with Portfolio Manager Michael Guggino of The Permanent Fund, a conservative asset allocation fund, Guggino said he expects commodities overall will continue to run as a result of the U.S. and other countries efforts to re-flate their economies. You can hear my entire interview with Michael by going to www.berkshiremm.com and clicking the ‘Radio Interviews’ button.
Remember too, that John Roque, technical analyst par excellence, and also a guest on my radio show, is still convinced that we will see gold at $1,200-1,300/ounce before we are too much older. I agree with both of them. You can hear my full interviews with both guests at Berkshiremm.com.

Posted in A Few Dollars More, At the Market