Market Commentary

Stocks staged a handsome rally
May 28, 2010

Stocks staged a handsome rally on China’s pledge that it will continue to buy European debt dampening concerns that the region’s debt crisis will worsen.  I ask is there some type of irony?  The capitalistic west held hostage by the communist east, a vast country whose export dominated economy is heavily dependent upon an economically strong west for growth in order to maintain relative harmony in its society.  I guess this is what one calls a symbiotic relationship. Each is mutually dependent upon another for survival.

Where will we go from here?  Will the typical drivers—earnings and interest rates—return?  As widely publicized earnings have been great and as per Bloomberg have posted the largest year over year gains since 1984.  Short term interest rates are at multigenerational lows.

Answering the above question, I think earnings and interest rates will soon return as the basic drivers of equities.  Based upon recent European legislative acts, it appears Europe is attempting to exercise some fiscal discipline.  Greece, et.al.  have been bailed out.  In my view whether or not this new fiscal prudence is sustainable will not be known for at least a year hence suggesting the European issues issue may no longer be at the forefront.

What about interest rates? Richmond Fed President Jeff Lacker, who is a well known inflation hawk, stated that he is growing uneasy with the term “for an extended period of time” as it relates to monetary policy.  There were several other Fed officials commenting about the surprising strength of the economy but not mentioning monetary policy.

I think stocks could stage a moderate rally, perhaps to around 10750 as data continues to surprise on the upside thus inferring profit growth will continue.  However this growth rate will cause a change in monetary policy assumptions that may create another round of volatility, a round beginning in early summer ending several months later following the first change in monetary policy.  It is at this juncture I believe equities will trade higher posting a handsome 10%-12% annual gain.

I must write this is the third time I wrote this outlook.  I was correct about the volatility and approximate timing but wrong about the catalyst.  Perhaps the third time is the charm, falling under the proverbial guise that a stopped clock is correct twice a day.

What will occur today?  The economic calendar is moderate.

On a different note, Monday is Memorial Day.  Please take time to remember all those who gave the ultimate sacrifice.  It is because of the fallen that we can live our incredible lifestyle.

Last night the foreign markets were up.  London was up 0.47%, Paris up 0.13% and Frankfurt up 0.35%.  Japan was up 1.28% and Hang Sang up 1.73%.

The Dow should open quiet. Activity is expected to wane throughout the day as many leave early to start the Holiday weekend.  The 10-year is up 12/32 to yield 3.31%.