Obama high
Stocks – Thursday was just the ticket for equity market bulls with the Nasdaq technology index celebrating its longest bull streak in 17 years and the S&P 500 index accelerating away from the peak it reached at the start of June and before a more recent 9% correction. The rally to 979 on Thursday marked the highest price since President Obama was elected last November.
According to investors the world is a suddenly a better place. Investors had braced for a 33% decline in earnings during the second quarter compared to this time last year. So far we’re in for quite a treat with net income so far only sliding by 25%.
Online retailer, Ebay Inc. closed with an 11% gain after its results implied that consumers were back spending online. Apple rose after slashing the price of its MacBook Pro laptop and bucked an industry wide slide in sales. AT&T’s deal with customers of Apple’s iPhone delivered stronger earnings boosting its shares. Ford Motor Company, who skillfully sucked in so much financing last fall and averted bankruptcy, reported a much smaller loss than Wall Street scribblers had taken a stab at. Ford’s share price rose 10%. Homebuilder DR Horton jumped more than 7% as existing home sales rose for the third month in a row.
Of course, as regular readers, you already know the next sentence has to start with a “however.” After-hours on Thursday, computer software giant, Microsoft announced its first annual revenue decline as a publicly quoted company as sales took a gut-punch across all units. Its shares fell 7% in after-hours trading as investors were left quivering by the sense that there were few signs of recovery likely in the near-term.
American Express said a drop in customer spending saw profits almost halve helping send its shares down 5% in late trading.
What appears to be happening, to us at the very least, is that rallying markets offer the path of least resistance. Late comers to the rally are enthralled with the allure of recovery and believe that the inevitable rally is just around the corner. That might be true in any normal recovery but that’s not the situation today. It would have been extremely hard for construction markets to have fallen further than they did. Equally it would have been harder for auto markets to contract further, yet still at an annualized rate of less than 10 million units, the industry is still producing less than the country’s replacement needs.
We are not picking holes in the stock market’s rally. Indeed, readers of Jurojin Weekly have been long the S&P 500 index through options for the last several weeks and we think this rally might yet see the index pierce 1,000 this summer. The strength of any decent trader is to recognize not what he or she thinks, but to recognize what everyone else is thinking.
Thursday’s words of wisdom from New York University economist, Nouriel Roubini, widely recognized as the predictor of the financial crisis, will continue to be a factor in our thought process in the weeks ahead. He notes that the “perfect storm” of rising bond yields and runaway oil prices coupled with problematic fiscal deficits, weak profits and a stagnant labor market could yet see the economy slide back into recession by next year or 2011.
The 1% growth he predicts over the next couple of years is well below the trend growth rate of 3% and when one pores over the below par earnings that are comforting investors, one is left wondering what this pony’s next trick will be.
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