Stocks will push for another bullish end to the year

With so much controversy and turmoil in the marketplace in 2007, it seems only fitting that a prediction of bullishness is viewed skeptically by many in the investment world. However, I believe there are several factors that will continue to churn out new records in most equity sectors and classes.

Recent stock market pull-backs have been caused mainly by rising interest rates. Bond Yields rose again on Thursday bringing rates to around 5.17%. Despite the substantial increase of 400 basis points, the equity markets finished higher due to some good economic data. Although bond yields pose a short-term threat to the markets, they can only do so much damage before the flood of capital and investor confidence takes over.

Looking at the 10-yr bond yield (considered one of the best measures of rates), it continues to approach the target Federal Funds rate level. But what is going to happen when bond prices become just a few hundred basis points away from the target interest rate? They will halt, quickly. In other words, the upside to the stock market far outweighs the potential rise in bond yields. Therefore, if bond rates are not going to get much higher, we must assume that housing will begin to stabilize during the latter half of the year. In addition, consumer and institutional confidence should continue to increase providing higher highs in the marketplace.

Another key aspect of the interest rate impact regards the flattening of the yield curve. One of the main arguments of the bearish analysts on Wall Street this year has been the inverted yield curve. Not only has the curve flattened, it has really begun to shape back to its normal progression, with yields correlating to the length of the investment. Stabilization of interest rates and normal payout percentages will make short term bonds more unattractive and simultaneously display equities as a prime target for even larger amounts of capital.

Stocks remain undervalued when taking into account global profits, revenue and earnings growth, higher margins, and currency conversions. Now might be the time to buy, not sell.

Another big sell-off, but was it healthy?

As US economic growth wavered in Q1, coupled with a few big sell-offs in the equities markets, stocks steadfastly rebounded and repeatedly approached new record highs. Taking into account the vast amount of negative numbers regarding economic data, equity prices fearlessly drove higher, despite predictions by several top economists and market analysts that a recession was near. A key basis point of these bears centered around the inverted yield curve, a unique phenomenon which has been succeeded by a recession every time it develops.

Low and behold, several months and vastly higher heights later, another pair of significant sell-offs occurred. This time however, these bears are missing a significant piece to their pessimistic puzzle. Finally, after years of mismanagement by the FED and US Treasury Dept., the yield curve has begun to normalized. The inversion has reversed, as long-term treasury yields have overtaken the 90-day T-bill rates.



Another issue the bears seemed to dwell on regarded weakness in the US Dollar. Many argued that global equity markets would continue to prosper while US stocks would take a significant hit because of the weakness in profitability between exchanges in currency rates relating to asset levels and market capitalization. Unfortunately, these bears failed to realize the global impact and success of American companies abroad. Giants such as General Electric, United Technologies, and Boeing continue to impress and solidify market share across the globe. Therefore, these revenues made abroad will translate high relative to the USD, failing to impact corporation's balance sheets like pessimists believed they would. In addition, the Dollar has continued to climb against the Yen and made a good comeback against the Euro recently.

Therefore, don't expect a large correction over 5-6% anytime in the near future. The US economy is going strong and stock slumps are supposed to be caused by Bond yield inflation, not computer glitches. This is a natural cycle and valuations are still appealing in the equity markets.

Quote of the Day

"As you have heard me say on many occassions, the key to Tiger's success over the years has been a steady commitment to buying the best stocks and shorting the worst. In a rational environment, this strategy functions well. But in an irrational market, where earnings and price considerations take a back seat to mouse clicks and momentum, such logic, as we have learned, does not account for much."

-The great Julian Robertson, Tiger Management

US investments continue higher despite China

For the past few years, many bearish global and US market analysts have claimed that a recession or sharp decline on Chinese exchanges will create a detrimental domino effect throughout the free market world. Well, guess what, China's Shanghai index dropped some 8+%. Despite the rapid drop-off, resembling the DJIA in 1929, US stocks failed to coincide, edging slightly higher overall, including some of the very stocks with huge interest on the exchange such as PetroChina and CNOOC.

Unfortunately for these bears, they refuse to realize that globalization has helped reduce risk and dependence in any one country or region. Negating fundamental economics, though, baffles me.

As of 10:58PM ET, the Shanghai Index was down another 5%. We will see if the US exchanges can continue the momentum and further our dominance as the supreme nation of wealth. Also interesting, the Hang Seng seems to be higher still, some .37%. This means that worries among Chinese investors have yet to spread to outside investors, including a signifcant portion from the US.