Don't take the bet, JasonC.
Lurker is correct.
Posted on 10/16/2009 12:24:53 PM PDT by Ooh-Ah
The falling dollar, rising taxes, and an explosion of spending and debt make it hard for me to be a long-term bull.
Dow Jones 10,000 arrived on Wall Street on Wednesday for the first time in a year. It’s a milestone of sorts, and it certainly represents a vote for investor confidence in economic recovery. Blowout profit reports from Intel and JPMorgan helped fuel the day’s 145-point gain. So did a retail sales report that, excluding Cash for Clunkers, was actually quite strong.
Profits are the mother’s milk of stocks, business, and the economy. And top-line sales revenues now appear to be bolstering the corporate cost-cutting effort. As long as these earnings keep coming in strong, stocks will keep rising. My hunch is that we’ll move back to pre-Lehman levels — to over 11,000 on the Dow and over 1,200 on the S&P. Backed by an easy-money Fed, the economy will probably grow in a mild V-shape of 3 to 4 percent for the next year or so.
But storm clouds are gathering.
One of the biggest clouds out there is the sinking dollar. What we’re witnessing is a big global shift out of dollars and into commodities. The dollar is quickly losing its reserve status to the yen and the euro. In the second quarter ending in June, central banks around the world invested 63 percent of their new cash reserves into euro and yen, and put only 37 percent into dollars. This week, the greenback notched a new 14-month low against the euro.
None of this is good. If this trend continues, spiking inflation and interest rates will choke off the stock market rally and do serious damage to the economy. It could happen very fast.
No one in the Obama administration or at the Fed seems to care about any of this. In fact, they are probably applauding the lower dollar as a sort of 1970s way of boosting exports and the manufacturing heartland in the Midwest. But the falling dollar is bad news for consumers. It ultimately will cause higher inflation, as signaled by the rising price of gold. Over the past six months, the greenback has lost 15 percent while gold has climbed nearly $150.
And the storm clouds don’t end there. Future tax hikes also are looming, as is an enormous explosion of government spending and debt. All of this is why it’s hard for me to be a long-term bull.
The great market boom that took place between 1982 and 2000 was basically characterized by low marginal tax rates and a strong King Dollar. Unfortunately, the 21st century has witnessed a weak dollar and, more recently, rising tax rates that are coming due in 2011 (if not sooner). In other words, the prosperity-inducing Mundell-Laffer supply-side model is being reversed.
As economist Art Laffer put it to me, we are stealing demand and production from the future. So, even as we get a V-shaped recovery now and into next year, 2011 may finally pay the piper for both low growth and higher inflation.
What we need to be doing is exercising some monetary restraint to save the dollar. The Fed should start moving excess cash from the economy. It should follow Australia’s lead and begin raising its target rate. In addition, the Treasury ought to be buying all these unwanted dollars in the marketplace. And Washington needs to quit its explosive spending and borrowing. It’s killing us. Some statutory — or even constitutional — limits should be set.
We also need new economic-growth incentives, such as lower marginal tax rates to benefit investors, entrepreneurs, and workers. We should be slashing tax rates on businesses large and small.
Stocks could have another four to six months left to rally. That would be great news for increasing the wealth of the investor class, and maybe even enhancing the animal spirits a bit. But the policy mix is all wrong right now. Health-care entitlements and taxes punctuate the wrong-way policy mix.
What remains to be seen is whether the Republicans can successfully challenge the Democrats with a true supply-side economic-growth message and job-creating platform. If not, beware of the storm clouds.
— Larry Kudlow, NRO’s Economics Editor, is host of CNBC’s The Kudlow Report and author of the daily web blog, Kudlow’s Money Politic$.
It’s bonus season, of course everything’s up. For now.
ping
The only reason it is up that high is because the federal reserve has been using newly printed money to buy up large chunks of blue chip stocks.
More Marxist class warefare on the supposedley conservative forum.
Look for a 60 day rally in the US dollaraccording to FOREX studies.Gold will flux.
But come April, precious metals and commodity corporation investment will have become strong.Very, very, strong.Now is the time to get in, over the next 60 days.
Follwo the price flux of precious metals.( China has advized it citiezens to buy gold and silver, in specie purchases, while tryingto shore up the USD, but billionsof private gold purchases are happening with Chinese individuals, a major price driver world wide.)
This is the bull that was 50 stories tall, half a mile long, and with walls 1/100th of an inch thick.
Inside, it’s just empty space waiting to be reclaimed by the forces that cannot be denied.
Love Larry Kudlow - I was hoping he would throw his hat into the ring for Chris Dodd’s Senate seat.
We are sooooooo screwed...hang on to your seats...
Who says I’m lying? I read about it here of FR a couple months ago but can’t seem to find the article. It makes sense for Bernanke to quietly buy up fortune 500 stocks to obtain a better handhold on the market.
The media will call out the bands as soon as it hits 10,000. Will they do the same when unemployment hits 10%? As they did when the number of war dead in Iraq hit 3,000?
I love Larry Kudlow and have for years. He is usually an infectious optimist (although the Obama Admin has tried his soul). And such a kind gentleman. He has that rare asset, manners. Larry dresses impeccably, has an incredibly loud voice, and has great insight into the combo world of finance and politics. His mind is as sharp as a tack. I wish Fox Business News could win him away from CNBC. Maybe someday.
We get the Fed's balance sheet every week. They bought a lot of treasuries this year, though they've about finished that. They've bought a lot of agency mortgage backed securities from Fannie and Freddie, and they still are. They got repaid huge amounts from US banks, other US corporations, and foreign central banks, of the short term stuff they lent out in the crisis. The net sheet hasn't moved since late April (contracted $200 billion to the end of summer actually, back up to about the same level since then).
But do you know how much common stock they've bought? Zilch.
Making up lies to fit your own paranoid fantasies is something better left to the left...
The actual claim made even in the nutjob article is not that the Fed is buying stock, but that the banks might be, helping them earn money - then pretending that the Fed lending to backs is enabling it.
But they aren't, either. The banks are making trading profits from the improvement in the bond market, utterly unsurprising and merely undoing the ridiculous panic collapse in credit late last year. I flagged the rally in the bond market as the source of a turnaround in bank profitability as early as last December, and told everyone here that stocks would be weak for another quarter because it would take time for that to show up in their reported earnings.
Which is exactly what happened.
The Fed dropped short rates to zero, and flooded the money market with liquidity. That eventually broke the risk-premium fever in the LIBOR market, dropping LIBOR from 4.5% at the top of the crisis to 0.5% or less now. That means all those mortgages earning 5% become profitable with loan losses anywhere under 4.5%, instead of needing to be under 0.5%. (They are actually running 2.2% or so).
The money markets being healed meant the banks could lend to corporations again, keeping them liquid. Corporations being liquid meant they could roll over their debt at normal interest rates instead of the 15% and up rates seen late last year. That means the entire bond market rallied, and corporations had access to capital again. Understand, during the crisis 4th quarter 2008, the bond market was *closed*, forcing every company to liquidate everything it possibly could to scramble for money.
As soon as the bond market began rallying, it became a profitable trade to buy corporate bonds with borrowed money. All the investment banks did so and made trading profits. It took a quarter for those profits to show up in reported earnings, and in the meantime endless gloom and political crap kept stocks in the doghouse. But once it was clear earnings had turned at the banks, the market took off.
Within a month of that happening, money began flowing back to the Fed as all its short term support loans were repaid. $700 billion worth from late April to mid August alone, for example.
They didn't buy any stock and they didn't need to.
A functioning money-market means a functioning bond market soon thereafter. A functioning bond market means flush corporations and improving earnings all around. That and starting from panic lows was quite sufficient to send stocks back up half of what they dropped in the panic.
We don't need to make these things up. It isn't a conspiracy for paranoids and it isn't about politics. It is finance, it operates on its own principles and to the timing of its own internal developments. Everyone trying to play it all as a piece of politics or by chasing doom mongering headlines is a fool messing with stuff he doesn't understand.
And stayed there a whole 15 minutes....
Suckers rally.
Tell you what. I’ll bet you that it’s under 8,500 by years end, under 7,000 by Q2 2010.
You want a piece of that action?
You want my 3-year bet as well, or no? You can have either or both, entirely up to you.
Don't take the bet, JasonC.
Lurker is correct.
Dude, with what I'm making on commodities calls and retail puts?
Are you kidding? I'm in!
Or maybe bogus season. Given the news that came out today, I don't understand how the DOW is any where near 10,000.
While I’m not bullish, I tend to think there’s too much doom-and-gloom on this board about the economy. It’s slowing down, but I don’t think it will fully reverse coarse.
*BUMP* !
You're on.
8500 by 1 January 2010. 7000 by Q2 2010.
Best, L
By the way, anyone who understands puts knows it is a poor bet to offer, since you can get the same for 6 to 1 odds instead of even money in the market today.
But I'll happily take your money to reduce the bet size for you (lol)...
I'm an options trader. I consider this $20 put worth at least $200 in entertainment value, possibly $280. 10:1 leverage ain't bad. 14:1 is better. And if it expires worthless on Dec. 31, the trade overhead is basically absorbed in the total anyway.
On the other hand, when I collect, I'll be reminding you for, what, 36 months of your irrational exuberance? That's a pretty good LEAP. :-)
Off topic but do you remember the 14000 party on CNBC. I called my kid that day and told her to get out.
Did you ever see this article from Fleckenstein dated 07/23/07. Dow 14,000: I'm skipping the party.
Fools and their money...
Yep ,, window dressing time to make the 4Q numbers look nice .. time to sell the losers so they don't show on the prospectus's ... either that or maybe the geniuses don't have a clue what's going to impact the economy in 1q10 or 2q10,, they were all "surprised" when the mortgage defaults started rolling in ,, I guess they believed their flagrantly erroneous projections.
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Maybe he was thinking of the unaccounted for $2T and the antics of the PPT in derivatives/futures. not everybody is as "sophisticated" as you seem to be.
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I'll take it IF AND ONLY IF YOU ALLOW INDEXING FOR INFLATION IN THE MONEY SUPPLY and FREEZE THE DOW 30 SO WE AREN"T COMPARING APPLES AND ORANGES BY SUBSTITUTING AAPL FOR SOME LOSER STOCK . By 3 years from now we'll have had another crash and fake run up or two but we'll still have ZERO hammering away at every business that is profitable...
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