Why a Measly 0.02% 2011 Budget Cut Is Good for Investors

Apr 18, 2011, 6:25 am EST

The budget deal that kept the government from shutting down on April 9 reduced spending by next to nothing in U.S. budget terms. And that’s great news for investors in U.S. stocks.

How so? A quick look across the pond is all it takes to answer that one. The UK is in aggressive budget balancing mode and all the cutting of its government spending is sending its economy in reverse.

And a shrinking economy is an awfully hard place for companies to beat earnings expectations. If the U.S. had passed meaningful budget cuts, they would have the same economic braking effect as they did in the UK. And thanks to bitter rifts within the Republican party as 2012 approaches, the Democratic leadership should have little trouble exploiting those divisions to keep the Republicans from derailing the economic recovery. Read 

3 Stocks That Will Lead the Next China Rally

Apr 15, 2011, 12:01 am EST
3 Stocks That Will Lead the Next China Rally

In the past six months, we’ve seen four rate hikes by the People’s Bank of China (PBOC), and rather than continuing to decline as everyone had expected, Chinese A-Share stocks are now rallying. What gives?

Well, I think the stock market feels that the end of the PBOC rate hikes is near. The Chinese economy had been growing at an unsustainable pace — an alarming 11.9% in the first quarter of 2010 — so the monetary tightening that came in the form of short-term rate hikes, reserve requirement increases, and lending quota cuts was to be expected.

This naturally caused mainland Chinese equity indexes to underperform, as the tightening applies extra pressure on financial stocks and property developers. Yet even with those actions, there is still no evidence of the crash in the Chinese commercial and residential property markets that had been feared by bears in the camp of Jim Chanos and the like. Read 

Spain is the Last (and Largest) of the PIIGS to Fall

Apr 12, 2011, 12:43 pm EST

Basic economic theory states ceteris paribus — “all else being equal” — meaning the higher yielding a currency in real terms, the stronger the exchange rate should be against a lower yielding currency. There are, of course, many other factors that affect the exchange rate, but yield is certainly toward the top of the list.

And lately, the euro has been going up on expectations of European Central Bank (ECB) rate hikes in the next couple of years, while the interest rate outlook in the United States is still uncertain.

I think those coming ECB rate hikes will backfire because of the fundamental disconnect between different countries with divergent monetary policy needs, and single currency being exacerbated by the rate hikes. For example, Spain needs interest rate cuts, while Germany probably needs the hikes. Read 

Housing – Wall Street’s Kryptonite

Apr 12, 2011, 10:01 am EST

No rational person could think the housing market will somehow magically “repair itself” anytime in the near future. Today we’ll examine the current stagnation to see why economic growth will continue to stall — barring intervention by Federal Reserve Chairman Ben Bernanke — and look closely at the housing market as the catalyst for current and future market conditions.

In the United States, a broken housing sector must, by definition, mean a significantly underperforming economy — and that, in turn, will hit corporate profits before year-end.

Of the jobs created between 2002 and 2007, 40% were linked to residential construction. And current homebuilding is off its peak by roughly 80%. Read 

Fed Continues to Punish the Dollar, Blind to Inflation

Apr 11, 2011, 5:12 pm EST

At the last minute Friday night, the federal government dodged a bullet and avoided closing down. The market was flat last week, so it’s safe to say that the impending shutdown was not as scary to Wall Street as it was to those expecting their regular government services. Of course, nothing was solved for the long-term, and the U.S. dollar will continue to slide — based on Washington’s inability to control spending — while the U.S. economy has been humming along just fine, with or without federal government help. Dollar Sinks to the Bottom of the Currency Ladder

The euro hit a 15-month high to the U.S. dollar last week after the European Central Bank (ECB) raised its key rate by 0.25% to 1.25%. The People’s Bank of China also raised its key rate last week, up 0.25% to 3.25%. Meanwhile the Fed continues to maintain its 0% interest rate policy and quantitative easing.

The euro-zone is a mixed bag of good and bad news. On the positive side, Germany’s factory orders rose by 2.4% in February. That helped to strengthen the euro. On the other extreme, Portugal had to pay six-month interest rates of 5.11%, up from 2.98% just a month ago, so a bailout of Portugal (similar to the previous rescue plans in Greece and Ireland) may be necessary, pushing the euro-zone deeper into debt. Read 

Gov’t Careening Towards Shutdown. What’s Next?

Apr 7, 2011, 11:37 am EST

Obama, Reid and Boehner just came out of another emergency budget meeting to head off a government shutdown … but STILL no agreement!

Will they finally make a deal when they meet AGAIN at 7 p.m. tonight?

Maybe they will; maybe they won’t. Either way, we — the American people — will continue to pay the price for our leaders’ incompetence and cowardice. Read 

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