The major indices surged higher yesterday as the Dollar fell once again. The inventory of unsold homes fell to a seven month supply or its lowest level since February 2007. GDP for the 3rd Quarter was revised lower to show a gain of 2.8%. Same old story. The Great Depression has been avoided, we are emerging from the recession, but significant headwinds remain. Bank lending is contracting at a 15% annualized rate. The unemployment rate is above 10% and heading modestly higher. The economy is being supported by an unsustainable Keynesian nirvana. The bears would call it a “fool’s paradise”, whereas bulls like us would call the fiscal and monetary stimulus an imperative; without which the negative feedback loop of falling asset prices and further derivative unwinding would have resulted in far, far worse. We don’t believe we are postponing the inevitable, and remain confident that economic stabilization will ultimately lead to a period of sustained, albeit slow growth. The “rebound” over the next few quarters may well surprise to the upside, especially as a strong level of inventory rebuilding is necessary. After that, the gradual removal of monetary and fiscal stimulus and the need to bring deficit spending under control will create more systemic risks and most likely with it a prolonged period of subdued economic growth. We are making the comparison of the present secular bear market to that of 1968-1982, and in this analogy would say we are well into 1975. Back then the major indices doubled off the 1974 lows and were back to the old highs by 1976, and we believe this is entirely possible into 2011 as the S&P 500 (1106.24) makes the roundtrip back to 1550/1575. After that, a 1250/1550 range for a few more years may well play out before the 2000-2015 secular bear market comes to an end and we move into a new bull? What is important to recognize is that for now, there remains great upside for stocks. Equities remain severely undervalued, especially when compared to prevailing interest rates (how else would you value stocks?), and that organic growth stocks, in a slow growth environment, will lead the market in the years ahead. We have all been led to believe that we are sitting on mountains of unsustainable debt and that the “good times” are not coming back for a very, very long time. In a month the decade will come to an end and the S&P 500 will show its worst real return decade since the 1930’s, maybe in history. And yet let’s take a look at household net worth. Yes it’s fallen with the twin debacles in real estate and stocks; but it may well surprise investors to realize that it has risen 36% since the low in 2002. No it has not doubled this past decade, as it did in the 90’s, but it is up over 25%. Ultimately we would argue that assets minus liabilities for all households is one of the best barometers of consumer health. And while the plunge from the ’07 high and the rise in unemployment are keeping consumers wallets close to their vest; we maintain that predictions of the U.S consumer’s demise are premature and overstated. Americans are holding almost $10 trillion in cash, money market funds and bank deposits. That’s almost equal to our entire $12 trillion Federal debt, and equal to the entire market capitalization of the S&P 500. Corporate balance sheets are very healthy. We are seeing an enormous surge in productivity. In deed analyst earnings estimates now call for 2011 to be a record year for profits on the S&P 500. We have the addition of 2 billion new consumers globally. We have seen an unprecedented bull market in bonds, and with no inflation in sight, interest rates will remain low. Federal debt as a percentage of GDP is almost 80%, but still way below the 125% we saw after the Second World War. Secular bear markets create an overwhelming negative psychology, and this one will take a long time to break, but anyone with a longer term view will be richly rewarded by allocating more assets into the equity markets.
The Ts indicators closed at 0.89 and 1.08 and the mean stock is stubbornly under performing as there are more stocks below their 50 day averages than above it. We need to see the troops catch up with the Generals, and as we move into this seasonally strong period, the hope remains that the rally will “broaden out”. For now we remain in an Up/Up trend, but small caps will have to join the party if we are to see the end of year surge we have been anticipating.


S&P 500 (1106.24) is far stronger than the broader market and closed above its 10, 20 and 50 day averages and close to another fresh ’09 high. Can it break through the 1110 area with conviction and make its move to the down sloping 200 week and lead the broader market higher in the process? The 200 week is at 1241. Expect support at the 10 day at 1100 today. The 50 day/ 20 day buy pivot is at 1072/1079 and represents our line in the sand. There is no doubt we are looking “tired” but since March that has often been a prelude to a sharp move higher. We remain bullish near term and perhaps the holiday season can get the rally going in earnest.

Nasdaq (2176.01) closed back above its 10 day average but is reversing lower this morning. The unfilled gap at 2150 provides initial support. The 20/50 day convergence is up to 2129 and is the line in the sand. We want to give the rally the benefit of the doubt, despite its inability to gain immediate traction. We have moved sideways to lower for two months, and the stage is now set for a rally to close out the year, but we would add defense below 2129.