The Bulls Are Winning

General Motors files for bankruptcy and investors rushed to buy stocks. Perhaps as each chapter of bad news unfolds, it is a sign that we are closer to a recovery. The GM news was followed by an improvement in the manufacturing sector. This is clearly another tea leaf the bulls have been looking for.

The problem we have is that we understand why the massive cash sitting on the sideline is quickly moving into stocks. The dire economic times of September seem to be gone. A depression seems unlikely and tidbits of an economic recovery have been appearing weekly. Many financial institutions are still troubled but companies like JP Morgan, Morgan Stanley, and American Express are rushing to the equity markets to raise capital to repay TARP.

However, are stocks ignoring the many problems that still exist? In March, the world seemed to be coming to an end for most investors and today every stock seems cheap. The truth is probably somewhere in between. Not too long ago oil was at 40 and heading to 20 and now it is at 60 and going to 70 or 80. The rise in oil seems odd as demand has not suddenly spiked and supply has not disappeared. Perhaps it is just trend trading or the equilibrium price should be around 60.

China seems to have been an aggressive buyer of commodities globally. Is the stimulus plan in China driving global demand for oil, gold, silver, iron ore, etc? Maybe but more likely China knows they have huge future needs of many commodities and it is using this environment of depressed prices as a time to stockpile commodities. Its aggressive buying has pushed prices higher and created some of the impetus for rising stock prices. We are concerned that when China finishes its buying, global demand may not be strong enough to continue to propel economic demand. As such, a reduction of demand as well as some negative economic surprises could put a crimp in this bull.

We continue to ride the bull with caution as it is hard to know when to get off the train. Our liquidity remains high as should yours. As stocks rise, so will our cash. We may not garner every last profit in stocks but hopefully we don't take a swan dive either if the economic mood changes.