Earnings and Liquidity Drive the Market Higher

A majority of companies reporting third quarter earnings have beaten expectations. Apple once again crushed their numbers today and the stock soared. Technology remains a good sector to focus on as Google and Intel proved last week. Not all earnings reports will be good but many will be. During the past year, most companies drastically cut costs and when revenues pick up a little bit, earnings can soar.

We haven't turned bullish but continue to have investments in the market because the negativeness by investors and the plethora of cash on the sidelines keeps driving the markets higher. We believe there will be a day of reckoning and we will cautiously invest accordingly. With the U.S. deficit reaching 10% of GDP and the government debt growing by the trillions, we need to be concerned. The recession may be over but many problems still loom.

Perhaps we will be wrong and the global economy will pull the U.S. into a growth mode but a falling dollar, rising oil prices, a looming commercial real estate problem, and rising unemployment makes it hard for seasoned investors to think we are back to normal. Companies are acting responsibly by slashing costs and minimizing inventories while reducing employment. The result has been better than expected earnings. However, the economy got a big boost from the stimulus plan when it comes to auto sales and housing. The government grew its debt for the sake of moving home and car inventories but that stimulus is over. Manufacturers are rebuilding inventory but the consumer is still constrained and may not be there to buy again.

The consumer must pay back its debts and that is why savings rates are rising. Companies must pay back their debts and that is why we are seeing many refinancings, exchange offers, and bankruptcies. This trend will continue well into 2010. Finally, the government must pay back its debts and that is why we expect interest rates to eventually rise significantly. This coupled with a continual drop in the value of the dollar should lead to rampant inflation. This scenario will put a crimp in stock prices at some point but for now liquidity and earnings may drive the equity markets higher. Be cautious and careful and buy large, liquid stocks with strong growth characteristics. Alternatively, buy distressed securities or real estate.