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| Blowin' In The Wind
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December 14, 2010 - Some positive signs are blowin' in the wind. Maybe they're enough to underpin a real recovery. Maybe not. But they are definitely positive, and together, may be the foundation of a stock rally with some strength. Here are some of them.
Dividends: General Electric, Weyerhaueser, and many other companies are raising theirs. GE's quarterly dividend went from 10 cents a share early this year to 12 cents to 14 cents. If you own it by December 27th, you'll get it on January 25. GE is almost a surrogate for the economy as a whole since it has so many divisions, offering many products and services. When GE raises its dividend it means the board and management see better times ahead. Companies hate to raise or initiate dividends only to rescind them a few months or even a year later. They know some investors buy the stock for income, and if that shrinks, those investors sell, push the price down and move to another stock. Watch for more companies to raise their payouts (especially banks). It's a sure sign they see better earnings ahead. IPO's: Yes, there are IPO's again. After years of minimal issuance, new companies are finally able to access capital markets. And investors like what they see. The Chinese company iSoftStone Holdings started trading on Tuesday. It soared 31% within minutes of opening, going from $13, the IPO price, to $17. Another one, First Republic Bank went public again, after leaving the arms of Merrill Lynch which was swallowed by Bank of America. It was priced at $25.50 and quickly traded to $27.50. GM had a great reception, priced at $33, then moved up before settling in between $33 and $34. The IPO window is open again. More capital is flowing into stocks, and new stocks are welcome, always a positive sign. Look for companies like Chrysler and many from China to tap the market as soon as possible. Stock Prices: In the last 5 months, the Dow Jones Industrial Average is up almost 20%, going from a low of 9614 in July to its current level of 11,495, a 2 year high. The S&P 500 index is at a 2 year high at 1245. Stocks usually move ahead of good or bad news, anticipating the future rather well, most of the time between 6 months to a year ahead. If stocks are measuring correctly now, they're saying that good times are coming. With many sectors still just emerging from the worst economic times in decades (sectors like banks, cars, airlines, hospitality), profits could be substantial next year. And stock prices like higher earnings.
Interest Rates: They've blipped up this week, but not anything that's too worrisome. Interest rates most likely won't go too high for a while, though they will definitely move up once the economy gets traction. Even then, it will take a while since companies are sitting on $1.93 trillion of cash (who knows how much the banks have). Companies won't need to borrow for some time so any push on interest rates, from the demand side will come from consumers and home buyers. Banks will keep their lending standards stringent for a while, making sure they don't go anywhere near the depths of their self-made messes of the last few years. Also, the regulators will most likely let big banks fail this time if they get too far gone. The American public wouldn't stand for another round of bail outs, though they made money on most of the loans to banks and car makers. Expect low rates for at least the first 3 to 6 months of next year as the Quantitative Easing (QE2) program is effected. Low rates are usually positive for stock prices. Retail Sales: They're up, at shops and online. November saw holiday shoppers open wallets, dig deeper, and buy. It's the fifth month in a row when retail sales improved. The Commerce Department revised upward the September and October numbers. The trend is stronger than orignally thought. Since consumers are about 2/3 of the economy, these numbers make a slip back into recession unlikely. So does all this add up to a great year? Of course not. There are plenty of negative signs blowin' in the wind as well. But these positive developments have only recently happened. There is never a time when everything is all good (or all bad). It's when the good outweighs the bad that real economic growth occurs. If unemployment drops and housing sales pick up, that wind will turn into a hurricane of higher stock prices. - Ted Allrich |
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