The Bullish Case

¹²The Bullish Case.

By Normxxx | 24 March 2010

The largest 500 companies (excluding financial companies) hold almost $1.2 trillion in cash, or more than 10% of assets. That's the largest amount since the 1960s. This cash could be used for investments, to increase dividends or stock buybacks, or to acquire weaker competitors if the market pulls back. Interest rates are also at record-low levels. So companies can borrow at next to nothing and invest in cheap assets like (commercial) real estate, which is down more than 30% across the country [[and probably headed still lower, at least in the near to intermediate term: normxxx]].

The government still has two-thirds of the $787 billion stimulus money to spend over the next 18 months. In the past two months, it has used the cash to increase lending to small businesses, give people money to buy homes, and extend unemployment benefits. Millions of Americans are also contributing to higher corporate profits. The employed are working harder than ever. People are scared of getting laid off, so they're working more hours for no additional pay.

Workers are also afraid they won't be able to find a new job with unemployment at 16-year highs, so they're staying put even at lower salaries. For businesses, these trends mean higher output, fixed costs, and increased productivity. Inventory levels are still low. After overbuilding in 2007 and 2008, companies cut back on production. Inventory levels fell by 70% for some companies. Today, with the economy growing again, production must come back online. That's why manufacturers like Boeing and Caterpillar are increasing production.

Finally, there is some $3 trillion in money-market accounts earning next to nothing in interest. As the stock market continues moving higher, investors will seek more return. And if companies use their $1.2 trillion in cash to raise dividends, we'll see even more cash on the sidelines flow into large caps with strong balance sheets like Verizon, McDonald's, and Altria.

The bears will tell you the rebound in stocks is on little volume meaning the surge in equities is not convincing since institutional money (big money) is not coming in to the market. But a recent study by Standard & Poor's suggests this is normal. The study showed over the past four bull markets since 1987, money was slow to come into equities in the first year. In the second year, more inflows occurred.

That may be why Goldman Sachs is predicting a 13% rally in the S&P 500 from these levels.

We will likely see inflation from low interest rates and reckless government spending, eventually— but not anytime soon; probably not until the banks start lending again. The rich and middle class will see massive tax increases to pay down our huge debt levels. And we may get the 5% to 10% pullback everyone is predicting. But any pullback will be a short-term buying opportunity.

As long as interest rates are near zero, companies are flush with cash, productivity is surging, and sales are at least modest, stocks will move higher. I predict at least the next two quarters of earnings will be strong. That means stocks could continue upward until the Fall, for at least the next six months.

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Normxxx    
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