Thinking Short Term...

Perhaps the most interesting thing I've learned over the past 8 months is the difference between overall economic reality and short term stock market perception. And perhaps this is most noticed in the fact that I think there is some money to be made in stock between now and year end, as well as potentially between now and March 2010. My reasoning?

(1) The economic reality is poor - I repeat the same mantra of the constrained consumer, huge government debt, the threat of additional government debt imposed by possible legislation on health care and carbon emissions, the masked stabilization of the housing market, and the declining value of the dollar. However, I've learned that being correct is not always right.

(2) The cause for a fair portion of the recent rally seen over the past 8 months is due to the Federal Reserve's decision to keep interest rates low and pour money into the market. We haven't seen inflation because the banks are holding all the money, but the Fed has indicated, especially in the past month, that it plans to keep interest rates low until inflation becomes a problem (which won't be until 2011 likely due to excess economic slack) and/or until unemployment improves (while a survey this month of economists revealed that unemployment is expected to rise through the middle of 2010 and stay stubbornly high throughout 2010). THUS, low interest rates will continue to hurt the value of the dollar, prop up corporate profitability and propel commodities higher in value (the one hiccup here being that excessivly high gas prices could further hamper the economic recovery in place).

(3) If interest rates stay low -- this means easy money making for banks and corporations in general - and stock traders to an extent. And while the recent run-up of 60% in the S&P 500 won't be duplicated in 2010 - you can expect a CHOPPY but overall steady climb toward 1150 by year end and 1250 during 2010. That's another 5-15% of upside in those cases.

(4) What about a double dip or a market correction? I think that one would be appropriate - but I think that it will take the Fed Raising interest rates or rates increasing of their own accord (as the Fed pulls out of purchasing mortgage-backed securities in March 2010) to cause such a correction. And both of those event are 5 months out at a MINIMUM, keeping in mind that the Fed isn't expected to raise rates at all in 2010 now.

(5) Long Term thoughts -- we are pursuing the same bubblish type of actions that inflated crude oil to a price level of $147 last year and, similarly, eventually (as the Fed raises rates and unemployment subdues) the Fed will raise rates and banks may lend more and inflation will start to rear its head. This creates a very likely scenario for market troubles .... but not for awhile. So yes, we could easily see the market rise and then pull back to Dow 10,000 or Dow 9,000 in the years 2010 or 2011, but, in the short term, the lack of Fed action = more of the same for now = inflating market gains.