‘Cause two out of three ain’t bad

Founder and Publisher of the Switzer Report
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Last week, before the European Central Bank’s (ECB) eventful announcement, I hoped we would see three positive results. We got two; the ECB’s plan impressed the market and then stocks reacted accordingly, but we missed out on the third leg of the good news trifecta because the US job numbers disappointed.

The Dow Jones index snuck up by just 14.64 points, or 0.1%, to wind up at 13,36.64. Meanwhile, the S&P 500 was up 5.8 points, or 0.4%, finishing at 1,437.92.

This was not a bad result considering economists were expecting the US to come up with 125,000 jobs and only 96,000 showed up in August. Ironically, the unemployment rate dropped from 8.3% to 8.1%, but that was because less people are looking for work. The same trend is actually happening here in Australia.

What happened?

Two reasons could explain why Wall Street didn’t panic at such a disappointing labor force outcome. The first is the residual positive effects of the ECB’s plan to buy bonds and the second is the heightened expectation that the US Federal Reserve will unleash the much-vaunted QE3 – that is, more monetary expansion.

And while this would be a desperate measure I hope the Yanks could avoid, it looks like it might be necessary to give the US economy one last shot in the arm. It would come as worries over Europe decrease and so there is a greater chance that confidence – business, consumer and investor – would start to snowball worldwide.

It will also coincide with China making a greater effort to stimulate its economy and that will have favourable consequences for commodity stocks. Late last week we saw how the likes of BHP-Billiton (BHP) and Rio Tinto (RIO) reacted positively to the ECB news.

Our mining stocks and our economy will be substantial beneficiaries if the ECB + US + Chinese expansionary strategies hit the mark. But of course, if they fail to bolster economic growth worldwide, then it will be a win for the Doomsday merchants.

I’m hoping – and I think – the doomsters will lose again, but as an objective analyst, you can’t rule out the possibility that something goes wrong or, God forbid, my analysis will be wrong!

What to watch

Here’s my summary of the key issues that leads me to my positive scenario:

• The ECB has been a major reason for struggling stock markets and the German DAX is up over 20% since June 4.

• There is evidence of a US housing recovery, albeit a slow one, but this is critical for an economic recovery in the USA.

• The National Development and Reform Commission, China’s top economic planner, approved 55 investment projects worth 1 trillion yuan, or $157.7 billion last week and stock markets shot up on the news.

• On the local economic front, we are seeing a mix of data consistent with a turning point that could be positive or negative. Now, while that might sound terribly inconclusive, I’m saying enough has been done for the economy, which saw growth drop from 4.3% in the March quarter to 3.7%. In response, there have been 0.75 percentage points worth of interest rate cuts plus Federal Government handouts and now good news out of Europe helping the stock market to rise.

Bull or bear?

I have been arguing for months that this could be the makings of a long bull market, but there still remain challenges such as China’s slowdown, US jobs, a US election, the fiscal cliff threat, and then there is Europe.

The European Union (EU) and eurozone specifically have made giant steps to help their member governments and economies, but it still has political problems. For example, Greece. Germany also looks like it’s heading for recession. The ECB’s plans to stimulate Europe couldn’t be better timed.

Sorry, it could have been about 18 months ago, but the Europeans were too thickheaded and so lacking leadership that they needed to be dragged kicking and screaming to make the moves that can sort out this mess.

Since June 5 our S&P/ASX200 index is up 7.8% and that’s a nice rise, but we now need to see some more positive initiatives from overseas that promises a stronger global economy. That’s why the US job numbers were disappointing.

I think the Fed will move ahead with its third quantitative easing stimulus package (QE3) with Bernanke putting the economy first over accusations of being politically biased. This will help the US economy and stocks.

The bottom line

As you can see, I remain cautiously positive, but nonetheless positive; only political stupidity can ruin this progress.

In a nutshell, what I’ve shared with you can be summed up in the old cliché: “No one rings the bell at the end of a bear or a bull market.”

I think I can hear something ringing – maybe it’s a bell! But remember, I did say “maybe”.

Postscript: Last week was huge week and this week will be a big week. Click here if you would like to read about what’s on.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.

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