Greece is still a problem as the rest of the EU talks about a bailout without calling it a bailout. Greece itself seems to be walking around like a zombie telling anyone who will listen that they have no problem.

There are many issues that could upset the worldwide recovery as China deals with a budding inflation problem. So far they have tightened their money supply twice this year to hold down inflation.

Despite these headwinds there is a rather large tail wind for our economy. Only about a third of the stimulus package passed last year has been spent. As a result, this year and next will see massive spending in our country and at a time where economic stats are showing us the beginnings of a recovery already. That spending is a major push and should support continued growth.

Will that push stock prices higher? Earnings and growth are the key. The chances are good that both will do well this year.

Good Trading
Steve Peasley

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By mid week, after a couple good days, we had a sell off on Thursday which was broad based and painful. However, this morning with the bank stress test and an employment report for April behind us without any surprises the market decided to rally again, at least so far this morning. This is an obvious case of the market climbing a wall of worry.

The economic numbers actually were very encouraging this week. Retail sales were up for April by .3% and for last week up .7%, but what was more surprising was the first time jobless claims which fell by 34,000 this week and the four week average fell as well by 14,759. True jobless claims sit at over 600,000 which are very high but the stock market cares about the trend and is looking for the beginning of the change. That seems to be happening. Can this change turn into actual growth? At some point it will but not for a number of months, maybe by the fourth quarter this year or next. At some point the worry will turn to the strength of the recovery but so far no one is talking about that, yet!

We have had several weeks in which economic numbers, though still showing us that the U.S. economy is in a recession, seem to point to a turn from free falling to just falling or leveling off. The just ended earnings season came in better than expectations. Of course those expectations were severely downgraded at the beginning of the year therefore beating them is not all that difficult. The real test will be the sustainability of improving numbers. Can that happen?

I believe it will. The LIBOR rate is now below 1% when a few months ago it was as high at 5%. That is the rate banks lend to each other. The mortgage rates are at 5% or less and this week we saw productivity increase by .8%. Add these stats to all the others these last few weeks and we have strong evidence that things will get better. Finally, China, who embarked on their own stimulus plan, is already showing signs of strengthening growth despite the slow down in exports. The guidance, by independent firms, is calling for an increase in China’s GDP from 6% growth to 8% this year.

Does this mean the stock market is going to rally straight up from the March 9th low? Probably not. We will have corrections along the way. Any correction will be one to buy not sell. At the same time taking profits every so often is not a bad thing. Since China is already recovering and growing we have increased our exposure to the Asian market. You need to go where the growth is and since the stock markets of the Far East fell a lot harder than ours it has made all of Asia a good place to invest, despite the risks of lack of transparency and multiple books that their companies keep.

It is time to invest and has been for several weeks. No one knows when and where the bottom is but we can look back and clearly see a strong bottom of the various markets that took place on March 9th. Put fear aside and let’s make some money.

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On the economic front, retail sales reported this week fell 11% from February to March, Industrial production fell to 69.3% down 1% from February, and new construction fell 10%. All bad news, so why didn’t the market fall this week? Obviously, this kind of news was expected. Fear is subsiding. We saw good news this week in the earnings reports for the banks, in inflation which is dead, in mortgage applications for homes which are up 45% for the week compared to a year ago and in mortgage interest rates which are down to 4.8% for a 30 year fixed.

The numbers are still very ugly but the stock market has been so beaten up that it is reacting to news that shows some hints that the worst is over. The stock market is still down for the year even with the strong up move in the last month. There was a stronger move downward for the first two months of the year and so far all the market has done is return to early February levels. Except for the NASDAQ.

The NASDAQ index, which is full of large tech companies, is flat for the year. Past bull markets have been led by tech and this one is no different. Banking stocks are coming off severe bottoms and no bull market in history has occurred without a rally in banking stocks. It appears that though the economy is still in a severe slump that the stock market, which is itself a leading economic indicator, is telling us that the fix is in. That ‘fix’ may be some months away as we deal with backward looking statistics but it certainly seems that the mood has changed.

As we at KPP Financial have been heavy in cash. We did not pick the bottom of this stock market, nor did anyone else. Because we were heavy in cash we did not go down with the market in January, February and the first part of March. What that means is that we are late in catching the rally as well. As our clients have seen we have been moving into the market for the last six weeks. We are now heavily invested but with some cash on the sidelines that we plan to put to work on any weakness in the market. This is a bear market rally so far, albeit a sharp one, forming a ‘V’ bottom which was unexpected. Any pullback will be an opportunity to buy.

Finally, history tells us that this is the first leg of a rally. If the ultimate bottom is in, which we have stated in previous newsletters that we think it is, then the rally should continue. It should rise at least 50% from the bottom. After the 1973-74 recession, which so far looks very similar to the current recession, the S&P 500 rallied 73% and the DOW 75.7% over 19 months. This kind of rally from a recession low is normal. Don’t think that this is uncommon. Therefore, missing part of the first leg because you were protecting your nest egg, as we were doing, is not a bad thing.

However, it is now time to invest. Do it carefully and in fact hope for some weakness so that you can take advantage of lower prices. Do not fear any correction. Fear is hovering over everything. To the degree it is keeping people out of the market it is a good thing. Stock market rallies climb a wall of worry. Be cautious but be buying.

We will continue to buy slowly. The plan is to take advantage of any weakness to buy more. That doesn’t mean we won’t sell if something is not working but overall we are on the buy side of the market not the sell side. That time is over.

Good Trading,

Steve Peasley

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The market appears to be giving back some of the recent gains but with reluctance. Most traders and investors expect a pullback from the recent steep rise and because they expect it they will likely make it happen.

However, earnings season is starting in earnest and it is getting in the way. Built in to stock prices is an expectation of very poor earnings so any outlook of future earnings that are reported as less draconian might push the market higher. On the flip side any reports that point to worse numbers may or may not affect the market because expectations are very low. This is going to be a confusing time.

This morning there was a very large merger in the home building industry and Alcoa reported bad numbers for the first quarter but the stock is up on expectations of better times ahead. The market was up this morning but weakly after being down strongly yesterday on the fear of bad earnings.

As I said, this earnings season is going to be confusing.

Good Trading
Steve Peasley

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The main news item this morning was the official jobs report for March. There were 633,000 jobs lost raising the unemployment rate to 8.5%. This was a little better than expected but a non event for the stock market.

Economic numbers continue to show us that we are in a slump. However, those numbers, while weak, are revealing a slowing in the economic fall. That alone has sparked a rally. This rally is a Bear market rally. Usually a 20% move from a bottom is considered a change to a Bull market. That is what we have seen. It is hard to feel all that comfortable because we had a 25% collapse in the market the first two months of the year and in the beginning of March it continued to fall until the third week. Then we had almost three weeks of an up market producing a ‘V’ bottom. Technically we are in a Bull market.

You can not fight the tape. The market is rallying. That is a fact and you have to ride it as far as it will go. Stock prices are still very low for those companies that have earnings.

Fear is subsiding. That is a good thing; therefore maybe this bull rally has further to go.

Good Trading
Steve Peasley

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So is the bear market over? It is possible. We are having a healthy bounce and yes it could be sustainable. The news out of Washington is not nearly as bleak as it has been, but is it enough to turn the economy? The stock market for the moment thinks it might be. Monday’s very large rally was a continuation of the previous two weeks and Tuesday only gave back some of the rally, while the very volatile Wednesday was starting to show signs of an over reach to the up side. Thursday was up strongly and Friday so far is down. There will likely be a pull back and that pullback will be one to buy if we hold the recent lows. On a chart we see a ‘V’ bottom, just the opposite of what I expected a few weeks ago when I said in this Newsletter that of the two possibilities of bottoming, one being a ‘V’ the other a ‘U’, I expected a ‘U’. That is not happening. At the risk of being wrong again I do think we have put in the ultimate bottom and the possibility of a pullback is very high.

Meanwhile gather your list of stocks. That list should be full of companies with growth, cash and little or no debt; solid companies with great fundamentals. Stocks are still reasonably priced but next month starts the earnings season for the first quarter and the numbers are not going to be pretty. The question is has the market built those numbers into the expectations? No one of course has that answer.

This week we have seen some good news in housing, a restatement of how bad the fourth quarter was last year, being one of the worst in history, and possible good news in toxic debt removal from banks and recapitalization. All good things.

However, the market has historically embarrassed the most experts and pundits it can, so beware of the experts calling a bottom or an economic turn around. Of course your newsletter editor can be, has been, and will likely in the future be one of the embarrassed. I called for the ‘U’ bottom and got a ‘V’. When in the market be prepared to be wrong.

We have suggested you buy gently and gather your list of stocks. That appears to be good advice. Buy more aggressively on any pullback. If we did not hit the bottom a few weeks ago we are very close.

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