The Birds Eye View On The Market...

I have been out of commission for the past 2 weeks but I felt that today is a good day to comment on a couple of recent developments.

Including today the Nasdaq is now up 11 (!) days in a row. During the same period European stock markets managed to put in the greatest advance since 2004. The broader based US stock market indices managed to gain between 10 % (S&P 500) and 13 % (Russel 2000 Small Cap index) over the last 8 trading days alone.

The current rally has many fathers but its roots can clearly be found in better than expected earnings for the majority of the S&P 500 companies.

About 25 % of the companies making up the index have reported 2nd quarter earnings thus far and as of right now 70 % of the companies have exceeded expectations.

Analysts had been looking for quarterly earnings of about 12 $ for the index but it now looks like we might scratch $ 14 for the quarter.

The market has been taking the better than expected earnings with excitement and took of with a vengeance.

As always the big questions is what happens next. As such I feel it is important to offer some perspective.

Most of the companies which reported better than expected earnings managed to do so not because of increases in revenues but rather because aggressive cost cutting measures boosted profits.

The problem with that is that one companies cost cutting effort is another persons job loss or another companies loss of earnings.

As such the overall macro picture is of great significance. Simply put...companies might be able to save themselves to better earnings for one,two or even three quarters but at one point the top line (revenues) have to start to increase in order to boost earnings in a sustainable manner.

In this context it seems rather significant the type of comments Fed Chef Ben Bernanke offered over the last two days as part of the semi annual economic review in front of the House and Senate Committee.

Bernanke was basically downbeat on the prospects of an accelerated or speedy recovery of the US economy. On the contrary, he forecasts sustained high unemployment rates with no significant improvement until 2011. He also stated clearly that the recovery will be slower and burdened by more significant headwinds then prior recoveries.

To top it all off...he made repeated comments that the current size of the Federal Deficit is unsustainable and needs to be addressed sooner rather than later.

So...what does it all mean ?

As I like to say...tomorrow is mystery but a couple of things seem clear to me today.

The next economic recovery will be slower than any economy recovery we have seen post World War II. It will also be burdened with some very big risks which might cause significant headwinds to the recovery.

I am sure we will see positive GDP growth...as such I am not forecasting a dooms day scenario.

However...I believe it is entirely possible that real GDP growth will be between only 1 % to 2 % on average for the next 4 to 5 years. (think Japanese economy post real estate bubble).

The reason why I mention all of the above is to offer some perspective for stocks. After some of the greatest runs in stocks of almost a decade it seems to me that the longer term scenario is somewhat disregarded right now.

As is always the case with stocks...the sun always shines until the next thunderstorm.

It is difficult right now to say what might cause it but I believe there is a good chance that the current party ends one day and we end up heading lower and/or sideways for a prolonged period.

One thing seems for sure....stocks will not be able to continue like they have done since March of this year. Average monthly gains are now over 10 % since the bottom in March and there is no historical example which could suggest that this will continue.

Current trends are clearly up so I am not sounding the alarm bells to get out of stocks. I would just like to suffest to keep the above in mind so that you have an idea why stocks might stall one day and not make progress for quite some time.

Until the next time,

Steve Benger