Tuesday, November 04, 2008

Retailers Moving Up!

Despite the mini feud that is playing out between UK and the EU officials, London retailers are moving up this morning. EU officials claim that England needs to move interest rates down more than does the EU. Which will have the bigger recession? This dance is not as pretty as Fred and Ginger but it does not really matter who leads.

The market is ripe for a nice move. However, markets have their own mind. This one may bounce around a while longer but the risk of being out is great. The early moves will be surprisingly strong. Missing a few of the best days will cause your performance to suffer.

Inflation expectations are running at around 1%. Such low inflation rates could bring 10-year and even 30-year bond rates down to 2.25 to 3.0%! Average stock market returns are 3% higher than bond returns. The yield curve argues that GDP should grow 3% next year, 4% counting the 1% inflation rate. For potential stock profits, it does not get much better than that. PE ratios should soar. The above scenario argues for PE ratios of 25 but, in the excitement of the moment, the market usually over shoots. The S&P could sell at 30 times in a year or two!

Retailers tend to lead the market break out. Last week, when BMW bought into VW, short sellers were squeezed and the price went out the roof. Many hedge funds are closing down. They do not want to get caught in short squeezes where the potential losses are unending.