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At present we are about 22 months into the current bull market. There are similarities between the first year of this bull market and the one that preceded it -- specifically the steepness of the rise and the distance traveled. And the current bull has climbed at a steeper angle and traveled more distance.
While anything is possible, it doesn't seem reasonable that the current bull market is over. There has been a strong upward thrust, a substantial correction, and this week we made new bull market highs. A long-term rising trend line has been established. If that line remains intact, it is possible that the S&P 500 could reach the top of the long-term trading range at about 1550 in the next eight to twelve months.
On the negative side, the angle of the current rising trend line seems a bit steep, and a sideways consolidation would be a good way to correct this and to add longevity to the bull market.
BOTTOM LINE: In the last 22 years the market has not been noted for turning out textbook examples of bull or bear markets, so we probably shouldn't get too hung up on the current bull market following a script that causes it to end in eight months. On the other hand, there is nothing on this chart that would cause me to believe that this bull is going to end anytime soon.
What Source of Money Is Pushing U.S. Stock Prices Higher? Market Cap Rises $2 Trillion in 2010 as Buying by Companies and Foreigners Offsets Selling by Pension Funds and Retail Investors. However All of Gain and Then Some, $2.4 Trillion, Since QE2 Announced at End of August.
At the end of 2009, we published a report entitled, “Are Federal Reserve and U.S. Government Rigging Stock Market?” We questioned whether the Fed or the Treasury were pushing up stock prices because we could not identify the source of the money that pushed the market cap up by nearly $7 trillion from mid-March 2009 through December 2009.
At the time we released our report, many people thought it was crazy to suggest that the Fed or the government would manipulate the stock market. Yet Ben Bernanke, Alan Greenspan, and Brian Sack have all but admitted publicly this year that the Fed attempts to prop up stock prices.
The market cap of all U.S. stocks increased $2 trillion in 2010. All of the gain and then some, $2.4 trillion, occurred since the end of August after QE2 was announced. Once again, most of the money to push the market cap higher does not seem to have come from the traditional players that provided money in the past
U.S. Stock Market in Trouble Once Fed Interventions Stop. No Amount of Bond Buying Will Keep Stock Market Bubble from Bursting Eventually.
If the money to boost stock prices by almost $9 trillion from the March 2009 lows did not come from the traditional players, it had to have come from somewhere else. We believe that place is the Fed. By funneling trillions of dollars in cash to the primary dealers in exchange for debt, the Fed has given Wall Street lots of firepower to ramp up the prices of risk assets, including equities.
But what will happen when the Fed stops buying assets? If QE2 works and the wealth effect of higher asset prices creates a sustainable economic recovery, we think the Fed will stop its QE activities. The Fed is legally mandated to manage the economy, not the stock market, and we think the Fed will sacrifice the stock market to its legal mandate. If that happens, stock prices are likely to plunge to well below fair value.
A more likely outcome is that stock prices will be higher by the time QE2 ends, but economic growth will not be sustainable without massive government support. Then even more QE will be needed, and stock prices could keep rising for a while. In our opinion, however, no amount of QE will be able to keep the current stock market bubble from bursting eventually.
“The market is starting to believe the Fed will be successful in creating growth,” said Ray Humphrey, who manages inflation-indexed bond portfolios in Hartford, Connecticut for Hartford Investment Management Co., which has $161.7 billion in assets. “Nominal bonds are frankly reflecting those higher growth rates.”
The worst performance by Treasuries since the second quarter of 2009 reflects prospects for faster U.S. economic growth rather than concern that rising budget deficits will drive investors away from government debt.
While the average yield on Treasuries rose to 1.89 percent from 1.42 percent at the end of September, according to the Bank of America Merrill Lynch Treasury Master index, the price of credit-default swaps tied to U.S. debt declined to 41.5 basis points from 48.4 basis points at the end of September, Bloomberg data showed. The dollar rose 1.5 percent against an index of currencies of six major U.S. trading partners.
The drop in swap prices and the greenback’s strength shows bond vigilantes aren’t ready to punish the U.S. for its spending. Pacific Investment Management Co. and JPMorgan Chase & Co. raised their growth forecasts after President Barack Obama agreed to extend George W. Bush-era tax cuts as reports show gains in retail sales, manufacturing and consumer confidence.
“More than anything else, it’s a growth story,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York. “From the fiscal stimulus to the monetary stimulus to the tax extensions, it’s the belief that the U.S. government is all in.”
The Obama administration’s 2011 budget forecast a $1.267 trillion deficit for the fiscal year, which ends Sept. 30, after shortfalls of $1.294 trillion in fiscal 2010 and $1.416 trillion in the 2009 fiscal year.
Even as deficits remain at almost record highs, the bond market is giving the U.S. time to address structural budget imbalances. A Bloomberg News survey of the 18 bond dealers that serve as counterparties to the Federal Reserve in its open market transactions show they forecast the 10-year Treasury yield to rise to 3.65 percent from 3.30 percent on Dec. 31, below its average of 4.33 percent since 2000. Two-year yields will climb to 1.05 percent from 0.59 percent, holding below the average of 3.03 percent since the beginning of 2000.
Bond dealers and foreign and domestic investors bid about $494 billion for $165 billion of Treasury securities auctioned during December, government data show. That’s an almost 3-to-1 bid-to-cover ratio, matching the demand for Treasuries during 2010.
“If there were some new concern about the U.S. budget situation it would have shown up in the currency markets, which it hasn’t,” said Tony Crescenzi, a portfolio manager and strategist at Pimco in Newport Beach, California, which runs the world’s biggest bond fund.
China eased capital controls on exporters' foreign-currency earnings this weekend—a move that over time could damp inflationary pressures and slow growth in the massive foreign-exchange reserves that have made Beijing a heavyweight global investor. The move, an expansion of a program that allows exporters to keep their foreign-currency earnings overseas instead of changing them into yuan, was announced Friday and took affect on Saturday. .Chinese exporters get almost all their revenue in dollars and other foreign currencies. In the past, they could use some of that money to cover foreign-currency costs such as imported materials for their factories, but they were required to bring the remainder back to China and exchange it with the central bank for yuan. The Chinese central bank's purchases of that foreign currency are the main source of its reserves, which have roughly doubled in the past three years to more than $2.6 trillion. The system, which hails from a time when China was more worried about preventing capital outflows, has long vexed the country's monetary authorities.
"The direction is clear. The authorities want less foreign exchange to come in, so they are giving exporters the right to keep it abroad," said UBS China economist Wang Tao.