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Financial Markets on Sugar High?

For months now, PIMCO, the world’s largest fixed income manager, has been saying that the economy is on a sugar high from all of the monetary stimulus pumped into it by the Federal Reserve. That monetary stimulus is driving up the financial markets but isn’t making its way into the real economy to generate real economic activity and increased employment.

By now, you should have received in the mail (if you are on our mailing list) the 2010 Economic and Financial Market Forecast that we are using for investment management purposes for 2010. In it, you will read that one of the forecasts was an increase in unemployment, not a decrease as most are expecting. I’ve taken some heat from people who did not believe this, but yesterday we had a big negative surprise in the unemployment report.

My statement in the forecast was based upon the rule of thumb that you do not get increases in employment until you have sustainable 3% GDP growth. Under our forecast, we will have below recent trend GDP growth for the foreseeable future which will keep unemployment high. I won’t repeat the whole thing here as you can easily read the reasons for the below recent trend growth in the newsletter.

As far as the investment markets go, look for the monetary stimulus to continue to provide an upward bias in 2010 – although I’d anticipate at some point this winter we’ll see a bit of a pull back which should kick in some of the stop losses we have in place. We’ll use the cash generated by the stop loss sales to buy into our favored sectors for the next leg up in this bear market rally.

Yes, I still think we are in a secular bear market with a cyclical bullish rally in place. The secular bull market is outside the US – look to the emerging markets like Brazil, Singapore, and South Korea for real bull fundamentals and to developed markets like Canada, Australia, and Switzerland for significantly better fundamentals than the US – is still in place and even though late 2008 and early 2009 were very painful there, the secular bull is still in place there.

Right now, the dollar is in a counter-trend rally (you’ve read ad nauseum here about the reasons for the dollar bear market) and it is near-term putting some pressure on the markets discussed above. But we are using this as a buying opportunity to establish positions for new clients or to add to positions for current clients where appropriate.

So, our forecast dovetails nicely with PIMCO in my opinion. The financial markets should continue to move higher albeit with some scary corrections to work off over bought situations based upon the continued monetary stimulus. When the Fed gets serious about reducing the stimulus, that is when you will likely begin to see a topping of the market and serious chances for reversals to the 200 day moving average on the S&P.

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Right now, that 200 day moving average is at 992 and rising. I’d set that as the bottom of any trading range for the forseeable future with 1250 as the top (you can read about 1250 in the Forecast). Several of the technical indicators I follow are showing that we are a bit frothy at the moment so do not be surprised if we trade sideways or pull back some in the near-term.

Remember, markets can work off over-bought situations with either time or price movements. With money flowing into the market from retirement plan corporate contributions during the early part of the year, this should keep any pull back to manageable levels or just allow the market to grind around within a narrow range until the frothiness is worked off.

That seems to be the most reasonable assessment of the current market situation to me. So, enjoy your sugar high while it continues – and see if you can spot a well known Oscar nominated actress (three times with ne win) in one of her first roles 15 years ago in the video above – and hopefully enjoy an Illini victory tonight – both much better things than facing the cold weather outside.

Mark