Positive Signals, Despite Washington Threats

If I told you that the dollar is up, gold is down, and profits are powerful, would you be bullish or bearish? Well, I would be bullish -- at least for the short-run. There are a lot of positive signals out there right now, quite apart from all the Washington tax threats and big-government politics.

For example: The 10 percent NASDAQ stock correction was erased with a good gain on Wednesday. The techie index is now nearly 2 percent above the January 19 correction level. And the broader S&P 500 is coming back -- it has recouped virtually all of its election losses.

There now is a growing consensus that the U.S. economy, at a minimum, will outperform the economies of Europe and Japan. Plus, business profits, the mother’s milk of stocks, could hit $90 a share. That comes to an earnings yield of over 7.5 percent, or a price-earnings multiple of about 13 times.

So let me ask you this: Do you want to own a 3.7 percent Treasury bond? Or would you rather take a 6 percent corporate bond? Why not take the stock yield which is much higher?

Now here’s a good leading indicator: Financial stocks are coming alive again. Citigroup and AIG are leading the parade. The whole group has recouped its correction loss, plus 2 percent. Others like Morgan Stanley, BB&T, BofA, and Goldman Sachs have good momentum. And corporate bond rates are coming down. The Treasury curve is still steeply upward-sloping. Heck, even a banker can make money with a zero interest rate and a more than 3.5 percent 10-year bond.

And guess what? I love this. Rich people actually may be on the rise. According to the new Forbes list, billionaires in the U.S. went from 359 last year to 403 in 2010. You can’t have successful free-market capitalism without rich people. You can’t have capitalism without capital. Washington doesn’t understand this.

We should not be eating our rich with punitive tax rates. We should be rewarding them for their successful investing and entrepreneurship. No capitalism without capital. Capital creates jobs. So let’s help those who are the most successful; they help everyone else. (By the way, this is one of the reasons why there is going to be one powerful political regime change come November.)

On the downside, the U.S. just posted a record budget deficit in February. Yet again. This, despite the fact that tax revenues actually rose for the first time in almost two years, which is a sign that the economy is improving. But here’s the rub: Spending increased almost 17 percent in the last 12 months!

This is nuts. Stop the madness.

And here again, a new congressional bill that just passed the Senate will cost $150 billion -- and for what? Little temporary tax credits and more transfer payments to the state. No spending-cut offsets whatsoever. Will they ever learn? Ever?

But the wonder of wonders is that our mostly free-market economy and stock market are pointing to recovery, despite Washington.

Financial Reform Bill To Debut Monday

The market is slightly lower this morning, though its already well off its earlier lows. Senator Corker just gave a press conference that a financial reform bill is likely to be unveiled Monday, even though it will not be a bi-partisan effort. It appears Sen. Dodd is under some pressure to get a bill out, even though it may not be ready for primetime. The uncertainty around this issue is likely an overhang on the financial sector today.

Now Pres. Obama is coming on TV to make some comments, and his appearances have never helped push the markets higher.

The dollar is lower today, but it isn't really helping commodity prices all that much. Oil is lower below $82, and gold is roughly flat near $1104.

Asian markets were mixed overnight; the 10-year yield is higher to 3.74%; and the VIX is up slightly to 18.93.

Trading comment: The market has had a very impressive streak of consecutive up days here, so I think a much needed rest is in order. I think any pullback will be shallow, but with the put/call ratios coming in at low levels lately, I would not be surprised to see a 1-2 day selloff in the market. I would use any weakness to add to names that have recently broke out, or those that are just beginning to break out.

IBM looks like it could be poised to play catch up; WFR broke out yesterday; DISCA looks good; and RIMM looks like it can still move higher. Just to name a few.

long DISCA, IBM, RIMM, WFR

TIME TO BE AN OBSERVER

Folks there are times when the right thing to do is to just sit and watch. This is one of those times. We really have no edge at all in the gold market right now. Gold is moving down into the daily cycle low and I expect that decline to be exacerbated when the stock market corrects. So there’s no call to try and pick a bottom at this time.

We still lack two confirmations that this is a C-wave continuation, so there's no need to buy this dip yet, epecially if this does turn out to be a D-wave as there will be a lower low by the time the next intermediate cycle bottom arrives.

Now if gold can hold above the prior dip at $1087 it would be a big plus as it would keep the pattern of higher short term highs and higher short term lows intact.

I'm not terribly confident that will happen though as the stock market hasn't corrected yet. When it does it's probably going to add downside pressure to gold and miners.

On the plus side the right translated nature of this daily cycle swings the odds heavily in favor of gold holding above the $1044 low. So once we do put in the cycle bottom gold will have another shot at taking out the critical $1161 level.

It doesn’t make sense to buy the stock market this deep into the daily cycle especially with the negative divergences and money flows popping up (more on that in last night's update). It’s safest to just sit and wait for the correction to unfold and then buy into the dip.

Shorting is probably out of the question as this is one of the most powerful bull markets in history. And it should be, with all the liquidity that’s been thrown at it. The surprises continue to come on the upside. So you are just asking to get kicked in the teeth if you are shorting anything right now.

Folks I think it's time to step back and be a spectator for a while.

Are We Headed for Another Bull Market Year?

The key question facing investors right now -- on the anniversary of a record-breaking stock surge, the best in 75 years -- is whether we’re headed for a second bull-market year.

It’s a battle royale between rising corporate profits -- which are the mother’s milk of stocks, business, and economic growth -- and the high-tax policies pouring out of Washington, aimed at capital gains, dividends, top earners, banks, foreign earnings, and financial transactions. It’s a miserable list of tax hikes.

Then, of course, there’s the looming specter of Obamacare, with all of its high taxes, spending, and regulatory burdens to control almost 20 percent of our nation’s economy. My CNBC pal Jim Cramer says the passage of Obamacare could really damage the bull market. He makes an important point, one with which I totally agree.

Right now, it’s big government versus the free market.

So, will the profits surge, coupled with an accommodative Fed, overcome the Washington tax surge? Will profits trump tax hikes? Is political regime change lingering in the cards? Perhaps a defeat of Obamacare? That would certainly bolster the free market and encourage more investment in stocks, new businesses, and new jobs.

This is the key debate facing investors. Short term, I like stocks. Longer term, it’s a very open and difficult debate.

On another note, I’d like to mention Cisco’s announcement of a new high-tech innovation in the form of a powerful new router. This thing has 12 times the capacity of Cisco’s closest competitor. And get this: It could download the entire Library of Congress in a little over one second. This is a shining example of American ingenuity. But we should reward it, not punish it. Likewise, we should punish failed banks, not reward them.

We also should be reducing excessive government pay and pensions, bringing those federal (as well as state and local) workers in line with the gigantic setbacks suffered by the beleaguered private-sector workforce. Doing so could reduce tax burdens.

Special Kudlow Report Tonight...

This evening at 7pm ET:

Karl Rove, former top adviser to President George W. Bush, will join me on The Kudlow Report tonight. Lou Dobbs will be aboard too. Should be interesting.

Topics will include Obama tax hikes, tea parties, Bush legacy, 9/11, U.S. economy, etc.

Please join us. The Kudlow Report. 7pm ET. CNBC.

S&P 500 Near New Highs

The stock market is higher again this morning, defying those who continue to call for a pullback. I have been talking about how even though the market had become overbought, instead of pulling back it mostly went sideways while the overbought condition got worked off. This was a positive sign, and as you can see in the chart below, the oscillator has confirmed the recent highs in the market by making a higher high.

Speaking of new highs in the market, the Nasdaq, small- and mid-cap indexes have all made new highs for the year. Only the S&P 500 has yet to confirm this breakout. But at 1148 right now, it is not far from breaking out into new high territory soon.

The Nasdaq is again leading the SPX today. The strongest index is the biotech index, with acquisitions taking place in the sector, the BTK is up +5.4% today. Financials are also strong, with a successful preferred offering by Citi, couple with short-covering and positive comments from analyst Dick Bove, pushing the BKX up +3.2%. The energy index (XOI) is lagging, -0.14% so far.

Among emerging market ETFs, Brazil (EWZ) is up most, +1.55%, while Russia (RSX) is lagging, -0.41%.

The dollar is lower today, helping to support commodities. Oil is trading higher near $82, while gold is flatting around $1122.

Asian markets were mostly flat overnight. China fell -0.7% after Chinese banks reported extending about 700 billion yuan in new loans for February, half the amount loaned in January as tighter lending restrictions took hold.

The 10-year yield is rising to 3.74%, and the VIX is down -2.2% to 17.52, very close to new lows.

Trading comments: Not much to add to what I stated above, and what I have been saying the last several days. The indexes are making new highs, and growth stocks are breaking out and showing strong technical action. I am staying the course, and looking for dips to add back to names in which I have taken partial profits.

long EWZ, XBI

Quote of the Day

"We are all faced with a series of great opportunities brilliantly disguised as insoluble problems."
— John W. Gardner: former secretary of health, education and welfare