Hope Floats Down the Potomac

07/20/2011 10:42 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

The market turnaround based on signs of political compromise in Washington and Europe marks a rare display of optimism, writes MoneyShow.com senior editor Igor Greenwald.

What a difference 24 hours makes.

At midday Monday, the stock market was wearing prison stripes, wilting 1.5% under the hot noon sun on the assumption that its brief late-June parole had been revoked.

By Tuesday’s close, it was doing cartwheels and wondering who had written that crazy suicide note in its pocket.

Monday started with another bear raid on sinking Europe, progressed to talk about the lack of progress in Washington budget talks, and ended with economic forecasts cut, oil up, and gold at a record high.

But then came Tuesday, and the luck abruptly changed, and the condemned began pulling one “get out of jail” card after another from the stack.

It started with news that housing starts had hit a six-month high, a tentative sign that growing demand might soon put a floor under the housing market.

Then came the providential pie, transforming a parliamentary grilling of the Murdochs over the ugly phone-hacking scandal into the touching tale of a mugged octogenarian and the pretty wife leaping to his defense. News Corp (NWSA) shares bounced to the levels that prevailed last week, before a string of resignations and arrests.

The market got another boost after the closing bell, as Apple (AAPL), VMWare (VMW), and CSX (CSX) reinforced IBM’s (IBM) bullish profit news from the prior evening. The good results made Cisco Systems (CSCO), Bank of America (BAC), and Goldman Sachs (GS) look more like ne’er-do-wells than harbingers of profit doom.

The bulls felt another prod after lunch on Tuesday, on indications that the debt crises on both sides of the Atlantic were moving a step closer to resolution.

There was the call that President Obama placed to German Chancellor Angela Merkel ahead of Thursday’s European summit. Merkel is under swelling pressure, at home and abroad, to start worrying less about the bottom line and more about saving European unity.

The International Monetary Fund has come out strongly in favor of an expanded bailout fund finally authorized to buy sovereign European bonds below face value. And the older generation of German conservatives who unified Germany is grumbling pretty loudly that Merkel lacks vision, and might soon find herself alone at the center of a broken economic bloc.

There was movement in Washington, DC as well, as Senate moderates seized the initiative, offering a face-saving way out of an impasse between House Republicans and the Obama Administration.

Never mind that the compromise pushed by the “Gang of Six” is not so much a plan, much less legislation, as a napkin sketch of the budget policies meant to prevail over the next decade, subject to agreement by future presidents and Congresses, of course.

Never mind that the sketch’s deficit-cutting ambitions and tolerance for new revenue roughly matched those already outlined in the recently derailed talks led by the Vice President.

What mattered was the new spirit of compromise in the air. It suggested that everyone who was anyone was now looking for the votes to raise the dreaded debt ceiling. Such headhunting expeditions usually pan out.

As someone who’s been bullish for months on techs like Apple and Dell (DELL) and a lot longer than that on commodity shares, I’m as heartened as anyone by the turnaround.

I think that the housing-starts number hints at the economy’s ace in the hole, which is simply the passage of time. Time can heal many self-inflicted wounds, and gradually restore demand for housing, stocks, and even labor.

But I do wonder how stocks will fare in a few weeks, when the reassuring drumbeat of corporate results gives way to less cheerful noises from the struggling broader economy. And when I think of all the ways the politicians could still seize disaster from the jaws of normality, the mind boggles.

There is obvious value in equities right now. But they’re cheap for a reason, and not out of the woods by a long shot. As the averages edge closer to the post-crash highs, it’s time to wonder what might get them up and over.

More jobs and stronger house prices might do the trick. Strong earnings may not—that card is already lying face up on the board.

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