Who Isn’t Buying the Next Dip?

01/17/2012 11:47 am EST

Focus: MARKETS

Igor Greenwald

Chief Investment Strategist, MLP Profits

With the US economy improving and share valuations modest, charts signaling further gains deserve the benefit of the doubt, writes MoneyShow.com senior editor Igor Greenwald.

The Dow is flirting with another triple-digit gain, while the S&P 500 could top 1,300 before the day is over. That would be the highest close since July 28, reversing the subsequent market plunge on premature fears that the US would adopt European-style austerity, hastening a recession.

In fact, political gridlock in Washington ensured that deficit spending equaling 9% of the GDP would prop up growth for another year. Gridlock proved to be the economy's best friend. Over the next six months consumer confidence gradually bounced back, corporate profits continued to impress, and interest rates fell enough that even the depressed housing market seems to be slowly gaining strength.

While Europe continues to court disaster, China's growth has slowed just enough to refocus Beijing from fighting inflation to boosting growth. And that's what had the bulls so giddy overnight.

China said its GDP grew at an 8.9% annual rate in the fourth quarter-down from the 9.2% pace for the entire year, but a bit above estimates. Shanghai stocks, which have been yo-yoing wildly in action typical of market bottoms, soared 4% on the news.

Buyers hope the government will ease its lending curbs and take other steps to stimulate the slowing economy. For the moment, such hopes are ascendant.

Still, growth around the world is decelerating most dramatically since the start the last downturn, when hopes that policymakers would save the day proved tragically misplaced.

Can China cope with its bursting housing bubble more effectively than the Federal Reserve dealt with subprime losses five years ago? Maybe; the larger down payments made by Chinese homebuyers should make the financial system less leveraged, and presumably more stable. Perhaps more importantly, China's unaccountable government could bail out banks once more without anyone saying boo, and worry about inflation later.
The European mess seems certain to get worse as austerity and credit crunch bite. Europe in 2012 is a lot like subprime in 2007-an unhealed wound that could still turn gangrenous. But it's a crisis that has festered for two years now, and last year's global market slump did price in some downside risk.

Which brings up one of the nicer contrasts between the latter part of '07 and today. Stocks were expensive then after a multi-year run, with the S&P topping out above 17 times earnings just before said earnings rolled over. If something similar is in store this time, the disappointment should at least prove less drastic given the current earnings multiple of 13. Meanwhile, Shanghai's at 9 and Moscow's at 6.

For now, there are signs on the corporate level that those record profit margins will hold up, especially for companies benefiting from the US recovery. If that holds true during the earnings season, the market could test last year's highs. And there's plenty of frustrated money on the sideline to buy any interim dip.

The latecomers will want to buy stocks like TJX (TJX) and Celgene (CELG). I'm more excited at this point about names like Ebix (EBIX), Eagle Bancorp (EGBN), and Fortune Brands Home & Security (FBHS). They have nice charts and lots of upside should things continue to go right.

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