As global wealth is growing at a steady pace, capital flow creates turbulence in wealth assets. But investors continue to avoid equity stocks. However, the growing capital base prefers to park in the safe haven of money market. Investors with more risk appetite would allocate capital in corporate bonds. As market is hovering on hot money, investors are gaining confidence and the demand for stocks of large corporations are increasing because of stable growth and attractive dividend.
While broad market index stays atop, investor confidence remains low. Individual investors are still waiting for market collapse to pick up bargains. Therefore trading volume is relatively low. However, day trading activities have increased due to more participation from institutional investors and hedge funds as well as market manipulators. As mentioned in earlier posts, market stays on a slow upward trend while economic woes cause oscillations, hence opportunities for speculators.
Fed Juices Stocks--but Bears Are Sniffing
Stocks could stay on an upward trajectory for the time being, while bruised bears sniff out the next trouble spot for markets.
The Federal Reserve's new round of quantitative easing and promise to keep policy easy well into the future propelled stocks and other risk assets higher, putting the Dow less than five percent away from its all-time high in the past week.
"For a period of time, the markets will give the central banks the benefit of the doubt," said Barry Knapp, head of U.S. equity portfolio strategy at Barclays. "You would expect the downside would be limited over the next six weeks or so, but there's some major questions about the effectiveness, from a macroeconomic standpoint."
Stocks have racked up double-digit gains since June, despite prognosticators' expectations that the market was heading for a summer sell off.
Fears of the fiscal cliff - the year-end expiration of Bush-era tax cuts and automatic spending cuts - top the list of lingering concerns that could halt the market's climb. But there are others, including earnings slowdown. The weakening dollar, however, could help the earnings of multinationals.
"By our reckoning, the third quarter is going to be the trough," said Richard Bernstein, CEO of Richard Bernstein Capital Management. "The rates of change should actually run more positive unless we hit a profit recession ...The problems that you're seeing I would argue are more related to the dollar and weakness around the world. Domestic companies seem to be doing okay." Bernstein said he remains bullish and does not see warning signs of a bear trend.
For now, he is also looking for an increase in volatility and a minor pullback, of about five percent after the summer run-up. "I don't think now is the time to be chasing this rally," he said.
How Fed's 'Shock & Awe' Will Affect Investors: O'Neill
The Federal Reserve delivered more than expected last week and in doing so changed the way investors will have to look at the economy, Goldman Sachs investment chief Jim O'Neill told CNBC.
Under normal circumstances, the central bank has what is known as a "dual mandate" - the responsibility of using monetary policy to ensure both maximum employment and price stability.
But the move to implement quantitative easing until unemployment stabilizes means the Fed, which announced the move Thursday, is focusing far more on jobs than it is worrying about the inflation that critics worry QE will cause, O'Neill said.
Study: Tax Cuts for the Rich Don't Spur Growth
Cutting taxes for the wealthy does not generate faster economic growth, according to a new report. But those cuts may widen the income gap between the rich and the rest, according to a new report.
A study from the Congressional Research Service -- the non-partisan research office for Congress -- shows that "there is little evidence over the past 65 years that tax cuts for the highest earners are associated with savings, investment or productivity growth."
In fact, the study found that higher tax rates for the wealthy are statistically associated with higher levels of growth.
The finding is likely to fuel to the already bitter political fight over taxing the rich, with President Obama and the Democrats calling for higher taxes on the wealthy to reduce the deficit and fund spending. Mitt Romney and the GOP advocate lower marginal tax rates for top earners, saying they fuel investment and job creation.
There is one part of the economy, however, that is changed by tax cuts for the rich: inequality. The study says that the biggest change in the distribution of U.S. income has been with the top 0.1 percent of earners - not the one percent.
The study said that "as top tax rates are reduced, the share of income accruing to the top of the income distribution increases" and that "these relationships are statistically significant."
In other words, cutting taxes on the rich may not grow the economic pie. But the study found that those cuts can effect "how that economic pie is sliced."
Earnings Magic? Big Rebound in Profits May Be Coming
Corporate earnings are expected to be just short of awful in the third quarter and then stage a a fairly dramatic turnaround the rest of this year-and analysts believe the rebound will last into 2013.
Analysts, in fact, are betting that a confluence of factors - the ending of what some hope is just an economic soft patch, an influx of newly minted money from the Federal Reserve and European Central Bank, and a presidential election, to name three - will help change the earnings story.
That has come amid worries over persistent economic weakness as unemployment stays above 8 percent, consumers retrench and geopolitical troubles in Europe and Washington continue to boil.
Yet earnings projections say the slowness will be short-lived.
While this quarter could see earnings per share declines of 2.1 percent, growth is expected to hit 10.2 percent in the fourth quarter and 11.7 percent for 2013, according to Reuters estimates.
But Dan Greenhaus, chief global strategist at BTIG in New York, cautions against reading too much into the earnings projections as a signal of economic strength.
Instead, he says, the numbers are inflated by "base effect," which simply means that because growth was so weak a year ago - particularly in the fourth quarter of 2011, when earnings barely moved - this year's numbers have a very low bar to clear.
For their part, companies continue to take down their third-quarter expectations, though the negative ratio has come down some over the past four months. Currently, a net 10.2 percent of the S&P 1500 companies have issued negatively revised forecasts, according to Bespoke Investment Group.
That isn't stopping investors from buying into the notion that the stock market can keep rising even if earnings don't quite meet their lofty expectations for future quarters.
"You're at the point in the cycle where earnings growth slows down. That's undeniable," Greenhaus says. "But even moderate earnings growth is still earnings growth, and that's the point of the cycle in which we find ourselves."
What This Rally Needs Now Is Fresh Converts to Buy Into It
Oh baby, what an awesome party that was. Like a two-week wedding in a remote Mediterranean village, the recent seven-session market feast just kept bringing out the food and wine. But now what? How can we ever top that? Like most events, improving on them means making them bigger, and in the case of this market, that's going to require fresh blood (e.g. money) to get in the game.
Given that investors have been pulling money out of stocks in favor of bonds all year, the new era of anything goes central banking may be just enough to win some converts.
"I think you're going to see those outflows largely slow down to a trickle and possibly reverse," says Peter Kenny, managing director at Knight Capital Group, in the attached video. "If that does happen, that will add fuel to the fire, give more buoyancy to the market, lift the tide and give the market a push into year end."
To that point, Kenny says the key indicator to watch is the money, or more specifically, the money flow. Any decrease in the retreat, so to speak, could mean we've turned the corner and not only gotten some burnt bears to surrender, but to join the chase.
"At the end of the day, money flow is what smart money looks at," Kenny says. "We're at one of those inflection points where you might see money starting to come back in."
High-Frequency Trading: It's Worse Than You Thought
High-frequency trading, which already has a sullied reputation, is even worse than the critics have charged, a new survey shows.
The Federal Reserve of Chicago recently asked 30 firms associated with the industry -- traders, exchanges, vendors and others -- to evaluate where HFT stands in the wake of a series of high-profile blowups.
A broader question, though, could be why the nation's central bank is so concerned about irregularities in the stock market.
Nicholas Colas, chief market strategist at ConvergEx in New York, suggests one answer: That the Fed's quantitative easing programs hinge on an efficiently functioning market.
The Fed last week announced the third round of QE, an open-ended program to purchase $40 billion of mortgage-backed securities each month until the economy recovers enough to drive down the unemployment rate.
Central to the Fed's easing policies is the "wealth effect" created by rising stock prices.
"The upshot is that the Federal Reserve is right to be concerned about market structure, in that a strategy of boosting stock prices is predicated on the notion that people believe them," Colas said in a research note. "The Federal Reserve probably needs to rethink how stock prices 'transmit' information to consumers and businesses. The game is changing. Quickly."
Near Perfect Conditions Suggest 30% Rally for Stocks in Next 12 Months: Hays
"Courage is resistance to fear, mastery of fear, not the absence of fear," Mark Twain once said. For investors, Twain's words seem particularly timely right now, given the transitioning state of unease that has been gripping the stock market for the first full week of the post-QE3 era. In fact, if you talk to veteran strategist Don Hays, of Hays Advisory in Nashville, he'll say that what we need right now is a little more fear and the conditions would be absolutely perfect.
"We've looked at the last 50 years, and when you have conditions very similar to today — with monetary policy extremely positive, valuations extremely positive, and psychology a little queasy here — you still have very high odds that in the next 12 months you're going to make money," Hays says in the attached video.
In fact, 50 years of analyzing these three variables has shown that when they do all line up, there's an 84% chance that stocks will be higher in the next 12 months by an average of 26%.
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