Premarks: After Friday's Rally

Greetings from Rhode Island! This is where I've taken refuge from the draught and heat that's plaguing the Midwest so far this summer. The iPad is a truly remarkable creature in that I can literally do most of the things on it 1000 miles away from the office that I would do if I was sitting in my command chair back at Global HQ. Since most of Chicago's western suburbs are still without power from storms that cracked our area yesterday, it's better to be out here than back in the office. The tablet computer and in particular the iPad is a game changer and we are only in about inning two of that transformation. Basically though the device lets one go about one's business from nearly anyplace on the planet and on days like today I'm grateful for that. A few thoughts on Friday's rally and some observations from the trip out East. 

Friday's rally had all the trappings of a bear gore. The environment had become so toxically negative that any little event had the potential for an outsized market gain. Of course the little event I'm referring to was the fact that the Germans seemed to blink regarding austerity measures in the EU. European papers have wasted no time in pitting German Chancellor Angela Merkel and by extension the Germans as the ultimate losers. We'll see about that. Ultimately it's those same Germans who will have to write the checks that are propping up all those same peripheral countries that are delighting in Germany's so called about face. The devil's often in the details and bailing out the rest of the continent is no more popular today with Heidi and Fritz than it was a week ago. 

Regarding my prediction on healthcare last week that the Supreme Court would throw out the individual mandate and keep the rest, I'll declare partial victory. The individual mandate was denied as a valid extension of Congressional power under the commerce clause but it was retained as a valid measure of Congress' ability to tax. The rest was kept. Conservatives are fuming at the result but I think that over time they will see that they were handed a much more significant victory than is first suggested. Hospital stocks soared on the news last week.

More chatter over the weekend that corporate profits are facing headwinds from Europe and from our own economic slowdown. I'll simply at this point say again that we're using 103.75 for S&P 500 earnings this year and based on that number stocks are still cheap. the fact that we've hit a bit of an economic dog patch is not exactly an unknown development right now. Despite all the volatility and angst since the spring, the S&P 500 still managed to gain nearly 8% in the first six months of 2012.

While I think stocks are cheap I still can't shake the feeling that we are going to have at least one more downdraft this year. Too much is being thrown at markets right now and we'll have the election to contend with as we get closer to the fall. If stocks stick to that script then we're going to see a topping process over the course of the next month followed by a downward thrust into late summer/early fall. No law says we have to go this route but it would be in keeping with every year since 2008 with the exception of 2009. We'll have our defensive pages nearby just in case this starts to occur. I'll reiterate that irrespective of what the next few months holds we are still of the opinion that stocks are cheap longer term.

 I mentioned on Friday last week that I would post today and Thursday this week. I will still hold to that schedule unless events warrant a break in. In the meantime happy 4th of July! 

*Long ETFs related to the S&P 500 in client and personal accounts.