Why the Market Could Easily Go Up 30%

Position Your Portfolio to Profit from a Weak Dollar

April 22, 2009

The stock market has been rallying impressively over the past several weeks. What I like most is that the market has a lot of fuel to continue its run.

Consider that the amount of money sitting in money market funds is worth slightly more than half of the entire S&P 500. That's more than twice the level where it was in March 2003 when the stock market took off after the statue came down in Baghdad (the world seemed to be a simpler place that day). In my opinion, the stock market could easily run 30% higher from here, just like it did six years ago.

So what will unleash all that cash? I honestly can't say sure, and don't trust anyone who tells you they know. However, I can point to a few possibilities. For example, the market would be helped if any of the major banks repaid their TARP money. Another possibility would be if Tim Geithner's bank plan turns out to be a success.

We're Now in the Worst Part of Earnings Season

The March 9 low, which was really a low for distressed financial stocks, is unlikely to be tested again thanks to improving earnings from leading financial stocks. The federal government's famous "stress test" for these financial giants will obviously be positive and that may restore investor confidence. Since many of these firms also want to return their TARP money (subject to Treasury Secretary Geithner's shifting rules), that's also working to boost confidence.

The worrying point is that the Obama administration is debating whether to convert the government's preferred shares in these financial companies into equity. That way, the government can continue to influence credit markets. This move is highly unpopular both on Wall Street and on Main Street. This rumored "backdoor nationalization" has triggered another sell-off in financial stocks. This recent sell-off has been nasty but I don't expect a retest of the March 9 low.

As for right now, we're currently in the worst part of earnings season. Analysts expect corporate earnings will decline by 38.7%. This will be the seventh straight quarter of falling earnings. Ugh!

Complicating matters is that the U.S. dollar was strong in the first quarter, which hurts earnings at many multinationals and commodity-related stocks. I'm still expecting a big fall for the dollar as a result of our massive budget deficit.

So far, the federal government has only spent $60 billion of its $787 billion stimulus program. The budget deficit for fiscal 2009 is on track to be $2 trillion dollars which is massive for a $14 trillion economy. Considering that the bulk of the $787 billion stimulus program will occur in fiscal 2010, it should help to boost GDP growth, but the budget deficit won't improve significantly. I remain convinced that the dollar will decay and that inflation will resurface later this year. The core Consumer Price Index, which excludes food and energy, has been rising in recent months.

Prepare Yourself for Stagflation

The important point is that this brewing inflation is our salvation. Inflation will eventually spark businesses to rebuild their severely depleted inventories. Based on the latest Leading Economic Indicators, the U.S. economy is now contracting at a 2% to 3% rate, which is a considerable improvement over the fourth quarter, when GDP fell by 6.3%. By the time the third and fourth quarters arrive, the U.S. economy should be growing around 0.7%. For next year, I see economic growth perking up to 3%.

Two things are about to happen: Either Wall Street will get depressed with the dismal first-quarter earnings and shoot down all stocks, or those stocks that are bucking the dismal environment will emerge as an oasis amid the chaos.

For investors, your best defense is a strong offense of fundamentally superior stocks. Two inflationary stocks I like right now are Occidental Petroleum (OXY) which reports earnings on Thursday, and Sociedad Quimica y Minera (SQM), a Chilean fertilizer stock which reports next Tuesday. Both stocks have outstanding fundamentals and should profit handsomely in the weeks and months ahead.

In these volatile times, your best defense is a strong offense of fundamentally superior stocks. Make the wrong choices and your already battered portfolio could suffer even more. Make the right moves though, and you can ensure your portfolio posts profits for the entire year. The actions you take now could make or break your performance this year. Today accept your copy of the 2009 Investing Guide, absolutely FREE, so that you can get a look at the opportunities and the dangers that investors will confront in 2009.