Tuesday, October 9, 2007

Tuesday morning quarterbacking

The IMF downgraded the growth of the US economy from it's July estimate of 2.8% to 1.9%, and is also cutting their growth forecasts for Europe. So why is the US dollar rebounding against the Euro and the Yen? Because their growth is slowing also, and they are lagging behind the interest rate cuts of the Fed. In this slower growth environment, stock investors will pay more for growth. As the slowdown in housing continues, further cuts in interest rates are still needed, which allows growth investors to expand the earnings multiple that they pay for stocks as rates come down. And the beneficiary of this is the move in technology growth stocks. Cramer's four horseman of the Nasdaq, AAPL, GOOG, RIMM and AMZN are a microcosm of the multiple expansion taking place in the market, and as certainty increases over the estimates of other companies earnings, they'll have an expansion in their multiple also.

The market is like the MNF game last night with the Bills and the Cowboys. With about six minutes to go in the game, it looked like the Cowboys were toast. (And if you missed the game, watch the highlights on ESPN). It was the same with the market. The bears had the bulls on the ropes in August, but they couldn't put them away. The recovery of the onside kick was like Bernanke's 50 basis point cut. It gave the bulls hope, and turned bad news into good. Folk's 53 yard field goal that put the game away, is like the earnings reports that the companies are giving. When they report, it's game over for the bears. It was the professionals who panicked and dumped stock while the common folk stood their ground. Now they get paid. Not quite the script the bears had in mind. That's why they play the game!

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