By Nick Markola

The productivity in the US and abroad went up after Spain was crowned the World Cup winner. No, the wizards on Wall Street did not invent a new way to motivate workers but rather workers stopped watching soccer games during the work day and are back at work, hence the rise in productivity. Besides Spain, another great winner of the biggest sports event is Octopus Paul who correctly predicted every match. For the inquisitive minds, Paul is a common octopus living in a tank at a Sean Life Centre in Oberhausen, Germany who was tasked with predicting winners of soccer matches. His track record of predicting? Perfect 8 for 8.

Wall Street is back at work too, trying to figure out where the markets are going. There are two diverging opinions. In one group are the pundits with a pessimistic view who expect a double dip recession in the US and see the markets sliding.  In the other group are the ones who expect the economy to continue its recovery and the markets to rebound strongly. Time will tell which group is calling it right and, while rooting for the latter group, I am hoping Octopus Paul will opine on this soon because both sides have some strong arguments in their favor.

The group that argues for a double dip recession and a significant market slide from current levels points out that the unemployment in the US continues to hover around 10% (currently at 9.5%)  and despite all the government intervention, this administration has been unable to lower it. Yes, the unemployment rate did drop from 10.2% to 9.5% recently. However, the reason for the drop is not real job creation but rather some backdoor maneuvers. First, most of the jobs created were in the government sector which we know is struggling. Secondly, a number of unemployed stopped looking for work after being unable to find work for long time so government statisticians don’t factor this group in the unemployment rate calculations. Unofficially, when all the unemployed are tallied together with the underemployed (some of the baristas at Starbucks who can’t find a job in their field and temporary took anything they can find), the unemployment rate in the US is above16%. Some of the other points raised by the pessimistic group are that the EU troubles will spread to the US. Funds from massive US stimulus packages will dry out soon hurting consumption and businesses. Figures released last week show that consumer credit shrunk a whopping $9.1 billion showing the hesitancy of consumers to take on debt without improvement in the labor market. Other negatives points are the out of control government spending, budget deficits, trade deficits, weak housing market, lower tax receipts,  and tax rates going up.

When listening to the optimistic camp, the ones that expect the economy to continue its recovery and the markets to rebound, we hear that companies are flush with cash, investors are on the sidelines and will get in the market soon, interest rates are low and conducive to further growth, less than half of the $850B government stimulus has been spent thus far and the 2nd part is slated to be spent soon, industrial production is expanding, companies are posting strong earnings and the turmoil abroad is reinforcing our dominant position in the world. The optimists point out that corporations have plenty of cash on their balance sheets earning close to nothing which they will deploy soon and move the markets up. They further mention that many investors are on the sidelines with their cash earning almost nothing in interest and will start investing in the market to offset the drag of inflation on their cash. Currently investors are holding over $11 trillion in cash on the sidelines. Low interest rates will spur borrowing and growth of small companies while there are reports of industrial production expansion as auto manufacturers are posting solid numbers. They also point out that government spending will continue to offset the weak consumer demand which will be further helped once the second part of the $850B stimulus is put to work. They also expect low interest rates to spark some demand in the housing sector as mortgage rates are near historic lows.  

Without consulting Octopus Paul, there is no real clarity about where the stock market is going. I am of the view that the negatives are well known and that the markets have had time to adjust. While I do see interim volatility, the health of corporate credit and business balance sheets, in conjunction with over $11 trillion of investor assets on the sidelines among others, give me hope for a positive move of the market over the next several quarters. We know the saying that when the US sneezes, the rest of the world catches a cold and are rooting for the US not to sneeze. We are also hoping to extend Octopus Paul an employment offer on Wall Street so he can put his prediction skills to work and help the US not to sneeze or the world catch a cold.