The rally so far has taken on many new subscribers with me included. Many of the perma-bears have shed their coat and are now wearing a nice new
bull skin. I had thought that the fundamentals would have put the breaks on the markets but then lots of little things kept improving. This morning is a case in point as UK house prices rise for the first time in 16 months. All this little signs have fed the most amazing and unprecedented rally in recent history. Hindsight has clearly shown us that the March lows were very oversold but the current pricing in of growth is in my humble opinion overly exuberant. Somewhere in between these two extremes lies the perfect market price. However that’s not my concern, in the past this would have swayed my view but now I’m just watching the trend and not questioning the greed.

There are a few things that do concern me going forward which is why I am now extremely cautious. The increasing chatter on exit strategies and the awkward bond between China and the US is of cause for concern. It’s no coincidence that president Obama is the first president to deny a meeting with the Dalai Lama. China needs to keep buying US bonds and the US needs to keep printing money but this is not an indefinite exercise and eventually someone will have to play their hand. The notion of the US defaulting is preposterous and will never happen but the notion that China may tighten its terms and conditions crippling the US for generations to come is not. In such a scenario China could make the terms of payment so sever that the US will essentially be at its mercy economically and monetarily. This is something that concerns me and until we have a clear notion of how the United States is intending to pay back the trillion dollars and mounting deficit I will remain concerned.

My second fear is not a new one but an old one that has yet to materialise. A few months ago when some people were convincing me property was now a good bet I maintained that it would go lower and then spike higher would happen only to lead to a bigger drop in prices. This is the classic bull trap as prices reach a level that people are willing to pay and those waiting on the sidelines start to trickle back. The only problem with this spike is unemployment. In Ireland it is starting to show signs of stabilising but I believe growth is a long road and with the car being repossessed walking that road is going to take time. This is why I believe this is a false dawn in the property market. New legislation in the UK placing the responsibility of the mortgage on the mortgage provider. Spending on shoes, clothes and childcare could also be assessed under a new, industry-wide “affordability test”. These new measures will make it harder to get money and with the risk of unemployment it will be interesting to see how willing the banks are to dish out new loans.

With this fear is also the prospect of continuing defaults in the commercial property markets and escalating defaults in the private sector too. Evidence of consumer saving patterns showing excessive savings signals an uneasy and apprehensive customer who is uncertain and unwilling to part with their cash. Until this is corrected it will be hard to see consumers rushing back to the shops and maybe a seismic shift has occurred leading to the majority of consumers living within their means.

Lastly and back to my opening remarks we have a new earnings season afoot with high expectations. I think we will get through this as companies have continued to trim the fat but with no fat left and winter approaching how are some of these companies going to weather the long and cold nights ahead. I believe the next point to note is next March when the true picture will be revealed one where earnings are not as great as greed desires and traders seek new pastures for riper pickings. My assumptions maybe wrong and we may be fine but looking at 52 week highs on 50 companies I monitor they are all pushing that upper range and considering we are still in the woods this is optimistic.

Since bottoming at a 12-year low March 9, the S&P 500 has rallied nearly 61% and the Dow has rallied nearly 53%. According to Thomson Reuters, 79% of the companies that have reported results have beat on earnings and 61% have beat on revenue. This week I will be looking at Apple, Microsoft, Coca-Cola, Yahoo, Wells Fargo, Amazon and eBay. The tech giants will be an indicator of the consumer’s mood and with Microsoft launching Windows 7 it will be interesting to see what traders make of their results and forecasts.

Safe trading and keep your losses small.

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