Cash flows and cheap money are enough to keep the current rally going into 2010, I believe.
Comparisons with really, really weak quarters in the first half of 2009 for global economies in general and for company earning in particular favor a continuation of the upward trend in stock prices in the quarters that end in March and June 2010, I believe.
After that, though, things begin to look decidedly dicey—unless investors can see clear signs that the growth we’ve seen in the last half of 2009 is sustainable and is building momentum.
On that, unfortunately, the jury is still out.
Take recent numbers from the North American steel industry, for example.
In October steel inventories at metal service centers in North America climbed by 150,000 tons, or about 2%. October is historically a month when steel inventories fall. The average October decrease over the last five years has been 162,000 tons, according to Deutsche Bank.
The rise in inventories could be a sign of a lack of demand. After adjusting for the extra day in October, shipments fell slightly from September and they’re down 27% in volume from October 2008.
But the rise in inventories could simply be a sign of restocking after sales depleted inventories to historically low levels. The October inventory level of 6.9 million tons is far below the August 2008 inventory level of 12.7 million tons, Deutsche Bank notes.
In which case the rise in inventories isn’t a negative signal at all.
That latter interpretation is scant comfort though because what’s missing from this picture is a clear signal that demand is picking up.
That’s exactly the kind of evidence I need to see if I’m going to make the transition from an investor who is nervously riding a rally that he doesn’t believe in for six months or so to one willing to invest in the long-term fundamentals of an economic recovery.
And that’s exactly the kind of evidence that I haven’t seen so far.