At 30,000 feet, here is what things look like in America from the eyes of the Stock Market Companion-

• Yesterday’s Republican victory in the House of Representatives pushes the government back to a more center position and a gridlocked government.  Two years ago, the Democrats swept in and took control of all three houses of government.  Yesterday, Republicans took one back. Unquestionably, this is a favorable development for business and therefore, equities.
• We do not yet know the outcome of the status of the Bush era tax cuts.  We believe that tax cuts without spending cuts by the government are destructive.  The Republicans entering office and already in office may not agree with our conclusions and many are not really conservative when it comes to fiscal responsibility.  Many still are of the breed that spend and avoid difficult decisions in order to get re-elected.  There will likely be some compromise on the Bush tax cuts, but we do not yet believe that there will be real spending cuts.  We would like to be proven wrong here. This development is still modestly favorable to equities.
• The Federal Reserve – for its part – is proceeding to follow what it calls its mandate = maintain price stability and promote employment… at the expense of the buying power of our currency abroad.  This means that as short term treasuries are purchased (Today, the Fed announced a $600 billion purchase plan of short term treasuries) and yields diminish on treasuries, some will feel forced to find higher returns by investing in equities.  This is certainly favorable for equities over time.
• Holders of cash on the sidelines – something between $4 and $6 trillion worth – are  going to eventually decide that the lights are still on at American companies and that earnings are good.  We are currently 1.5 years away from the March 2009 lows and cash holders can now see that commerce is not falling off the earth and that excellent businesses are doing, well … excellent business.  This money is not going to be poured into bonds, but will gradually find its way into equities.  This is favorable for equities over time.
• Unemployment is not going to budge much without a broad-based jobs policy that promotes American employment and discourages transfer of jobs overseas.  It will improve a bit as home inventories eventually decline and building starts again (this may be several years from now).  Gradual improvements in employment – when it arrives – will be favorable for the equities market.

We are not “perma-bulls or perma-bears” at the Stock Market Companion.  We exited the market 3 times this year – Jan. 12th, April 29th, and August 11th.  We believe that there will be a replacement cycle in certain industries (like cars) and computers that will aid certain stocks.  We believe that the adoption of smart phones is a driver for certain stocks.  We believe that if China continues to restrict the export of certain materials – such as announced today for Aluminum – that there are stocks like Alcoa that will benefit.  And we believe that the markets are far enough away from March 2009 and that bond yields are so low, that there is plenty of money that will be applied to grow these areas.  Turn-around stories such as AIG and others will also emerge.

Stay tuned.

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