BEING STREET SMART

Why 2012 Should Be Better Than 2011!

December 23, 2011.

A year ago there was widespread confidence that with the recession having ended in June, 2009, the economy continuing to recover, further QE2 easing underway, and the stock market clearly in a new bull market, that 2011 was going to be a great year.

In my annual forecast last December I agreed the year would be positive in the early months, but that the economy would begin to slow again once the effects of the Fed’s QE2 program expired. I expected that would spook the stock market into a substantial correction during the market’s often unfavorable summer months, and only after that correction would a subsequent rally produce the expected positive year.

As we approach the new year this year, sentiment is just about opposite to a year ago. Gone is the confidence for both the economy and stock market, replaced by worries about the debt crisis in Europe, and the budget deficits and dysfunctional politicians in Washington.

The consensus expectations this year are for a serious recession in Europe that will drag the rest of the world, including the U.S., into a serious global recession, and that the U.S. stock market will roll over into its next bear market early next year on those fears.

Once again this year I disagree with the popular expectations.

After its first half slowdown this year, the U.S. economy has been in recovery mode and steadily gaining momentum. More importantly, unlike the recovery that was underway last fall, the economy is now recovering impressively on its own, without a boost from some sort of QE3 stimulus from the Fed.

It’s also not just that so many economic reports have been coming in positive for several months now, nor even that most are soundly beating economists’ forecasts. It’s where the surprising improvements are taking place.

Historically, the two main driving forces of the economy in both directions have been the housing and auto industries. That makes sense since both have long coattails, taking so many other industries that supply them along for the ride, whether it’s to the upside or downside.

And we’re seeing home sales and new construction starts at multi-month highs, the inventory of unsold homes at multi-month lows.

Regarding the auto industry, it was reported this week that global auto sales and production are at record highs, fed by demand that was pent up during the Great Recession. And the recovering global car and truck market in the U.S. grew faster this year (9%) than in China (5%).

No wonder then that employment reports have been showing upside surprises for several months now, with new jobs creation up, the unemployment rate surprisingly declining, and new unemployment claims still falling as recently as last week.

Meanwhile, the Rockefeller Institute of Government reported that total tax revenues of 48 states in the U.S., have returned to pre-recession levels, a potential positive for the jobs picture going forward.

In order to produce the impressive improvements in overall jobs creation of recent months, new jobs being created in the private sector had to outweigh government lay-offs at the Federal, State, and Municipal levels. With state tax revenues recovered to pre-recession levels will that mean fewer lay-offs at the State level, perhaps even re-hiring to begin?

And then there is the potential progress being made on the eurozone debt crisis.

The initial reaction to the new containment plan announced after the recent European Union summit meeting was skepticism, even derision. But as the details are being fleshed out, it is gaining some grudging recognition as having potential.

And this week the European Central Bank added to hopes with a surprise announcement.

For months the ECB has been talking tough, insisting that individual eurozone governments had to impose tough austerity measures and bring their debt and deficits under control on their own, that the ECB wasn’t going to bail them out with massive purchases of their bonds as markets had been hoping they would.

But on December 8 the bank announced it would offer unlimited, low-cost, three-year loans to European banks. It opened the vaults for the first wave on Wednesday and 523 banks showed up to borrow 489 billion euros ($640 billion), well above expectations.

The intention, or hope, is that European banks will use the money to buy the high-yielding bonds of Greece, Italy, Spain, etc., providing the troubled banks with the profit from the spread, while helping to alleviate the eurozone debt crisis.

That ($640 billion) is a big chunk of money being thrown at the problem, and perhaps will alleviate some of the crisis of confidence in markets, by indicating that although talking tough, the ECB does have the eurozone’s back.

That was the approach taken by the U.S. Fed in its efforts to pull the U.S. out of the 2008 financial meltdown, talk tough but open the vaults.

These developments do raise the odds that the eurozone debt crisis and a European recession will begin fading into the background after the first of the year, and allow markets to focus more on the U.S. economic recovery.

With that background, I am expecting a quite positive market next year, with only a minor pullback in the unfavorable season of the summer months.

However, that’s just a target and given how easy it is for conditions to change, again this year, as for the last 25 years, I will depend on technical analysis to navigate through the ups and downs within the year.

Sy Harding is president of Asset Management Research Corp, and editor of www.StreetSmartReport.com, and the free market blog, www.streetsmartpost.com.

BEING STREET SMART

The Truth About Election Years!

December 16, 2011.

Next year is a Presidential election year, and the stock market is almost always positive in election years. Right? At least that assurance has been a supposed truism for many decades, and repeated as fact each year in numerous interviews and financial columns.

After all, the Four-Year Presidential Cycle has an unusually consistent pattern of the market experiencing most of its serious corrections in the first two years of a Presidential term and most often making a substantial recovery in the last two years. The pattern was interrupted when the financial crisis hit and 2007 and 2008, the last two years of the Bush Administration, experienced a serious bear market. But the circumstances were unusual, and the few times over the last hundred years that the cycle did not hold true to form did not affect the long-term percentage of the cycle.

It also makes sense that election years would be positive as each Administration pulls out all the stops to make sure the economy and stock market are positive when re-election time arrives.

But it’s just not true. I studied all election years since 1920, and here’s how the Dow fared in each. I included whether it was a Republican or a Democrat in the White House in case that made a difference.

However, ignoring whether or not they were elections years, over those 91 years 62 were positive anyway, or 68%.

Conclusion: The market was up in 68% of years overall, and 67% in election years. So, whether it was an election year or not had no effect on the market’s performance.

Of the 23 election years, the market was up 63.3% of the years when a Democrat was in the White House, and 66.7% when it was a Republican.

Conclusion: It makes no difference which party is in the White House at election time.

So it seems investors will not be able to rely on an election year ‘indicator’ to guide them through the market next year.

Coming next is my study of whether an election year has any influence on the market’s annual seasonality of usually making its best gains in the winter months and experiencing most of its serious corrections in the summer months.

Sy Harding is president of Asset Management Research Corp, and editor of www.StreetSmartReport.com, and the free market blog, www.streetsmartpost.com.

BEING STREET SMART

The Truth About Election Years!

December 16, 2011.

Next year is a Presidential election year, and the stock market is almost always positive in election years. Right? At least that assurance has been a supposed truism for many decades, and repeated as fact each year in numerous interviews and financial columns.

After all, the Four-Year Presidential Cycle has an unusually consistent pattern of the market experiencing most of its serious corrections in the first two years of a Presidential term and most often making a substantial recovery in the last two years. The pattern was interrupted when the financial crisis hit and 2007 and 2008, the last two years of the Bush Administration, experienced a serious bear market. But the circumstances were unusual, and the few times over the last hundred years that the cycle did not hold true to form did not affect the long-term percentage of the cycle.

It also makes sense that election years would be positive as each Administration pulls out all the stops to make sure the economy and stock market are positive when re-election time arrives.

But it’s just not true. I studied all election years since 1920, and here’s how the Dow fared in each. I included whether it was a Republican or a Democrat in the White House in case that made a difference.

However, ignoring whether or not they were elections years, over those 91 years 62 were positive anyway, or 68%.

Conclusion: The market was up in 68% of years overall, and 67% in election years. So, whether it was an election year or not had no effect on the market’s performance.

Of the 23 election years, the market was up 63.3% of the years when a Democrat was in the White House, and 66.7% when it was a Republican.

Conclusion: It makes no difference which party is in the White House at election time.

So it seems investors will not be able to rely on an election year ‘indicator’ to guide them through the market next year.

Coming next is my study of whether an election year has any influence on the market’s annual seasonality of usually making its best gains in the winter months and experiencing most of its serious corrections in the summer months.

Sy Harding is president of Asset Management Research Corp, and editor of www.StreetSmartReport.com, and the free market blog, www.streetsmartpost.com.

BEING STREET SMART

It's Small-Stock Sweet Spot Time!

December 9, 2011.

Some investing truisms are pure baloney. For instance, that you can rely on the stock market returning 10% to 12% per year on average. That if you want higher profits you have to take more risk. That you can’t time the market. That election years are always positive for the stock market.

But there are some that can be very useful. The market is almost always higher in April than in September (annual seasonality). The market performs significantly better with a Democrat in the White House (so says the data of the last 100 years). The market tends to experience most of its serious corrections in the first two years of a new President’s term (and if it doesn’t, watch out in year three or four).

One that is about to enter its zone is the tendency for small stocks to outperform the market from mid-December to mid-January.

It used to be known as the ‘January effect’, but in recent years the pattern has tended to begin in mid-December. The theory behind it is that there’s a considerable amount of tax-loss selling in small stocks toward year end, which drives their prices down, and sets them up for bargain hunters. The tendency is for small stocks to often continue to outperform larger stocks into the spring.

One that I like is MTS Systems, symbol MTSC, Nasdaq, $40.25, small cap (15,800,000 shares). The company provides systems for testing and examining the mechanical behavior of materials, products and structures, as well as instrumentation for factory automation. The company’s sales and earnings slid significantly in the recession, but have been roaring back this year. Earnings over the last four quarters more than doubled on a 20% sales increase. The company is experiencing solid backlog growth, which bodes well for next year. Meanwhile, solid cash flow has allowed the company to increase its dividend, as well as to accelerate a share repurchase plan. MTSC has roughly $100 million in cash and no long-term debt, and sells at just 12.5 times trailing earnings.

I also like Neenah Paper Inc., symbol NP, NYSE, $20.32, small cap (15,600,000 shares). Neenah was spun off from Kimberley Clark in 2004. The company produces specialty paper products for filtration, abrasives, wall coverings, and melt-blown technologies, as well as for packaging and labels. Earnings are growing at double digits as the company builds on its growing export sales to Asia and South America. The shares are selling at 11 times trailing earnings with a dividend yield of 2.1%.

Keep in mind that there are three risks in investing; market risk (the direction of the overall market), sector risk (the direction of individual sectors within the overall market), and stock risk (the direction of individual stocks within a sector).

And there’s more risk in small cap stocks because of their smaller float of available shares. The smaller float creates bigger gains in rallies when buying pressure dominates and there are fewer stock-holders willing to sell, but larger declines if unexpected negative news brings in selling pressure, since there are fewer bargain hunters aware of the stock and looking to buy.

One way to substantially decrease individual stock risk is obviously to diversify among numerous small cap stocks, and the easiest way to accomplish that is via etf’s designed to track with a small stock index.

So investors interested in the potential for extra dynamism in small cap stocks might want to consider that route.

Available small cap etf’s include the iShares S&P Small Cap 600 etf, symbol IJR; iShares Russell 2000 Small Cap etf, symbol IWM; and the Vanguard Small Cap Growth etf, symbol VBK.

Some investors object to investing in an index on the theory that if they can pick the best performing stocks within the index they can outperform the index.

Those willing to take the extra risk of individual stocks in an effort to beat the performance of the underlying index, might want to consider using a leveraged etf on the index instead. The advantage of diversification is still achieved, and a two-to-one leveraged etf will double the performance of the index while still avoiding the risk in the individual stocks.

One of my favorites in that category is the 2 to 1 leveraged ProShares Ultra Russell 2000 etf, symbol UWM.

Just be sure to keep in mind that leverage is a two-edged sword. Leveraged holdings produce gains much faster if you have the direction right, but also produce losses faster when you’re wrong.

In the interest of full disclosure, I and my subscribers have positions in one or more of the holdings mentioned in this column.

Sy Harding is president of Asset Management Research Corp, and editor of www.StreetSmartReport.com, and the free market blog, www.streetsmartpost.com.

Wow! The Economic Recovery Surprises Continue!

February 3, 2012.

I’ve been writing some quite optimistic and positive columns since October, quite a contrast to the negativism I was exuding last April in explaining why I expected a significant market correction during the summer months.

It wasn’t just that the stock market was about to enter its traditional favorable season, and was coming off a significant correction low that had the S&P 500 down 20% on October 3. It was that it was beginning to look like the economy was recovering after its stumble in the first half of the year.

As it has turned out, not only did the economic recovery resume in October from its first half slowdown, but some surprising data has come out regarding the entire 3-year recovery from the ‘Great Recession’, data that is in sharp contrast to the gloom and doom projections so popular in 2008 and 2009 (which even continued in some quarters in 2010 and 2011).

I noted some of the positive surprises a couple of weeks ago, including that most of the highly criticized rescue loans to banks and the auto industry have been paid back, with interest, and that the U.S. auto industry is solidly back on its wheels. For instance, just three years after its bankruptcy, General Motors has regained its crown as the top-selling car-maker in the world. In other data, the Federal Reserve has even made profits, exceeding $155 billion, so far on the ‘toxic’ assets it moved from the books of banks to its own books, and on the Treasury bonds it bought in its two rounds of quantitative easing.

I also noted the Financial Times report that since the start of the global recovery manufacturing employment has grown faster in the U.S. than in any other leading developed economy, with more net manufacturing jobs having been added in the U.S. since the start of 2010 than the rest of the Group of Seven developed countries put together.

There are other positive statistics not widely recognized in the midst of the recent focus on the risk in the eurozone debt crisis.

For instance, S&P 500 earnings have increased 125% since the end of 2009, their fastest expansion in a quarter century. The result is that even though the stock market has doubled since its 2009 low, the S&P 500 price/earnings ratio has declined, currently at 13.7, lower than its long-term average of 16.4, leaving the S&P 500 potentially still selling at bargain prices.

And of the $37 trillion of stock market valuation erased during the 2008-2009 financial meltdown and severe bear market, $24 trillion has already been restored.

“Yeah but,” the gloom and doomers say, “what about the miserable employment picture? You can’t have an economic recovery with so many people out of work.”

But how many realize what has also happened in the employment picture? As of the end of the year, the unemployment rate had dropped from 9.8% (in 2010) to 8.5%.

Each monthly decrease was met with disbelief and claims that it was a one-month aberration caused by seasonal factors or whatever. But the improvements kept coming.

December’s big increase in new jobs was supposedly due to additional hires for the holiday shopping season, which would be reversed in January. In fact, the consensus forecast of economists was that January would see only 121,000 new jobs created.

But wow! The Labor Department’s employment report on Friday showed that 243,000 jobs were created, double the expectations. And further, the number of new jobs reported for November and December were revised up by an additional 60,000. And the unemployment rate dropped again, from 8.5% in December to 8.3% in January. A separate report on Thursday showed that new applications for unemployment benefits have fallen to their second lowest level since June, 2008.

Not that employment is back to its pre-recession levels. There are still 12.8 million people looking for work, and while an unemployment rate of 8.3% is much better than 9.8%, unemployment averaged only 5.4% in the ten years prior to the recession (and 5.7% over the last 60 years). But the trend continues in the right direction.

And we need to realize that employment is a lagging indicator. Employers don’t begin hiring again until the economy has recovered enough that they can’t keep up with demand without adding workers. So in that respect the increasing momentum in the jobs picture may indicate the recovery is further along than previously thought.

That may have implications that the Fed is behind the curve (again) in saying last week that it will probably keep interest rates near zero until late 2014, instead of its previous target of 2013. But that’s another subject.

Meanwhile, as would be expected, the stock market responded very positively to Friday’s jobs report, tacking on still more gains in its rally off its October 3 low.

A word of caution for those who are not already in the market and may be tempted to jump in whole hog at this point.

As my subscribers know, for many years I’ve referred to the monthly jobs report as ‘The Big One’. That’s because it’s so difficult to predict that it most often comes in with a surprise in one direction or the other. That in turn most often results in a kneejerk reaction by the market that creates a one to three-day triple-digit move by the Dow in the direction of the surprise. The other side of the pattern is that the initial outsize reaction to the report is then usually reversed over the following days and the market returns to normal.

But then, normal may not be a bad thing, given that the market is now entering its fourth month of rally off that October low.

Sy Harding is president of Asset Management Research Corp, and editor of www.StreetSmartReport.com, and the free market blog, www.streetsmartpost.com.

Let's Not Get Too Optimistic!

January 27, 2012.

In investing much is said about the folly of following the crowd.

It’s voiced in age-old maxims like “The market will do whatever it must to fool the majority”, and Warren Buffett’s advice to “Be fearful when others are greedy, and greedy when others are fearful”.

It’s measureable in investor sentiment statistics, which clearly show that investors tend to be overly fearful and pessimistic at market lows, not willing to participate when the market turns up, and then overly bullish and confident at market tops, not believing a rally has ended.

The current rally has been underway since October 4th. The S&P 500 has gained 21% in the four months since, which would be an impressive gain for a full year. Is it getting a bit ahead of itself?

Investors are finally catching the fever. This week’s poll of its members by the American Association of Individual Investors shows 48.4% are bullish and only 18.9% bearish. Those aren’t extreme readings, but are clearly opposite to the sentiment in late September, just before the rally began, when it was the bearish percentage that was at 48% and the bullish percentage at only 25.3%.

The VIX Index, also known as the ‘Fear Index’, measures the sentiment of options players, another meaningful method of measuring sentiment. It was at 42.9, historically a high level of fear by this measurement, in late September at the market low. Fear has declined significantly as the rally off the October low has progressed, with the VIX Index now at just 18.6, in the zone of low levels of fear, high levels of optimism, usually seen at rally tops.

So, is it time to take profits from the rally, or even take downside positions in anticipation of a correction?

In that regard, I like another of Warren Buffett’s insights regarding not following the crowd, “You are neither right nor wrong just because the crowd disagrees with you. You are right because your data and reasoning are right.”

In other words, plan to sell when others are greedy, but investor sentiment alone cannot be used to tell you greed and optimism are so high that a top is due. Sentiment can only be used as an indication that ‘the crowd’ is becoming bullish or bearish enough that it’s time to keep a close watch on other data and indicators.

When I look at other data and indicators my work includes a considerable amount of technical analysis. That is, whether a market is potentially overbought or oversold, is near potential support or resistance levels, whether money flow into or out of the market has reversed, and so on.

So, while investor sentiment reached overly bearish levels last September, my other indicators did not trigger their buy signal until mid-October. Shortly thereafter changes also seemed to take place in the fundamental conditions, most notably increasing signs that the U.S. economic slowdown of the first half had bottomed and the recovery from the ‘Great Recession’ of 2007-2009 had resumed.

And now, with investor sentiment recovered and reaching toward being overly optimistic, is it time to consider the potential for at least a pause in the rally?

We can look at another troubling condition. The enthusiastic buying in January has the market again spiked up into a potential short-term overbought condition above 50-day moving averages, to a degree that often brings a decline back down at least to the m.a. That would be a decline of 5 or 6% - if it halted at the moving average.

Then there is the history of February often being a negative month.

My intermediate-term technical indicators remain on their October buy signal, and the market’s favorable seasonality does not usually end until April or May.

But the high level of investor bullishness, and short-term overbought technical condition, indicate it may be time to temporarily take some profits from the rally.

That does not change my overall outlook for the year. If a short-term correction does develop it will be accompanied by gloom and doom predictions of something worse. But my work tells me the rally would likely resume to new highs by the end of the market’s traditional favorable season in April or May. Only then am I expecting a more serious sell-off, sometime in the unfavorable summer months, from which profits can again be made from downside positions.

But anything can happen, and in the interest of risk management, for now it’s probably at least a time for caution, on the potential for a pullback at least sufficient to cool investor sentiment off to some degree.

Sy Harding is president of Asset Management Research Corp, and editor of www.StreetSmartReport.com, and the free market blog, www.streetsmartpost.com.

The U.S. Recovery Is Producing Surprises!

January 20, 2012.

In 2008 it was a sure thing the bursting of the real estate bubble, the collapse of the sub-prime mortgage market, the freeze-up of the banking system, the ravages of the ‘Great Recession’, collapse of the auto industry, bailout of mortgage- insurance giant AIG, bankruptcy of General Motors and Chrysler, etc., would wind up with the economy in the next Great Depression.

It was then a sure thing that the massive stimulus and bailout efforts would not work, and the costs would bankrupt the country and drop it into third-world economy status.

There was no chance the banks or the U.S. auto industry would ever pay back the bailout loans. The assets the Federal Reserve was also putting on its books to help the banks clean up their balance sheets, by exchanging Treasury Bonds for some of the toxic assets on the books of banks, was just further money down the drain.

The way the banks seemed to be using the bailout loans to expand, buying out competitors, expanding into Asia, rather than using it to make loans, was going to make the ‘too big to fail’ problem even worse for the future.

Even since the recovery began, it has been derided as just an illusion, as could be seen by the housing industry still being mired in depression-like conditions, and no progress being made in the terribly high unemployment situation.

Sometimes it seems we’re so focused on the negatives that we haven’t noticed the unexpected positive surprises in the recovery

For instance, how many realize that most of the government loans made to the banks and auto industry have already been paid back, with interest.

Or that the U.S. auto industry has bounced back dramatically. Global auto sales recovered sharply in 2011 and the U.S. led the way, with sales up 9.2%, topping even the 6% auto sales growth in China.

Yesterday it was reported that General Motors has bounced back from its bankruptcy three years ago to a degree that it has regained its crown as the top-selling car-maker in the world.

Meanwhile, the Federal Reserve is making surprising profits on many of the assets it put on its books in the bailout process, $79.3 billion in 2010, which it turned over to the Treasury. And it recently estimated it made another $76.9 billion on those assets, and the Treasury bonds it bought in its two rounds of quantitative easing, and will be turning that profit over to the Treasury Department for 2011.

Regarding the employment picture, we sometimes forget it was a global ‘Great Recession’ and the rest of the world has also been struggling to recover since the recession ended in 2009.

In that struggle the economic recovery in the U.S., as anemic as it has been, has apparently been leading the way.

The Financial Times reported on Wednesday that manufacturing employment has grown faster in the U.S. than in any other leading developed economy since the start of the recovery, and has added more net manufacturing jobs since the start of 2010 than the rest of the Group of Seven developed countries put together. Only two other major economies, Germany and Canada, have increased factory employment at all.

That’s not to say that the employment situation in the U.S. is great, still 2 million jobs below pre-recession levels. But it is apparently heading in the right direction and recovering better than most of the rest of the world.

The fears that the financial industry was going to wind up even more in the realm of being too big to fail in the future, are also potentially turning out to be unfounded.

Banks closed operations and laid off 230,000 employees in 2011, and estimate another 220,000 lay-offs in 2012. Almost every week brings news of a major bank selling off or closing a division. Just a few days ago it was that CitiGroup is selling its consumer operations in Belgium. A few months ago Bank of America sold its stake in the China Construction Bank. Both giant banks have been cutting back drastically, and recently Bank of America told regulators it may even downsize further by retreating from some parts of the U.S., possibly selling branches and operations in a reversal of its aggressive expansion of the previous 15 years.

Putting it all together, the U.S. recovery from the recession not only continues, but has been producing some unexpected results and surprises that were certainly not foreseen three years ago, not the least of which has been a substantial bull market that has the Dow 95% higher than three years ago.

Sy Harding is president of Asset Management Research Corp, and editor of www.StreetSmartReport.com, and the free market blog, www.streetsmartpost.com.

Brazil Looks Like A Buying Opportunity Again!

January 13, 2012.

Brazil continues to impress as a country and economy, due in no small way to its government’s multi-year efforts and determination to make it an important global presence.

Brazil is the fifth largest country in the world by geographical area and population (190 million), and now has the sixth largest economy, having surpassed the United Kingdom last year.

It’s long been known for its dirt-poor city slums, which are appalling. But its booming economy of recent years has increased the purchasing power of its population and moved an estimated 20 million out of poverty, with the majority of the population now in the middle class for the first time ever.

The increasing purchasing power of its population, and pent-up demand for goods, is an important factor in its solid economy and relative protection from the woes of the world.

The country is blessed with an abundance of natural resources, including huge and growing reserves of oil and gas, is the world’s largest producer of sugarcane, coffee, and tropical fruit, and has the largest commercial cattle herd.

Yet exports account for only 14% of its economy, which should leave it less affected by threatening economic slowdowns in Asia and Europe.

Manufacturing, including automobiles, steel, petrochemicals, computers, aircraft and consumer durables, account for 31% of GDP. Agriculture, construction, and services, including healthcare, banking, insurance, retailing, etc., account for the rest.

Over the years Brazil’s government has undertaken several timely measures that are probably the envy of many global central banks. Among them, the Brazilian government strived to pay off debts before the credit crisis hit.

Although its stock market plunged with the rest of the world in 2008, Brazil’s economy experienced solid performance during the global financial crisis and a strong and early recovery. The result was that in 2010, while Europe and the U.S. were just beginning to anemically recover from the ‘Great Recession’, Brazil’s economy was already over-heated, humming along at 7.5% growth. Taking quick action, Brazil’s government began aggressive measures, including raising interest rates, to slow the growth to a more sustainable level, and did so, with economists expecting its GDP growth slowed to 3% or so in 2011.

Now with global concerns about a possible recession in Europe that might spread out into Asia and even the U.S., the government of Brazil, unlike those of Europe and the U.S. where interest rates are already at record lows, is in a position of being able to cut interest rates and loosen policies to further stimulate its economy.

It began those policy reversals in August, and Brazil’s economy is forecast to continue to grow at roughly a 3% rate this year and in 2013.

Meanwhile, Brazil’s stock market plunged into another bear market in 2010 when its government began those tightening measures to slow its over-heated economy. The Bovespa Index declined 45% to its early October low. It began rallying strongly off that low, triggering a buy signal on our momentum reversal indicators, and we believe Brazil’s economic growth prospects support the buy signal. Brazil should be in a better position to continue its long-term economic growth than most other countries, and is not likely to be affected as much by the eurozone debt crisis, or a possible recession in Europe, which would be a larger problem for countries with economies more dependent on exports.

The International Monetary Fund estimates that Brazil, having passed the United Kingdom last year to become the world’s sixth largest economy, will next pass France, the world’s fifth largest economy, by 2015. It could happen even sooner.

We believe Brazil is again presenting a buying opportunity, and we like the iShares Brazil ETF, symbol EWZ.

In the interest of full disclosure, I and my subscribers already have positions in EWZ.

Sy Harding is president of Asset Management Research Corp, and editor of www.StreetSmartReport.com, and the free market blog, www.streetsmartpost.com.

BEING STREET SMART

Can the U.S. Economic Recovery Overcome Europe's Drag?

January 6, 2012.

In an October column I wrote, “For the first time this year the trend of U.S. economic reports is potentially bottoming and turning positive. And after being bearish in the spring and summer, I like what I see in the technical charts of many markets. If only we could ignore Europe.”

That pretty much still defines the situation as we enter the new year.

Our indicators did trigger a buy signal in mid-October, and the Dow is up 16.5% from its early October low.

The U.S. economic recovery did indeed get underway, and has been gaining momentum impressively.

More importantly, the positive reports are coming from all the crucial segments of the economy; consumer confidence, home sales, new home construction, the auto industry, manufacturing, the services sector, and even more impressive, in the employment picture.

This week’s reports continued the trend. They included that construction spending was up again in November, its third monthly increase in four months, rising 1.2% versus the consensus forecast of only a 0.5% gain. Near record low mortgage rates and rising home sales are encouraging home-builders. Private construction spending is at its highest level in more than two years. Of course, that’s not saying a lot since it’s still in a deep hole. But the four-month trend reversal is encouraging.

It was also reported this week that Factory Orders rose 1.8% in November, which no doubt contributed to the report that the ISM Mfg Index rose again in December, to 53.9, its highest level in six months. Within the ISM report, new orders also rose in December, which had companies boosting production and employment.

And that no doubt contributed to both the ADP jobs report on Wednesday, and the Labor Department’s employment report on Friday, which showed a big increase in the number of new jobs created in December. The Labor Department report was that 200,000 new jobs were created versus the consensus forecast of 150,000. And the unemployment rate fell for the fourth straight month, to 8.5% in December from 8.7% in November, 9.0% in October, and 9.1% in September.

However, I don’t want to be misleading with my optimism since October.

It’s not a time for buy and hold investing, still a time to go after intermediate-term rallies with willingness to take profits at some point and re-position for periodic corrections. The volatility will continue.

It seems clear the U.S. economy is still on the mend since the ‘Great Recession’ ended in June, 2009, and the slowdowns in the first half of 2010 and again in the first half of last year were only temporary pauses in the recovery.

But while the recovery remains on course it is still anemic, still not producing jobs fast enough, still not cutting into the glut of unsold homes fast enough, still not strong enough to have corporations using their record hoard of cash for investment and expansion, still not on sure enough footing to assure banks they can lend in confidence of being paid back (instead of seeing the loans become more bad debts on their books down the road).

There was horrendous damage done in the Great Recession of 2007-2009, and the economy could not possibly bounce back from that much damage as fast as from previous recessions. It will take more time, and involve more hiccups along the way.

For instance, there are the record U.S. federal budget deficits and debt, which will have to be taken care of sometime down the road, perhaps painfully for the economy and therefore the stock market. A continuing economic recovery can kick those worries down the road into next year or even beyond.

But unfortunately, that’s still conditioned on ‘if only we could ignore Europe’.

It’s no longer a question of whether the U.S. economy can recover from the first half slowdown on its own without the Fed providing further economic stimulus. It’s proving that it can, and is.

Now the question is whether the momentum of the recovery can continue if the eurozone debt crisis and potential for Europe to slide into a recession remain in the headlines.

In that regard, the market’s muted response Thursday and Friday to the continuing positive economic reports was a disappointment.

For years I have referred to the monthly jobs report as ‘the big one’ because it is anticipated with such intensity, has a record for most often coming in with a surprise in one direction or the other, and for those surprises to almost always result in a big triple-digit move by the Dow in the direction of the surprise.

That the market ignored Friday’s surprisingly positive jobs report, and instead focused on the news that the yield on Italy’s 10-year bonds surged back up above the danger zone of 7%, was a reminder of the continuing influence of Europe’s problems on the U.S. market, in spite of the impressive economic recovery underway in the U.S.

For now I’m giving the benefit of the doubt to the U.S. economy, expecting it will win out as the dominant factor, while watching our indicators more closely than usual.

Sy Harding is president of Asset Management Research Corp, and editor of www.StreetSmartReport.com, and the free market blog, www.streetsmartpost.com.