Sunday, October 22, 2006

Weekly Look Ahead

This week will be all about earnings and the Federal Reserve.

There are no economic indicator reports Monday or Tuesday (very unusual, that). Wednesday we will get a few minor reports (existing home sales and crude inventories) and the big gun of the week: the Fed policy statement.

Reality has set in on wall street recently, and people are realizing rates may rise. The current Fed interest rates are historically low and have fueled a record stretch of double digit profit increases for the S&P 500 companies. Typically companies slim down costs during a recession, profit very well as the economy recovers due to low costs and low rates for borrowed money, and then see profit growth falter as labor and credit costs rise. So far during the present cycle both borrowing and labor costs have remained relatively tame. At the moment those costs are still tame but every sign of increased interest rates or labor costs will put pressure on the predicted profitability of stocks.

The market will be negatively affected to some degree if the Federal Reserve sounds more hawkish that expected, although one hopes that most investors are already aware the Fed is considering more rate increases.

This week is the heart of earnings season and many companies will be adding their own story to the mix. I expect finanical companies to remain weak due to the inverted yield curve and industrial companies to remain strong due to continuing low costs.

Thursday brings us reports on Durable orders, jobless claims, and the "Help-wanted index." Friday will reveal advanced GDP numbers and the Michigan sentiment index. The two important questions to keep in mind this week: how are costs, and how is growth. If costs are rising (low jobless claims, high help wanted index) that's bad for stocks. If growth is good (high Durable orders, high sentiment and GDP numbers) that's good for stocks. If we get bad growth and high costs the market could get bloody, if we get the opposite look for new records.

The most likely scenario seems to be continued economic growth and moderate cost inflation, which should be a positive environment for stocks.

Invest Well,

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