Davos remarks and positive economic reports lift stocks

2010-02-01

There were no big surprises today, with commodities reacting most positively to the proposed record fiscal deficits over the next few years.  Money printing and the urge from Davos to keep the economy in life support via government stimulus reassured investors that the day of reckoning is postponed further into the future, which lifted stocks.  The Dow was up 118 points (117 bps), the S&P500 gained 15 points (143 bps), and the Nasdaq lagged but still added 24 points (111 bps).

Notable stock action of the day:
- Valassis Communications (VCI) was up more than 17% after it reached a litigation settlement with a division of News Corp for a payment of $500mm and a 10-year shared mail distribution agreement with a Valassis division.
- Leap Wireless (LEAP) was humming along but gapped up 13% after it announced that it hired advisers to help the company explore a potential sale, which would likely involve a premium to the market price.

According to economic commentary from Davos, Roubini sees challenges, Soros says the recovery will be an inverted square root (recover half way and flatten out), and Kahn says Europe's recovery looks definitely sluggish.  The question is whether the flattening out will be maintained or if the economy will double-dip, which will happen if stimulus is removed too soon.  There are plenty of areas of fragility and there are many causes for concern, but leaders' urging to avoid tightening too soon was interpreted positively.  [video link: http://bit.ly/b7h3Rj]

Stocks opened on a positive note and favorable economic reports sustained the upwards trend throughout the day.  At 10AM, the ISM Manufacturing Index showed that the manufacturing sector expanded more than expected in January and that new orders are heating up.  The index has consistently registered a reading higher than any other since January 2007 for the past 4 months in a row, which bodes very well for the economy, assuming that the trend is sustainable without government stimulus and that it is not all related to re-stocking after very sharp production cuts in early 2009.  For now, the reading is approaching 60 -- numbers higher than 50 indicate expansion -- and shows accelerating growth.

Gold bugs were also very excited today, shooting gold prices up more than $25 to $1,106 as Obama released his budget proposals.  The job-creation and middle-income tax cut package results in a fiscal deficit of $1.56tr in 2010 (10.6% of GDP).  Record deficits have to be financed, so there will be more money-printing and owning hard assets become increasingly popular.

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