On the heels of several buyouts and takeovers, stocks have pushed up through some key resistance levels to trade higher this morning. The Dow is up about 80 points so far, trading around 12,175, while the S&P 500 is up 10 points at 1,320. The NASDAQ is also performing well, adding 20 points at 2,790.
Companies are sitting on about $2 trillion in cash, and many are looking for other companies to buy to put that cash to work. Companies cannot afford to sit on cash for too long because shareholders will begin to question management’s efficiency. Large cash balances also make companies ripe for takeover, since the cash on their balance sheet can be used in the transaction.
The bigger issue is that these companies do not seem to be using their cash to hire workers, which is really what we need to see before the unemployment picture will improve significantly. Unemployment is a lagging indicator, meaning that we won’t see unemployment improve until fairly deep into an economic recovery. We did just see the rate decline from 9.4% to 9% last week, but I feel that the calculation of the rate has been skewed a bit, due to poor weather and holiday temporary hiring, etc.
We are certainly at risk of seeing a meaningful correction for stocks, since many companies are trading at multi-year or all-time highs. Also, commodities are extremely extended, with copper making yet another all-time high, at more than a 30-year high trading level. Those high commodity prices will eventually work their way into all other prices for the things you and I buy on a regular basis, which means that real inflation will begin to accelerate on the upside. Higher inflation pressure means higher rates, as the Fed will be forced to combat inflation. Higher rates will mean lower real estate prices, curtailed economic activity, and higher costs for companies that need to borrow to expand operations, etc.
Things are going right in a lot of ways, but I would feel much more comfortable putting new money to work in stocks if we were to see a sizable correction, to bring prices down to more reasonable levels.