GIMME AN E

In my 33-plus-year career, I've been inappropriately branded a "perma-bull" on our markets. A perma-bull is someone who is always bullish on our markets. Well, I guess that's better than being branded a perma-bear, someone who is always bearish, despite any facts to the contrary.

I'm really not a perma-bull, but rather I'm always looking for bullish ways to make money. I believe there is money to be made in every stock market cycle and every economic cycle; we will just make it differently.

While I'll never plead guilty to being a perma-bull, there is one thing I am guilty of, and that is being a cheerleader for our markets. Guilty as charged. Every day I do root for our markets to go higher, so if that's a crime, then lock me up.

BATTLE OF THE 2 E's

In my role of self-proclaimed cheerleader, let me begin with "Gimme an E." I'll make the case that this is currently the story of our markets, namely, which of the two "E's" will win. The first "E" is for our economy and the second "E" is for earnings. Right now we are in a classic market tug-of-war, if you will. Every time we get stronger-thanexpected earnings reports, the next day is followed by weaker economic releases on either consumer confidence or employment, and the market ends up giving back all of its recent gains as a result of strong earnings. It's pretty much like taking one step forward and then two steps back. Or is it two steps forward and one step back? Anyway, I think you get the picture. So if our entire market is dependent on which of these two "E's" wins out, the economy or earnings, then we'd better take a closer look at both, beginning with the economy.

"E" FOR ECONOMY

I will be the first to admit that our economy does seem to have hit a soft patch, so to speak. But a soft patch does not mean we are heading into a double-dip recession. Slowdown, yes, but recession, no way. Before you overreact to any individual economic release, let me make sure you understand that these releases are looking in the rearview mirror; in other words, they tell us what has already happened, not what is going to happen next.

There are three reasons I believe our economy will get stronger, not weaker. The first is big-ticket items, such as homes and autos. Secondly, state and local governments are now in a surplus. Thirdly, and finally, we still haven't spent all of the stimulus money to stimulate our economy.

BIG-TICKET ITEMS

Two of the biggest "big-ticket" items for most consumers are cars and homes. While I realize there are hundreds of ways to look at both of these sectors, I have found a way that should help us figure out what will happen, not what has already happened.

The most recent data from the automotive industry shows that we're scrapping more cars than we're buying, which puts us behind the curve and is a bullish sign for future automotive demand. From July 1, 2008 to September 30, 2009, 14.8 million cars and light trucks were taken out of service. Over that same time frame, only 13.6 million new-vehicle registrations were recorded. That means we are falling behind by 6.1 percent. You couldn't ask for a more bullish sign for the automotive industry— especially when you realize the revised forecast for new car sales is only 11 million. When you junk almost 15 million vehicles and only add 11 million vehicles, something has to give.

From a housing perspective, it's even better. Throughout all of 2009, we averaged 398,000 new households created each month. The most recent new-home sales data shows we're only selling 300,000 new homes each month. So every month, 398,000 new households are formed and only 300,000 homes are purchased. That's almost 100,000 households of pent-up demand every single month. At some point, something has to give.

GOVERNMENT SURPLUS

Try using the words "surplus" and "government" in the same sentence. Talk about an oxymoron! Well, believe it or not, state and local governments officially turned to a surplus at the end of the first quarter of this year, which is the most recent data available. So now, for the first time since the third quarter of 2007, in aggregate, state and local governments' budgets are showing a surplus, not a deficit. How is that possible? In short: because tax revenues are soaring. In fact, tax revenues are currently running at a 20 percent increase over last year.

So state and local governments had a $70 billion deficit in mid-2008, and now they have an almost $20 billion surplus. This boom-bust scenario is nothing new. In 2003, state and local governments had an $82 billion deficit, and by 2006, turned it into a $50 billion surplus. The good news is, despite the headlines, state and local government finances are now in the "black," not the "red," and that's bullish for our economy.

STIMULUS PACKAGE

The third and final reason I'm bullish about the future of our economy is that we've only spent about half of our massive stimulus package. That's right; the other half hasn't even been spent yet. Here are the numbers: The total stimulus package totals $862 billion. Of that amount, $626 billion is in spending and $236 in tax cuts.

Here is where things stand: Of the $236 billion in tax cuts, $209.5 billion (82.4 percent) has been spent so far. However, from a spending perspective, we have only spent $247.15 billion, which is only 39.5 percent. So, of the $862 billion stimulus package, only $456.65 billion or 52.9 percent has been spent. That means we still have 47.1 percent still left to drive our economy.

I don't mean to sound like a cheerleader; however, if you look at our economy from a big-ticket auto and housing perspective, state and local government budget surplus, or the government stimulus that has yet to be spent, then there is plenty to cheer about.

"E" FOR EARNINGS

Let me now move on to the second "E." This one is for earnings. I can already hear the perma-bears right now, screaming that all of these great earnings reports are looking in the rearview mirror, telling us what already happened, not what will happen. All right, for once I agree with these perma-bears; the earnings do indeed tell us what has already happened. So if we want to figure out what will happen next, in my view, the most important thing is cash. In other words, follow that money and that will tell you what will happen next.

CASH IS KING

In my view, there are two measurements of corporate cash, and both of these measurements show cash at an all-time high. The Federal Reserve Board has been monitoring corporate America since 1959 in a report called "Flow of Funds." Regarding cash, there are two aspects of this report that tell the best story.

The first report is titled "U.S. Non-Financial Corporations' Cash as a Percentage of Total Assets." This report excludes financial companies, because their large cash positions would taint this report. Only twice in the history of this report has this number ever been above 5 percent; the first time was in 1961, and the second time was in 2004. U.S. Non-Financial Corporations Cash as a Percentage of Total Assets has never been as high as 5.9 percent. That is, until today. This is what it means when you hear somebody say corporate America is flush with cash.

The second report is "Undistributed Corporate Profits." This number includes financial companies. Again, this number has been tracked since 1959. It took almost 30 years for this number to break $100 billion, as it did so for the first time in 1986. A decade later in 1996 it broke $200 billion. Two years later, in 1998, it broke $300 billion, and in 2004, it broke the almost-unheard-of amount of $400 billion. Undistributed Corporate Profits never hit $500 billion until this year, when it has crossed both $500 billion, an all-time record, and $600 billion, where it stands today—a new all-time record. No matter how you look at it, corporate America is flush with cash, and cash is truly king.

MONEY IN MOTION

Watch what is about to happen next. When that money goes into motion, no matter what corporations do with it, it will be bullish for our markets. They only have five choices: First, they could buy back shares of their own stock. If they do that, it will not only be good news for their stock prices, but stock buy-backs are bullish for the overall market as well. Second, they could increase dividends or establish dividends, both of which would be bullish, because in this low-interest-rate environment, it would bring even more investors into the stock market. Third, they could use the money to buy other companies. That, too, is bullish. Any uptick in merger-and-acquisition activity is viewed as an increase in business confidence, and that is bullish for our markets. Fourth, they could spend the money on capital improvements, such as technology, which would also be bullish for our markets, as any time companies make big-ticket expenditures, they're placing a bet on the future of our economy. Fifth and finally, here is an innovative thought: How about hiring a few employees? Talk about bullish signs for our markets! When employment finally turns the corner, look out, as just about everyone will turn into a perma-bull then.

With record amounts of cash on corporate balance sheets, I'm not sure if there could be a more bullish sign for our markets. But then again, I'm a cheerleader. Monica Author, a real cheerleader from Lima, Ohio, put it best when she quipped: "There's no halftime for cheerleaders."

I might add that there are no halftimes—or even timeouts— for strategists like me, who are perceived to be the 24/7 cheerleaders for our markets. It's a tough job, but somebody's got to do it, so it might as well be me.

Gimme an "E"!