Disney reported a 24% hike in net income, to $516 million (25 cents per share), in the quarter ended Sept. 30, vs. $415 million (20 cents per share) in the same quarter last year. The Magic Kingdom also reported full-year earnings of $2.3 billion for the fiscal year ($1.12 per share), vs. last year's $1.3 billion (62 cents per share). Minus a small tax gain, the $1.08 earnings-per-share number beat the $1.06 First Call consensus. And Disney executives have reiterated that they expect to see double-digit growth in fiscal 2005 earnings. [full story]

Plainly stated, a lot of people doubted this move. I have been getting a surprising number of questions about why this rally should be viewed as different from the three previous (failed) rallies of 2004, which included the moves off the lows in March, May and August.

I find several significant differences between this breakout and the earlier failed rallies of 2004:

Downtrend: This is the first rally to break the downtrend tracing back to late January 2004. That trend line (more or less) was where each of the prior rallies failed. Its penetration to the upside is a technical event of great significance. The previous trading pattern was selling the market at the top of the down channel and covering and going long near the lower channel line. The breakout changes the entire tone of the market: It shifts the stance of traders from selling rallies to buying dips.

Higher High: A bear market is defined as a series of lower lows and lower highs, while a bull market is just the opposite (higher lows/higher highs). For the first time this year, the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite each made a significantly higher high. That's yet another bullish sign.

Year-to-Date Positive: Sometime earlier this month, we moved to positive territory for the year on the S&P, Dow and Comp. Although we pivoted above and below the break-even line all year, the break now is most significant as it comes this late in the year. Why? This places enormous pressure on fund managers. It is easy to beat the averages when they are in negative territory -- all you have to do is hold cash, and your fund will be down less than the indices (that's considered outperforming). The danger to a fund manager comes from these fast reversals. If they are sitting in too much cash when the screens turn green, they very quickly see their performance slip. Suddenly, after a two-week rally, they are underperforming. A lot of this sidelined capital will be deployed before year's end. That also adds to the bullish momentum.

The market has made quite a run since late October, rising over 7% since Oct. 25. While many believe the market has moved too far too fast, we disagree. The beginning of most major intermediate-to long-term stock market advances occur in violent, upward fashion. This catches many investors by surprise -- and often under-invested. [FULL ARTICLE]

The technical condition of the market has not really changed: the trend for prices remains positive. A retracement would be natural at any time. End-of-day momentum measures suggest that any short-term price weakness should attract buyers, not sellers, so downside risk should be limited. Any price weakness would not change my expectations that a retracement should be limited in depth and duration. We are at the beginning of what has been historically, on average, the three best performing months of the year: November through January. [FULL ARTICLE]

What is confusing is how ANY U.S. asset prices can rise with the massive structural problems in the U.S. economy. The problems are legion. But the chief sins are:

-Chronic federal deficits ($477 billion this year) and a monstrous federal debt ($7 trillion)
-A current account deficit nearing $600 billion annually
-$9 trillion household debt, including $2 trillion in credit card debt.

These financial sins will lead to the END of the dollar standard and a global currency realignment. It's not difficult if you put it in moral terms; You cannot spend more than you earn and get rich. You cannot consume more than you produce and accumulate wealth. You cannot borrow today and force other generations to pay without ushering in a day of reckoning.

Even the possibility of a dollar crash should give Mr. Bush cause to rethink his tax policies -- if the prospect of burdening his children's generation with a massive national debt is not cause enough. Mr. Bush's budget deficit is so big that there aren't enough savings in the country to soak up the bonds he's issuing: The tax cuts are the prime reason for the expansion in the nation's overall savings deficit from 4 percent of gross domestic product in 2000 to almost 6 percent now. That gap has to be plugged by importing foreign capital, and if foreigners hesitate to provide it, the dollar falls until U.S. assets become cheap enough to lure them. This does not matter too much if the dollar's decline is gradual, as it has been so far. But the real worry is that investors may come to see a falling dollar as inevitable, precipitating a crash.

Economists have warned of a dollar collapse for several years now, and so far their alarmism has proved wrong. But some of them also warned of a stock market bubble in the 1990s, and after suffering some years of derision they were eventually proved right.

The economy is growing at a reasonable clip, but the foundation of this growth is vulnerable. When Mr Bush ran for president four years ago, the budget was in surplus to the tune of $236 billion; now the annual deficit is more than $400 billion. Calls to reduce growth in federal spending will put pressure on funds available for defence, foreign aid, HIV/AIDS and homeland security.

Add the fact that the current-account deficit is expected to be more than $600 billion this year, or around 5.5% of GDP. All this leaves the economy at the mercy of bankers in Asia and elsewhere who have accumulated massive dollar holdings. As Herb Stein said, that which can't go on forever, won't. A day of reckoning could well come over the next four years. If it does, Alan Greenspan or his successor will have to put up interest rates sharply.

. . .the most serious of all the questions facing the long-term prospects for the American economy, and by extension the stock and bond markets: the rising tide of red ink that is washing over it. . . .In its latest outlook, in September, the CBO predicted a deficit over the next ten years of $2.3 trillion. But that projection assumes, among other unrealistic assumptions, that most of the tax cuts are allowed to expire. With Mr Bush back in the Oval Office, that hope will almost certainly prove as optimistic as right-thinking people thought it was in the first place. Mr Bush has said that he wants to halve the deficit, but nothing he has said or done, nor any half-baked plan that he has come out with, gives any cause for hope on this score whatsoever. Independent number-crunchers think that the deficit over the next ten years will be $5 trillion-$6 trillion--more than twice the CBO's estimates. . . .In the past, most of the appetite for dollars came from private investors. Recently, however, private demand has evaporated, and the dollar has been supported by gargantuan purchases from Asian central banks anxious to keep their currencies from rising too much against the dollar. Since 2001, the foreign-exchange reserves of Asian central banks have increased by $1.2 trillion--or about two-thirds of America's accumulated deficit over the period. These purchases have kept the dollar stronger than it would otherwise have been and American interest rates lower. Foreign central banks will not carry on financing this deficit for ever. But what will happen to the dollar, to interest rates and to the American economy when they stop?

On these questions Buttonwood finds it hard to be sanguine. A good outcome would be a gentle but sustained fall in the dollar. A bad outcome would be a dollar crisis. Even then, bond yields might stay relatively low because of disinflationary pressures, but Buttonwood has no certainty about this: they could rise sharply because of a general shunning of dollar assets. Short-term interest rates might have to rise, again sharply, to attract the necessary saving. A combination of lowish long-term bond yields and much higher short-term rates would hit corporate profits hard, because perhaps half of them come from financial firms of one sort or another, and financial firms benefit hugely when short-term rates are much lower than long-term ones. Sharply higher rates would also bring an economy laden with debt to a juddering halt. Demand would shrink as consumers saved more. This would also hit corporate profits hard, presumably bringing an overvalued stockmarket down with them. Defaults, both individual and corporate, would increase. Bad debts would rise at banks; yields on riskier bonds, which have fallen to extraordinarily low levels, would rise sharply.

That, admittedly, is perhaps the gloomiest scenario, though it doesn't even mention an escalation of the worsening problems in the Middle East, nor another terror attack. It may not happen, it may happen slowly, or America's nine-lives economy may carry on muddling through: it is, after all, humming along quite nicely at the moment. But the re-election of Mr Bush does nothing to ease Buttonwood's long-term fears. That would take an administration with far greater intellectual clout and economic literacy than the bunch that has just kept control of the White House.

Gary B. Smith
Rally Runs Out of Room
The Comp hit its downtrend and now seems destined to fall.

Jeff Cooper
Watch Market Behavior on a Pullback
The first pullback after the Real Accumulation Week scored last week should be a good buying opportunity.

Helene Meisler
Poking Holes in the Bull Case
Various indicators suggest that stocks could see a brief rally after the election, but that's it.

David Merkel
Fade the Election
Neither man changes the fundamental economic problems of the U.S., and stimulus is fading.

Rising interest rates, slowing productivity gains, and high commodity prices were widely expected to bite into earnings. But steadily rising crude oil prices combined with a cooling economic recovery have conspired to hit profits harder than expected.