Last week I wrote that if “it gets rejected, then stocks could move a lot higher once they see that it’s still possible for the government of this country to do the right thing every once in a while.” That’s just what has happened.

Let me remind you what’s a stake here. It’s even worse than I wrote about last week. I said that the “surcharge” tax to finance this government takeover of private medicine would raise the top income tax rate to 45%. That’s bad enough, but what I didn’t mention is that the “surcharge” would affect capital gains taxes, too. The rate on long-term capital gains is now 15%. If Obama’s plan is enacted, it would jump to 25.6%.

I can’t think of a surer way to destroy the stock market — what’s left of it — than to raise taxes on capital gains. Isn’t it already hard enough to make money in stocks?

So don’t be surprised that stocks have taken off on the good news that this particular piece of political madness has been consigned to the dustbin of history where it belongs.

It’s especially good news because there’s more and more evidence that the economy really is coming back to life. It would be a shame to snatch defeat from the jaws of victory.

Most important this week, earnings season is shaping up to be absolutely terrific. Forty percent of the companies that are going to report this season have now done so. On average, earnings have surprised on the upside by 11%. That makes this, at least so far, the best earnings season in more than two years — by a substantial margin.

Let’s take a closer look at this earnings season — what’s hot and what’s not.

The biggest winner is the consumer discretionary sector — 120% above expectations on average, thanks to Ford’s huge upside surprise. To be fair, it was really only a smaller-than-expected loss for Ford. But it was still a surprise in the right direction. And the dollars involved — a $997 million improvement — are quite significant.

In second place is the basic materials sector — with an average upside surprise of 56% above expectations. Here the leader is the mighty Freeport-McMoRan. And this one is a legit double. Earnings — positive earnings, not a smaller-than-expected loss — came in twice as high as was expected.

A perhaps surprising laggard is the financial sector. It’s in dead last place, with an average upside surprise of only 4%. Yes, there were some spectacular individual surprises in the sector. In fact, Wells Fargo’s 71% surprise, worth a tidy $1.176 billion, is so far the biggest single surprise of the season. JPMorgan Chase, General Electric and Goldman Sachs also delivered big wins.

But the problem with the sector is that there were big losers there, too. Citigroup was a disaster, a $2.197 billion flop that was a loss three times worse than expected. Morgan Stanley and Zions Bancorp were also huge losers in the sector.

OK, so the brain-dead banking sector didn’t do so well. Which, by the way, is really only to say that it came in, on average, just as expected. And in a funny way, for the banks that’s actually a wonderful thing. The big problem with the sector over the last two years have been that no one has had any idea what to expect. Their problems were so complex and so enormous, how could a mere securities analyst ever figure it out? Well, apparently this quarter they did. At least on average, the analysts expected exactly what they got.

One element of this earnings season kind of worries me. While earnings outside the financial sector have delivered a nice upside surprise, revenues have not. On average, revenues have come in almost precisely as expected — about 1% lower, actually.

The problem with that is that a company’s profits are a fraction of its revenues. If profits are growing when revenues are not, that means the gains are coming from cost-cutting, not a true expansion of the business. What we really want to see is revenues expanding, so that a company can earn a larger slice of a larger pie. Sadly, that’s not what we’re seeing.

So where do we go from here? The matter of so-called health care “reform” is settled for a while. And earnings season has settled in with a nice upside tone. So what is there that could drive stocks higher at this point?

I don’t really see any fundamentals that can do it. But there is one technical factor. There are a lot of hedge funds that are still on the sidelines, that made a lot of money all the way down in the bear market but failed to call the turn at the bottom in March. They might be getting scared here.

There are lots of retail investors who are out of the market, too. They got shaken out in the horrific bottoms last November, and this January and March. They’re not feeling the kind of performance anxiety that a hedge fund manager is feeling, but they’ve got to be getting a little angry watching the stocks they sold at the bottoms recover so significantly. Maybe they’ll want back in.

So in the short term, stocks might have a little more upside. But my guess is that the rest of the summer will be fairly quiet. We need to digest the considerable gains off the March bottom.

After all we’ve been through the last year or two, quiet might be the best thing. I like it when stocks go up — don’t get me wrong. But getting a little rest here wouldn’t be so bad, either. We deserve it.

Anonymous

Mary Sweeney

It is pathetic and shameful. AT least you have the courage to show your true colors.

David Weissman

Spread your fear hate monger, I just don't give a sh*t anymore!

David Meade

To Anonymous: Your labeling of Mr. Luskin is improperly placed, The representatives in Washington you so much admire fit your so nicely made label. I currently use an HSA with a small premium per month for my health care for a family of four. I sleep well because of my choice of health care. Depend and expect nothing from your Government when it concerns Utopia.

To Mary Sweeney: The Four of July is not about being dictated or forced to be compassionate or to give charity. Relook at Mr. Madoff and President Obama. Find the similarities in what Madoff did and Obama is trying to do. When you find the dictator that forced you to exist, then find what this dictator wants you to do about paying another dictator to dictate your health care.

To David Weissman: Where are those in desperate need for health care? Are those in desperate need moving to Cuba, Venezuela, Canada, France, and Iran for health care? How much are you willing to pay for someone else's health care. Maybe you should donate to your nearest hospital or urgent care center. Maybe you should give speeches on taking care of oneself. The government does not have a great record in managing peoples health.

To David Meade: Research David research, do some, Mr. Luskin did not cause the current tanking of the Market. Look at those whom you seem to admire in Washington. Do you have any idea what they did to the Market? Do you have any idea how they are going to spend your money for "all" who need health care. What is your Government's return on the money given to them. What makes those in Washington any smarter than you. Getting elected is more about the stupidity of the public. Why should I pay for your health care or you mine? The last thing I want or anybody should want is to be a dependant of the Government

Here’s a sign that at least one member of Team Obama is cracking up, pleading for opponents to wait until after it’s over before suggesting changes (all clips courtesy of the Politico’s Pulse column, a daily must-read):

AP overnight, 'Official: 5 plans revamp health care, none final,' by Philip Elliott: 'President Barack Obama's advisers are urging critics of their health care overhaul to wait for Congress to finish writing legislation before issuing verdicts. They also signaled they are willing to wait longer than their White House-imposed August deadline for action if it means they can sway wary lawmakers. The White House spent Sunday defending Obama's health care proposals and stressing that Congress has not yet written the final draft of legislation that would dramatically reshape how Americans receive health care. Instead, they said, Republicans - and even some Democrats - should wait until a final bill takes form. 'There are basically five different plans in Congress right now and there are a variety of ways,' Health and Human Services Secretary Kathleen Sebelius said, trying to calm nervous lawmakers whose re-elections could hinge on the legislation.'

Now let’s see how out of step Kathleen Sebelius is with her former colleagues, the Governors from both parties.

PEAR-WATCH: GOVS SKEPTICAL OF REFORM reports NYT's Kevin Sack and Robert Pear from Biloxi, Miss.: 'The nation's governors, Democrats as well as Republicans, voiced deep concern Sunday about the shape of the health care plan emerging from Congress, fearing that Washington was about to hand them expensive new Medicaid obligations without money to pay for them. The role of the states in a restructured health care system dominated the summer meeting of the National Governors Association here this weekend - with bipartisan animosity voiced against the plan during a closed-door luncheon on Saturday and in a private meeting on Sunday with the health and human services secretary, Kathleen Sebelius.

'I think the governors would all agree that what we don't want from the federal government is unfunded mandates,' said Gov. Jim Douglas of Vermont, a Republican, the group's incoming chairman. 'We can't have the Congress impose requirements that we are forced to absorb beyond our capacity to do so.'

Now, compare this purposeful, impactful quote (below) by a real player, Mike Ross (D-AR) with that ineffective, self-immolation “Waterloo” line from Senator DeMint (R-SC), which I referred to yesterday. Ross goes up against Waxman over the next two weeks. Wish him well.

--Roll Call's Steven T. Dennis has your Ross profile: 'He warned them. Months ago, Rep. Mike Ross (D-Ark.), chairman of the Blue Dogs' health care task force, told House leaders and chairmen they'd better include Blue Dogs in the writing of their health care bill. But that didn't happen. Now, Ross has become the rallying point for a massive revolt against the leadership health care plan and may be the biggest obstacle to Speaker Nancy Pelosi's (D-Calif.) oft-stated desire to pass it by the August recess. 'I think the leadership has misread this one. ...This is not a midnight surprise. We expressed our concerns three months ago.'

Two points on that "Waterloo" quote from DeMint: 1. DeMint was speaking on a "conservative conference call", not giving an interview to a reporter. He was just throwing some red meat to his supporters, in other words. "Mick Danger" can bite me.

2. There aren't really any "effective" Republican senators right now. Maybe if previous "effective" Republican senators (Lott, for example) had actually stood for Republican values - like DeMint does - they might still be in the Senate and have a chance to be more effective in preventing Obama's agenda.

PS I moved into DeMint's old House district in SC, and I was sort of iffy on him when he ran for Senate. His slogan was something dreadful like "Bringing Freedom Home". However, I have been extremely pleased. Maybe if we could elect a few more like him, they might be able to more "effectively" roll back some of the idiocy after Obama is replaced in 2012.

Also, DeMint was ELECTED to the Senate. The sheer gall of "Mick Danger" saying STFU (anonymously, natch) is mind-boggling. Yes, let's have the people who were elected to office stop interfering with the "experts" like your boy. Democracy, who needs it? Our un-elected betters in Washington could get so much more accomplished if we would just stop sending all these amateurs over there who keep getting in their way!

PS Actually, Lott was a pretty bad example, but you know what I meant.

This may not need anybody to actually say it, but one thing I'd like to point out about the White House desire for people to wait until the bill is written before it gets criticized is that they force votes as soon as it is written so there is no time to criticize.

Posted by Donald L. Luskin at 12:49 AM | link  

Sunday, July 19, 2009