Reasons to Be Optimistic About Stocks

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Been in San Francisco visiting family and friends in the last week and it's hard not to notice the city's renaissance, as dot-commers who formerly were living in Silicon Valley have pushed into and gentrified the Mission District south of Market Street, formerly the home of much of the city's homeless and marginal types.

It's still block by block, but the entire district is now populated with uber-hip coffee houses that play vinyl records, expensive apartments, and restaurants with unpronounceable beer names and $18 pizzas.

It's hard, too, not to notice all the bullish signs for the markets in the last few days:

1) The S&P 500 has closed above 1,500 for the first time since 2007; The New York Times noted on Saturday: "As worries ebb, small investors propel markets."

2) There were record inflows into equity mutual funds in January.

3) China's Shanghai Index rose 2.4 percent to a seven month high ... stocks there have been on a tear since the beginning of December. Economic data have improved and there are hopes that construction demand will improve.

4) European banks are repaying the European Central Bank loans early, with ECB President Mario Draghi saying the euro zone economy was stabilizing; and there are reports Spain may end its short-selling ban because stocks have rallied and bond yields have fallen;

But the big question is how much will the global economies improve in 2013? This morning, December durable goods orders were much stronger than expected. Over the weekend, a leading Chinese think tank, the Center for Forecasting Science, predicted this weekend that China's gross domestic product would grow 8.4 percent in 2013, well above the 7.8 percent in 2012.

If the global economy indeed accelerates, top-line growth will accelerate, dropping enormous profits to the bottom line for global corporations. And the biggest trade of the year will be "short bonds/long stocks/long copper."

Elsewhere:

1) Caterpillar specifically referenced the improving global economy in its press release: "If the recent improvement in economic indicators continues, 2013 could be another record year for Caterpillar."

That's the good news. But read it more carefully ... the tone was cautious. Inventory reductions will continue through the first half of 2013. Sales in the first quarter will be lower year-over-year. Capital expenditures will be lower in 2013.

Then there's the mile-wide $7 to $9 earnings guidance. Huh? The reason for it is in the assumption of second half growth: "However, if, like the last two years, growth and confidence decline in the second half, 2013 could be a tough year."

Also note that 2013 consensus estimate for Caterpillar is $8.54; so most of the guidance is below consensus.

The only good news in the guidance — it's so wide it's unlikely they'll have to cut it!

2) With about 30 percent of the S&P 500 reporting, blended earnings growth is at 4.6 percent, 3.9 percent for revenues. The financials are mostly done. Bears laughed when analysts estimated that earnings growth for financials would be nearly 20 percent in the fourth quarter, but to date earnings are up 16.7 percent for financials. Who's laughing now?

3) Before you get too enthusiastic, remember this: the S&P 500 has closed above 1,500 for the first time since 2007. The problem, as everyone knows, is that the S&P 500 went over 1,500 for the first time in March 2000. As economist Peter Morici has pointed out, since then corporate profits are up 135 percent but stocks have made no gains over the last 13 years.