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Recovery Is the Mother's Milk of Stocks

As I’ve written many times before, profits are the mother's milk of stocks, and for that matter, business and the entire economy. And what we witnessed today in this big market rally was the return of earnings to the center stage.

Not just Intel's numbers, and not just Apple after-the-bell, but industrial companies like Honeywell and United Technologies and consumer companies as well. Ultimately, the recovery in profits over the past two years has been the backbone of the stock market’s big rise.

Here's another point on profits: Don't overlook the important role productivity plays in American business. It's running a solid 2.5 percent, and even higher in manufacturing and hard goods.

Look, American companies are very efficient. They are not in decline.

In fact, firms from all over the world are borrowing successful methods from American business and producing much more than folks think. And that's why the global economy is stronger than many people probably think.

Of course, I’d like to give American businesses greater incentives to create more jobs here at home. But we are still—in the U.S.—the best in business in the world. Washington needs to keep it that way with more free market policies, rather than suffocating government tax and regulate policies.

Another point on today's rally: this business of the falling dollar. I hate it. I’m a King Dollar man. Link to gold.

But let me go out on a limb here: if we get a debt ceiling increase with enforceable spending limits, and if the ultra-easy Bernanke Fed finally ends its pump-priming QE2 overprinting of new dollars, then we could see a dollar stabilization or even a dollar rally before long.

I hope so. I don’t want to lose our status as the world's reserve currency.

So, might a stronger-than-expected dollar hurt stocks? In the short run, a brief correction is certainly possible. So yes. But in the long run, healthy and profitable business is always the key to the stock market.

Profits matter.

Questions? Comments, send your emails to: lkudlow@kudlow.com

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