Rally Shows Affects of Real Global Economy

Good morning. Here's what I see today:

1) We have been talking about the "decoupling" of the U.S. economy from the global economy--not that the U.S. isn't important to global growth (of course it is); but that the world is not as dependent on the U.S. consumer as it had been in the past. We see that the biggest trading partner Japan now has is China (U.S. is #2), we see that Old Europe now is getting growth from trading and investing in New Europe (Middle and Eastern Europe).

Technology is a major beneficiary of this global growth, which is why the Nasdaq is also hitting new highs. We hear a lot about the slowing U.S. economy, but look at what is happening in tech land. JP Morgan, for example, this morning raised estimates on Intel , noting specifically the global strength in the PC market. Both unit demand and the pricing environment are stronger than expected in Q3 (are you listening? STRONGER than expected unit demand and pricing).

Despite all this, and despite Intel at 52 week highs, Intel is only trading at 17x forward estimates; that is at the low end of its normal range of 16x-22x forward earnings. In other words, the stock is not overbought by historical standards.

2) Expect more announcements like Citi and UBS . Analysts are talking this morning about another lackluster quarter from banks, specifically banks will be providing additional loan loss reserves due expected losses in mortgages. This is exactly what Citi did yesterday, and given the positive response from the market expect many more banks to do the same. This is the "kitchen sink" mentality we talked about yesterday; be conservative in your estimates (i.e. write off more losses than expected, provide bigger provisions for expected loan losses than expected), then hope that you can begin a clean slate in Q4 or at least in 2008.

3) Bears who hate this rally do have one strong point going for them. The weak part of the rally of the last two weeks (which has seen the Dow move 600 points) has been demand: volume has been comparatively anemic. It is one of the axioms of technical analysis that rallies based on falling supply rather than rising demand are usually considered suspicious (as Lowry, the dean of technical analysis services, has pointed out many times in the last week).

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