Markets Rally On Stimulus Fever

The awful payroll numbers on Friday finally seems to have galvanized Washington and the rest of the world--stimulus fever is now global, with additional packages in India and discussions of more in China and France.

The infrastructure stimulus plan is pushing engineering stocks like Shaw Group and Jacobs Engineering up double-digits, and auto stocks like GM , Visteon ,TRW , and Borg Warner up double digits as well on a belief that some kind of money will be forthcoming for the Big Three shortly.

The rally is based on the belief that both the quantity and quality of the stimulus will be such that it will be the "X Factor" that turns the economy. There is also a widespread belief that the Feds will figure out which programs work, and which don't, and that the bang for the buck will increase.

Now, here's the bad news:

1) Much of the success depends on the dollar remaining strong; if dollar holders start selling aggressively on the belief that the U.S. is less creditworthy, inflation will return in a big way. While reflation is a desire, inflation is not.

2) It's not clear that the main focus of the stimulus--infrastructure--will be successful long term. It sounds right, because there is a big bang for the buck initially from jobs and commodity production. But as Peter Boockvar at Miller Tabak noted: "The Obama proposed stimulus plan focused on public works is right out of the play book of government attempts to help the economy in the 1930's and 1950's and was a main focus of the Japanese in their lost decade, it helped for a short period of time and then flamed out because there was nothing sustainable from it because there is no lasting profit being driven."


- The Dow 30 at a Glance

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