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Farrell: A Transformed President

That's what the Financial Timescalled President Obama in Monday's edition: transformed. I guess if you take what Mr. Obama himself described as a "shellacking" in last November's election, you or I would be transformed as well.

Be you pro or con the president, it has been shown so often how difficult it is to govern from either extreme, the left or the right.

The transformation, if that is the right word, has been a pronounced shift to the center, in policy and personnel. The addition of Bill Daleyand Jeff Immelthas been greeted with almost universal approval. GE's Jeff Immelt is one of the few CEO's I actually know and if pushed might remember me (Jeff-it's spelled F-A-R-R-E-L-L, surely you remember!). So I am a big fan and applaud the move.

The shifts have been, to me at least, so dramatic they seem to require some caution in approaching them. Create jobs, be competitive, write pieces for the Wall Street Journal, maybe sanction a lower corporate tax rate.

President Barack Obama
Photo by: Pete Souza
President Barack Obama

My pal and keen Washington observer, Greg Valliere of Potomac Research Group, feels only part jokingly that instead of Paul Ryan (R-Wisconsin) giving the rebuttal, the Democrats might feel the need to rebut.

Can you do that, can one rebut?

Like as Sydney Williams asked the other day in his letter, quoting G.K.Chesterton, if one is no longer disgruntled, are they gruntled? Please don't say out loud, "Who is G.K.Chesterton?". I was distraught the other day when I said a current actress reminded me of Gina Lollabrigida and was told to lie down while they brought me a cold compress for my head.

The other rebuttal will come from Tea Party member Michele Bachmann (R-Minn.). If you want something interesting, either Google or YouTube her clash with Chris Matthews recorded the night of her last re-election. It's only four minutes and fun. She is articulate and, like all Tea Party advocates, very confident in her outlook. With President Obama's new approach and soaring approval ratings, wouldn't it be something if the TP (my abbreviation for Tea Partiers) were to split the Republicans and ensure Mr. Obama's re-election!

And business might pick up enough for the President to repeat anyway. The National Association of Business Economics issued a report that said 42% of those businesses surveyed plan to hire within six months. 42% ain't great but it is a whole lot better than recent surveys. Also, a national real estate firm called Trulia (I confess I don't know them, but I like their message) says that it is more economically viable to buy than rent in 72% of the United States. If so, then the housing market might start a recovery. We get the Case-Shiller numbers Tuesday about when you get this note, but don't expect much, if any, improvement in that review's numbers. It is yesterday's news.

On Friday, Big Brother will issue preliminary numbers for fourth-quarter GDP. Expect a reading of at least +3% and probably more. Some guys I respect for their forecasting ability are thinking as much as 4%. Consumption (that's you and I spending) will have grown at least 4% coming off same store chain sales of 3.7% for December alone. But with the consumer still needing to de-lever from a very high debt position, the coming state and local financing issues, a still lousy housing market, and unemployment at 9.5%, I don't expect the same robust growth the rest of the year. I think we will have a nice GDP rise, but not 4%. The recent payroll tax cut and Bush tax cut extensions will help, but growth via government largess does not deserve a high valuation.

But the value of the stock market seems too low to me. I do think we are poised for a modest correction more because it's the way of things than anything else. Consensus S&P500 EPS estimates for this year are clustered near $94-95. That makes the market a bit more than 13 times earnings. Inflation is low and we are likely to get confirmation Wednesday from the Fed that they will continue to pump money into the economy via QE2. With unemployment so high, it is hard to imagine wage pressures, the biggest component of American cost of goods. Commodity prices are high and rising but represent greater risks elsewhere. A fairer multiple for US stocks is more like 15 times. I expect reasonable earnings this year and some multiple expansion. A good target would be 1450 on the S&P. But a little correction first.

Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.