Hardly a day goes by that I don't hear a discussion or read an article about "the" forthcoming double-dip recession and today was no exception. The market tanked on more bad economic news and every self-appointed expert on the history of the Depression alleges to see striking similarities with today's political, economic and financial conditions. That may be so, but I do not believe a double-dip recession is likely to happen.

Yes, the economy is slowing down and even the Federal Reserve has lowered its forecast of economic growth. Unemployment is still near 10%, the housing market is still weak, retail sales have slipped for two consecutive months and consumer sentiment is sinking fast. But inflation is benign, interest rates are extraordinarily low and corporate earnings are rising. This combination of factors is bullish, very bullish, for stock prices.

Supporters of the double-dip theory can talk all they want about government debt, slowing consumer spending, the oil spill, LeBron James or whatever. It doesn't drive the economy like inflation, interest rates and earnings do. So why is the economy slowing?

The economy is slowing because small business owners are not spending money and creating jobs as they have done in the past. They are concerned about the political turmoil within the country and uncertain of the future. Those who need the money to grow, can't get it. Those who can get the money, don't want it. Those who have it, won't spend it. The traditional effect low inflation and interest rates have on stimulating the economy will be inhibited until government policies become more business friendly. So where do we go from here?

It is my contention that regardless of government policies, a double-dip recession will not occur as long as inflation remains benign, interest rates stay low and corporate earnings continue to rise. The Fed has repeatedly said it will keep interest rates low as long as it takes to keep the economy growing. That's great, but it may not be possible. They can control interest rates, but they cannot control inflation.

If inflation turns into deflation, the economy will shrink. If inflation takes off, the Fed will be forced into raising interest rates. When that happens, a double-dip recession is a virtual certainty. So it all depends upon what inflation does. It's The Wildcard.

MOVING TO THE SIDELINES.
I hate to say this, but it appears that we have gotten caught within the jaws of another Wicked Wedge. What does this mean and what to do now? Mr. Bryan Barnes, Consultant and Instructor, will explain what it all means and what to do now. So visit the VectorVest University to see this week's insightful "Strategy of the Week" presentation: "Moving to the Sidelines."

The Bulls stampeded on Wall Street yesterday, driving stock prices sharply higher on news of the Commerce Department's GDP report of 3.5% annual growth. Hurray, the recession is over...or is it?

The Bulls had a right to celebrate yesterday's GDP report. An expanding economy means jobs, higher earnings, a sustainable bull market and, indeed, a return to happier days. But some analysts say the GDP report was as phony as a three dollar bill. Be that as it may. The things I watch are earnings, inflation and interest rates. If the economy is on the road to recovery, it will be reflected by these factors. The Investment Climate shown below shows that the Trend Indicators for inflation and interest rates are favorable. The problem is earnings. What is going on with earnings?

Thomson Reuters, a leading data provider, says that with half the companies having reported, an astounding 81% have exceeded expectations. So what? Any CFO can low-ball a forecast; then beat it hands down. Let's turn to our trusty VectorVest database to see what we can learn. Let's open the S&P 500 WatchList and look at the average EPS for all the stocks in the S&P 500. As of yesterday, it was $2.26 per share. When I go back exactly one year, I see that it was $3.27 per share. Two years ago, very close to the S&P 500's all-time high, it was $3.70 per share. So the current EPS is still 39% lower than it was two years ago. That's not good.

When I look at an All-Weekly, Standard Graph of the S&P 500 average data, I can see that EPS literally fell off a cliff in September 2008 and hit bottom at $1.70 per share in March 2009. But it has been climbing higher over the last few months and that's good. However, it looks like it will take years to reach its former high. Indeed it will, but that's not the issue. The issue is the trend. This information is shown each week in the Investment Climate section of these Views. It is also shown graphically in the Market Climate Graph. As long as the S&P 500 EPS continues to rise, I am content to believe that we are on The Road to Recovery.

BEST PERFORMING STRATEGIES.
If you have been reading the Daily Views or watching the Daily Color Guard Report, you may have noticed how the Best Performing Strategies have shifted from predominately Bullish in early October to a mix of Bullish and Bearish in mid-October to predominately Bearish in late October. On Wednesday, October 21st, the five Best Performing Strategies were all Bearish. Which Strategy has performed the best since then? How well could you have done had you gone short with any of those Strategies? Mr. Glenn Tompkins, Manager of Internal Training, has all the answers. So join Mr. Tompkins at the VectorVest University to see this week's "Strategy of the Week" presentation: "Best Performing Strategies."

It's been a long time since rising inflation and rising interest rates have been headline news. But they were this week, and that's not good for stock prices. Rising inflation destroys wealth and rising interest rates raises costs. Ironically rising inflation is seen as an enemy, which it is, and rising interest rates is seen as a weapon to fight inflation. Together they can devastate an economy, torpedo corporate profits and cause a bear market.

As Chairman of The Federal Reserve Board, Dr. Bernanke's job is to maintain monetary stability and to ensure full employment. (The latter task was added to the Fed Chairman's job a few years ago to make the politicians happy.) Nevertheless, his real job is to fight inflation. So he and his associates, known as Fed Governors, have been railing against inflation ever since he took office in February 2006. Moreover, Dr. Bernanke followed in the footsteps of his predecessor and raised interest rates several times after taking office. The last interest rate increase took place in June, a year ago. At that time he said the Fed would consider pausing in their rate hikes since a slower economy would moderate inflation.

First quarter, 2007 GDP growth recently was the lowest in four years, a tepid 0.6%. So investors thought Dr. Bernanke would finally lower interest rates. This move, they thought, would spur the economy, ensure solid corporate earnings and help stock prices go higher. But Dr. Bernanke fooled them. In a speech this week, he said he expects the economy to get stronger over the next few quarters, so he would remain vigilant in the battle against inflation. In just a few words, he crushed any thoughts of an interest rate reduction anytime soon. Stock prices fell sharply.

To be fair, Dr. Bernanke never indicated that he was more likely to lower interest rates than he was to increase them in his fifteen months in office. On several occasions his statements were misinterpreted, (see my essay of 05/05/06), and even I thought that he would lower interest rates. But I should have known better - The Fed Chairman lowers interest rates only after the economy has gotten into trouble, not while it's still showing signs of life, (see my essay of 07/14/06).

Our Market Climate Graphs show that interest yields on 90-Day T-Notes, 10-Year T-Notes and AAA Corporate Bonds bottomed in June 2003, but have not risen substantially since Dr. Bernanke took office. Inflation, as measured by the CPI, is about where it was in June 2003, but hit a high of 4.7 %/yr. in October 2005 and a low of 1.3 %/yr. in December 2006. At this point, it is much lower, 2.6 %/yr., than it was in February 2006, 3.4 %/yr., when Dr. Bernanke entered office. So it seems to me that neither inflation nor interest rates have moved much since Dr. Bernanke has been in office and that the media is overreacting to Dr. Bernanke's comments. So we should not worry at this time.

We should start worrying about high inflation and interest rates when they stifle the economy and cause earnings to go lower. VectorVest tracks these data in our Investment Climate report, shown below, and it interprets the data with the Truth Chart. (See my essay of 03/28/03.) Right now, the Truth Chart is saying we are in a Case 4, Bull Market Scenario in which earnings, inflation and interest rates are rising. This scenario has been going on for a long time and will continue to do so, provided that Dr. Bernanke is right about the economy. For now, we do not have to worry about high inflation and high interest rates, The Deadly Duo.