Is This Rally Just Hope?

Stocks soared higher today as investors get hopeful that Europe may be close to a solution for Greek debt.

I’m not sure that hope is a good enough reason to push the Dow Industrials higher by 600 points in 3 days. Hope is usually not a very good investment plan. Maybe that’s why the rally faded down the stretch.

And besides, any EU decision on Greece is over a month away. And we also know that Germany will have to vote on increasing its contribution to the bailout fund, ESFS.

I think we all know how that vote would go in the U.S.

For Germany, there are definite advantages to the EU. For one, Germany gets a weak currency, the euro, instead of Deutsche Marks. Germany’s export economy wouldn’t be nearly as robust with a stronger currency, like the Mark.

We should not overlook stock valuations as contributing to the upside. At 11x forward earnings estimates, stocks are trading well below their average historical valuation of 14.

Of course, we’ve discussed the possibility that earnings estimates are too high, and don’t take into account the economic weakness we’ve seen since the Congressional debt deal was passed.

Overall, estimates fro the S&P 500 have been lowered by around 5%. But bank earnings projections have been lowered a lot more than that. And surprisingly, Goldman Sachs (NYSE:GS) is getting the biggest downside revisions.

The consensus estimate for Goldman’s 3Q is $1.45 a share, down from $3.64. But there are lower estimates out there, including one for a $0.35 a share loss, courtesy of Barclay’s.

While banks have unique earnings problems due to new rules that restrict their trading, their exposure to debt and the weak economy, they also highlight the difficult earnings environment. And we’re only a couple weeks away from Q3 earnings season.

Stock market volatility is all over the place lately. The VIX, the measure of volatility on the S&P 500, has more than doubled over the last two months. Volatility rises as stocks sell-off. And there are very easy, reliable ways to profit from volatility. Andy Crowder, head of the latest Wyatt Investment Research advisory service Options Advantage, has perfected a system for profiting from volatility.

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Economist Nouriel Roubini thinks the U.S. is already in recession, and the global economy will be following soon.

Whether he’s right or not, the U.S. economy feels like it’s in recession. Pessimism is high and unemployment is not improving.

At Wyatt Investment Research, we’ve been forecasting weak growth for several years ever since the financial crisis. But the inability of Congress and the administration to enact reasonable fiscal policy is making a bad situation worse.

Careful what you wish for, Research in Motion (Nasdaq:RIMM) investors. Rumor has it the Carl Icahn might buy in to the troubled Blackberry maker. While I’m sure it’s a relief to the RIMM crowd that someone may be interested in owning the stock, Icahn may not be the one you want.

Icahn’s playbook is well-known: he’ll buy shares, demand a seat on the board, and then start pushing for a sale of the company. If it works, great, the stock goes up and investors make some money. But what if no one wants to buy RIMM out?

That could send the price even lower than it is now. And with all the new smartphones on the market, just how important is the Blackberry anymore? One thing’s for sure, Icahn doesn’t care about the Blackberry or its success. He just wants a buyout.

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