“This one step – choosing a goal and sticking to it – changes everything.”

– Ishmael Scott Reed

I recall exactly where I was when the news broke that JFK was shot. The same for the instant the first plane hit the World Trade Center. And, now for when the news hit that Bin Laden has been killed. Perhaps, Cesare Pavese was correct when he said:

Last week there were more NEGATIVE than POSITIVE developments, but the stock market “climbed this wall of worry” to post a solid increase.

Below is a succinct list of last week’s events:

Positives:
1) Bernanke in his press conference implicitly says the end of QE2 in no way means tightening soon to follow
2) Univ of Michigan and Conference Board confidence #’s up a touch in April
3) New Home Sales a punk 300k but higher than expected
4) Pending Home Sales rise 5.1%
5) Milwaukee joins NY mfr’g survey as exceeding forecasts
6) China HSBC pmi holds steady

Negatives:
1) Chicago, Dallas and Richmond mfr’g surveys below estimates
2) Initial Claims disappoint for 3rd week, 4 week avg back above 400k
3) Durable goods orders ex transports bit below est (but prior month revised up)
4) MBA said purchases fell 13.6% to 2 month low
5) Inflation expectations in confidence data remain elevated
6) Gasoline prices up another $.05 to within $.20 of record high
7) Euro zone CPI up to 2.8%
9) Portugal, Ireland, and Greece yields continue to spike

These are jubilant days for the U.S. stock market, which makes the decision last week by Superman—the cape-wearing superhero, not Fed chairman Ben Bernanke—to renounce his U.S. citizenship all the more perplexing. Is the Man of Steel worried about the dollar’s waning purchasing power, or feeling outshone by Bernanke’s herculean effort in lifting risky assets? Or has he been keeping his 401(k) plan in cash, instead of stocks?

The market was awash in records last week after Bernanke, our money-printer in-chief, signaled an end to the central bank’s Treasury-buying this June but promised to hold interest rates low well beyond that. As the dollar fell for eight straight days to a three-year low, the Russell 2000 index of small stocks joined mid-cap stocks at an all-time high, as did the Dow Jones Transportation Average. Large stocks climbed to three-year highs, while the Nasdaq Composite Index surpassed its 2007 credit-bubble peak to reach its highest close since December 2000.

By keeping their staffs lean and working everyone harder, U.S. companies kept their margins plump and managed to grow their profits much faster than the 1.8% pace by which the U.S. economy expanded in the first quarter. Ford (ticker: F) earned its biggest first-quarter take in 13 years, and profits jumped 36% at Chevron (CVX) and 69% at Exxon Mobil (XOM). Wall Street analysts, who hushed their bullish chorus when oil prices climbed and after the earthquake hit Japan, have resumed raising profit estimates. Over the past four weeks, they’ve raised their forecasts on 702 stocks within the Standard & Poor’s 1500 and cut just 473, says Bespoke Investment Group. That produces a net upgrade of 229, or 15.3% of the index—the most bullish in more than 10 weeks.

Economists seem just as hopeful. While many recently cut their estimates for first-quarter growth to 1.5% to 2%, most still expect U.S. economic growth to re-accelerate toward 3% or so in the second half. Main Street seems a lot less sure, with investors pulling roughly $6 billion from domestic mutual funds over the past two months (Source: Barrons Online).

For the second consecutive week, US Stocks and Foreign stocks and Bonds all increased. During the last 12 months, U.S. STOCKS outperformed BONDS.

Returns through 4-30-2011	1-week	Y-T-D	1-Year	3-Years	5-Years	10-Years
Bonds- BarCap  Aggregate Index	.6	1.7	5.4	5.8	6.3	5.7
US Stocks-Standard & Poor’s 500	2.0	8.8	12.9	-3.4	-1.7	1.3
Foreign Stocks- MS EAFE Developed Countries	2.3	8.4	15.9	– 5.6	-1.2	2.7

Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.

My best reckoning in January was that 2011 would be a catch-up year and that U.S. equities should perform well. This proved to be the case in the first quarter. But, investors need to analyze what’s happening and challenge their expectations every quarter. Even though things seem to be working just fine, we must constantly reassess and ask, like former New York Mayor Koch, “How am I doing?”

So, how are we doing? Has anything changed over the past quarter? Yes, actually the “overweight everything” investment process is officially over. That easy trade to overweight all risky assets ran its course. Look at the first-quarter performance of the S&P 500 and you’ll see in late February when the market started to slip, well before the sell-off that followed Japan’s earthquake on March 11.

The winding down of QE2 is behind this shift. QE2 brought stability to the markets and made it possible for investors to overweight everything. When Fed Chairman Ben Bernanke began talking about a second round of quantitative easing measures last September, he essentially gave investors a free “floor” underneath the stock market. Promising to buy $600 billion in Treasuries was his way of reassuring investors not to worry about the negative economic data we saw last August or the possibility of a double-dip recession. He made sure the bond market would not riot and encouraged investors to trade their safe-haven fixed income assets for riskier assets.

Our central bank’s campaign of buying Treasuries to hold down interest rates will expire in June. But to stave off any synchronized rush for the exits, and to ease any withdrawal in the aftermath, count on Ben to drag out the end of “QE2” over at least three acts.

Act One could come as early as Wednesday, when Bernanke will end a policy meeting with an unprecedented press conference and get coy with reporters. To smooth the transition, he’s expected to detail plans to reinvest maturing securities and interest back into the Treasury and mortgage markets, which will help keep the Fed’s balance sheet big and indulgent for a while longer.

Next, if the economy continues to thrive after it’s taken off life support, the Fed might begin to let maturing securities roll off its books. “This passive contraction in the Fed’s balance sheet will likely be a prelude to explicit tightening,” notes one well known economist and chief market strategist. Only then will the Fed begin to unload securities or raise short-term interest rates—a final act that could be more than a year away. Source, in part, Barrons and Reuters.

Standard & Poor’s Ratings Services Inc. cut its outlook on the United States of America to negative, increasing the likelihood of a potential downgrade from its triple-A rating, as the path from large budget deficits and rising government debt remains unclear. “More than two years after the beginning of the recent crisis, U.S. policy makers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures,” S&P credit analyst Nikola G. Swann said. He said the rating agency puts the chance of a U.S. downgrade within two years at least one-in-three.

S&P said “We believe there is a significant risk that Congressional negotiations could result in no agreement on a medium-term fiscal strategy until after the fall 2012 Congressional and Presidential elections. If so, the first budget proposal that could include related measures would be Budget 2014 (for the fiscal year beginning Oct. 1, 2013), and we believe a delay beyond that time is possible,” S&P added. Source: S&P.

S&P’s time line is very much in line with my past comments projecting a financial crisis that may occur in 2015 (plus or minus two years).

“Plans are only good intentions unless they immediately degenerate into hard work.”

— Peter Drucker

This weekend, my wife Jo Anne and I visited Washington DC to visit my daughter Jennifer. We attended Easter church services at the National Cathedral. If you have the opportunity to attend a church service or visit, I strongly recommend it. The National Cathedral is a true treasure and the 6th largest cathedral in the world. My most vivid memory, other than the immensity of the building: the procession at the beginning. It lasted at least 7 minutes comprising of the symbols, relics, and local heads of two different churches, two choirs, banners and two groups of assistants.

There was something else I noted in my trip to DC. The trees there are FULL and all flowering bushes are in full bloom. I returned home to the Lehigh Valley to find the trees here still mostly barren and harsh looking. We are at least 3 weeks behind at this point.

Relishing the present instead of fretting about the future, the U.S. stock market snapped out of its recent indifference, snagged its first gain in three weeks and climbed toward its highest level of 2011.

Living in the now is easy when General Electric (GE) and Intel (INTC) are reporting surging profits. Apple’s (AAPL) income jumped 95% as it overtook Nokia (NOK) as the largest handset provider by revenue, while companies ranging from Qualcomm (QCOM) to United Technologies (UTX) told investors to expect even better earnings this year.

Of the 137 companies in the Standard & Poor’s 500 that have reported first-quarter results, three out of four have beaten profit forecasts—better than the 17-year average near 62%—while just 14% have missed their marks, says Thomson Reuters. Profits are coming in 8% higher than analysts expected—well above the longer-term average outperformance of 2%, though less than the 9% margin by which they were trumping targets the past four quarters. An impressive 69% also beat revenue expectations, with sales coming in 2% better than forecast.

So, the market barely flinched when S&P cut its outlook on U.S. debt from “stable” to “negative,” which paves the way for a future downgrade. Is it because we now see rating agencies as toothless and belated staters of the obvious? Traders expect Washington to take a token—though showy—stab at slowing the rise in our national debt, but not making a real dent for years. That would still favor equities versus government debt. Says Jan Loeys, JPMorgan’s global head of asset allocation: “Governments’ muddle-through approach is a negative for their bonds, but is not bad enough to destroy economies and equity markets.”

So where does that leave us? Money managers love proclaiming that they’re long-term investors and not market-timers, but lately that’s a lie. Anyone sitting on stock-market gains and angling for more are, like Cinderella, dancing with their eyes on the clock. We want to wring the most out of this party, but leave before the bill for this revelry comes due. So we scour the credit markets for signs of a loss of confidence and economic-momentum gauges for the first whiff of a turn, while we watch commodity costs climb toward the day when the crowds might cringe.

With the stock market closed for Good Friday, the Dow Jones Industrial Average ended last week up 164, or 1.3%, to 12,506, its highest finish since June 2008. The S&P 500 added 18, or 1.3%, to 1337, the highest since Feb. 18. The Nasdaq Composite Index jumped 56, or 2%, to 2820, while the Russell 2000 added 11 points, or 1.3%, to 846. Crude oil also rebounded, while gold rose to a new record at $1,503 an ounce.

A year ago, the stock market began a 16% correction, as our central bank wound down its quantitative-easing campaign, dubbed QE1, and as Europe’s debt crisis flared and business confidence plunged. The consensus now believes our economy is on a stronger footing and thus better able to withstand the end of QE2 this June. It helps that employers are hiring anew, and the rush to pay down debt has started to slow, which will allow consumers to spend more of what they earn. But we’re still keeping our eyes peeled for the first sign of trouble, just in case.

Today, cash in money-market mutual funds stands at 17.4% of what Ned Davis Research reckons is the market value of all common stocks, down from 47% in March 2009. “That still leaves a lot of savings the Fed perhaps wants to force into the stock market,” Davis writes, “but I think it’s fair to say the really anxious buyers of stock have already acted.” While Main Street seems vexed by $4.00 gasoline and creeping food inflation, the latest Conference Board survey shows that CEO confidence at the highest in seven years. At these levels, it’s hard to argue that corporate confidence isn’t increasingly priced into the market. So if CEO confidence starts to flag, watch out. Until then, Davis argues, the overall evidence “continues to lean bullish”—no doubt for now (Source: Barrons Online).