Will Cyclical Stocks Be the Next to Soar?

Last week's market action was simply stunning, as wave after wave of better-than-anticipated corporate earnings lifted the Dow by over 300 points in the three days after Monday's scary 140-point drop. At 12,506, the Dow is now at its highest level since June 2008, while the tech-heavy Nasdaq did even better last week, rising 2% versus 1.3% for the Dow and S&P 500. The Nasdaq was led by earnings reports from Intel (NASDAQ: INTC ), Apple (NASDAQ: AAPL ), F-5 Networks (NASDAQ: FFIV ) and Qualcomm (NASDAQ: QCOM ), among others. Are cyclical stocks next to rise?

2 Best Investments in a Weak-Dollar Scenario

The two best investments in a weak U.S. dollar environment are commodities - since they are universally priced in U.S. dollars - and multinational stocks, which reap windfall profits from being paid or priced in appreciating foreign currencies.

Let's take stocks first. Last quarter's stellar corporate earnings were fueled by stronger-than-expected sales, upbeat company guidance and a weak U.S. dollar, which boosts the earnings of many multinational companies. Since the average technology company is multinational in scope, they benefit from a weak dollar. Last week, we saw better-than-expected earnings from semiconductors like Intel, cloud computing like VMware (NYSE: VWM ) and networking firms like F5 Networks.

Interestingly, the analyst community was expecting Apple's operating margins to decline in the first quarter, but after Apple posted better-than-expected sales and earnings, the stock rose 7.1%.

Last week's rally was mostly about tech stocks, but this week we may see a rise in cyclical stocks - such as BorgWarner Inc. (NYSE: BWA ), Caterpillar (NYSE: CAT ) and Cummins Inc. (NYSE: CM ) are all expected to post strong earnings. Of the 137 S&P 500 companies that have reported first-quarter earnings so far, 75% have beaten forecasts, while just 14% have missed their projections. In addition, 69% beat their revenue forecasts, according to Thomson Reuters.

Among Dow stocks, General Electric (NYSE: GM ) earned 31 cents per diluted share last quarter, almost double its 17-cent earnings of a year earlier. AT&T (NYSE: T ) increased first-quarter profits 39%, while competitor Verizon Communications (NYSE: VZ ) more than tripled its quarterly profits, rising from 16 cents in last year's first quarter to 51 cents this year.

The other oasis in a weak U.S. dollar environment is commodities, so it is not surprising that gold is now over $1,500 per ounce and crude oil prices are over $112 per barrel, despite repeated reports of a glut of crude oil. So far in April, crude oil prices are up about 5% after rising 10% in March. Last week, I was in Houston, where I was told that the massive crude oil storage facility in Cushing, Okla., is essentially full, and until a new pipeline is completed, it will be hard to get Cushing's oil to refineries.

On Wednesday, the Energy Information Administration (EIA) reported that crude oil inventories fell by 2.3 million barrels in the latest week - a big surprise, since analysts were expecting crude oil inventories to rise by 1.6 million barrels. The EIA also reported that gasoline stockpiles fell by 1.6 million barrels. If inventories continue to tighten, I expect oil prices to remain firm throughout the summer driving season.

U.S. Government Earns 'Negative' Outlook From S&P

The U.S. dollar is now approaching its lowest level in 30 months. Last Monday, the dollar got an extra "push" off the cliff when Standard & Poor's issued a "negative" outlook on the United States' AAA credit rating and cited a "material risk" that our political leaders would fail to deal with our rising annual budget deficit and escalating long-term debt burden.

S&P effectively gave the government a two-year warning to get its fiscal house in order and enact meaningful change or else suffer a credit rating downgrade. Typically, after similar warnings, the S&P issues downgrades 33% of the time within two years.

Nikola Swann, an S&P credit analyst said, "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."

Adding insult to the United States, S&P said on Thursday that it has upgraded Estonia's outlook to "positive" and said that, as a new euro zone member, Estonia's transfer and convertibility assessment remains at AAA. So the United States has a new "negative" outlook, while tiny Estonia has a new "positive" outlook. Ouch!

I mentioned on CNBC's "Fast Money" on Wednesday that the euro just posted its largest daily gain relative to the U.S. dollar since January, in spite of the fact that, within the euro zone, chaos reigns. Yields on 2-year to 10-year notes and bonds in Greece, Ireland and Portugal all rose to record levels last week. With Greece's long-term bonds now yielding about 15%, a restructuring of Greek debt seems inevitable.

Naturally, the Administration is not too happy with the S&P's negative outlook for U.S. Treasury debt. President Obama quickly dispatched Treasury Secretary Tim Geithner to appear on CNBC and elsewhere in an attempt to do "damage control." On the air, Geithner said that there was "no risk" that the United States' AAA credit rating would be downgraded, but that is an indefensible statement. By contrast, the co-chairman of President Obama's own deficit commission, former Clinton chief of staff Erskine Bowles, told the Financial Times that S&P had been "absolutely right" in changing its outlook for the United States, saying that "if anything, they understated the extent of the problem," while adding that "what we need now is action."

Stocks Ignore Negative Economic Data

Last week's economic indicators were mostly negative, but the stock market doesn't seem to be paying too much attention to economic data during the peak weeks of earnings reporting season. That's why the market continued rising after we learned that the number of new jobless claims exceeded 400,000 for the second week in a row, and the Philadelphia Fed index reached a five-month low.

In other downbeat news, March housing starts came in at just 549,000, a disappointing 13.4% below the already depressed levels of a year earlier, in March 2010. The number of existing homes sold in March 2011 told the same sad story - coming in at 11% below March 2010, according to the National Association of Realtors.

This week, we'll have the first indication of first-quarter GDP growth on Thursday, as well as the March durable goods orders on Wednesday, and a variety of other consumer confidence and sentiment indexes. In the meantime, I expect the stock market to continue to "melt up" on persistent order imbalances.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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