Bears, Bulls, Chickens and Pigs: wOw’s Wall Street Weekly with Liz Peek (Week of 6/1) 

Editor’s Note: Liz Peek is a financial columnist and the author of wOw’s SHEconomics.

Speaking before the House Budget Committee, Fed Chairman Ben Bernanke spooked financial markets Wednesday by warning of rising budget deficits and, by implication, the need for higher taxes. The projection of a $1.8 trillion deficit this year and $1.3 trillion next, along with estimates that budget gaps would total 70% of GDP in 2011, up from 40% before the sky fell last year, caused investors to reap some recent gains. It’s not that the deficit projections were new; it’s just that mentioning them out loud makes them more real. Kind of like Harry Potter discussing Lord Voldemort.

Markets are seesawing day to day as investors weigh economic reports against cautions about slow growth from observers like Bernanke and, on the other hand, numerous “green shoots.” Yesterday was a perfect example, as so-so retail sales reports were overshadowed by the first tick down in unemployment rolls in 20 weeks. There is no question that the decline in manufacturing and in spending is proceeding at a slower pace. But the shape of the upturn remains uncertain.

As wOw readers know, the stock market is all about expectations. While four months ago any slight good news was deemed miraculous, economists have now ratcheted up expectations so that current results are occasionally falling short. This was the case with the newest report from the Institute of Supply Management’s services index, which was up slightly from April, but still below 50, indicating retrenchment.

As I said last week, investors will need to see solid proof that corporate earnings will increase over the next few years before they will chase equity prices much higher. To date, the market rally has been a celebration of bank survival and some restoration of normalcy in credit markets – both essential for economic recovery. But, after surging more than 30%, the stock market needs confirmation that business income is headed higher.

One region seeing real growth is China, where the manufacturing sector has shown advances for three consecutive months. Positive soundings on the Chinese economy have boosted the prices of nearly all commodities, including oil. While an upturn in China is good news, the sharp rise in oil prices will crimp U.S. consumer spending, which has been supported in part by savings on heating oil and gasoline and also by lower mortgage rates. Ominously, mortgage rates climbed above 5% yesterday for the first time in three months.

So two steps forward, one step back. Higher oil prices are, of course, very powerful for energy companies, as well as exporters like Saudi Arabia. This is only one reason that markets in the Middle East have traded higher of late. Egypt’s stock market, for example, has enjoyed a 34% jump this year. Another reason is optimism that relations with the United States are on the upswing, and that President Obama’s speech to the Muslim world will prove a catalyst to peace. I am currently in Cairo, at the invitation of Shafik Gabr, a leading Egyptian businessman who has hosted several media people this week as part of his longstanding crusade to broaden America’s understanding of the Middle East.

After the speech Mr. Gabr hosted a panel discussion before Egypt’s International Economic Forum. Reviews of Obama’s address were enthusiastic. The speakers felt the president set the stage for an important new chapter in relations between the U.S. and the Muslim community with his presentation of a balanced and honest agenda. They were especially pleased that Obama had sounded unusually evenhanded in his consideration of the Israel-Palestine conflict, considered the key issue for Arabs.

Mr. Gabr pressed the audience to consider “next steps,” since the panel agreed that Obama had passed the baton to the Islamic world.  He reminded the audience that Americans have a short attention span, and many serious problems at home. The overall sense is that the door has been opened and that it would be tragic to leave it unattended, only to swing closed once again.