Is the Dow Approaching Bubble Territory?


If the market finishes the day where it is now, it will mark the eighth straight session in which blue-chip stocks have climbed. With roughly an hour left in the trading session, the Dow Jones Industrial Average is clinging to a one-point gain.

Given this run into record territory, many analysts are now beginning to ask the inevitable question: Are stock prices approaching bubble territory? Leaving little to the imagination, a headline on Yahoo! Finance reads, "The Stock Market Is a Debt-Fueled Bubble." According to an economist interviewed therein: "Nothing can accelerate forever. At some point the acceleration stops, and when it does the market breaks."

Not surprisingly, however, there's another side to this story. David Tepper, the founder of hedge fund Appaloosa Management, has purportedly predicted that the S&P 500 could rise an additional 20% or more through the end of this year. Citing a person "familiar with his thinking," Kate Kelly of CNBC said Tepper is confident in the U.S. economy and is expecting gross domestic product to grow by 2.25% for the first three months of the year.

Either way, today's rally is based in large part on the fundamentals.

This morning, the Department of Commerce released data showing that retail sales in the United States jumped last month -- "a sign that consumers are gaining confidence and spending more despite higher taxes and gasoline prices," according to The Wall Street Journal. More specifically, seasonally adjusted sales of retail and food services rose by 1.1% over January and 4.6% on a year-over-year basis. This was more than double the 0.5% advance that economists surveyed by Bloomberg had predicted.

The results were great news for both McDonald's and Wal-Mart , both of which are up in afternoon trading. While these companies have seen their stocks gain this year -- McDonald's by nearly 10% and Wal-Mart by 6.3% -- it hasn't been a smooth ride for either. Among other things, same-store sales at the fast-food giant fell by 1.5% last month, as the prior-year period included an extra day for the leap year. And Wal-Mart has been working to stem the tide leak of emails about severely lagging sales at the nation's largest retailer.

Meanwhile, shares of Bank of America are trading higher in anticipation of tomorrow, when the nation's largest banks learn whether or not they'll be allowed to increase their dividend payouts and/or repurchase more shares. As I discussed, I believe the chances are good -- and it seems the market does, too. The same can be said for JPMorgan Chase , the nation's largest bank by assets.

The question is largely a function of capital -- Tier 1 common capital, that is. Banks with excess capital beyond regulatory minimums will presumably be given the green light to return more of that capital to shareholders, while those not similarly situated will be denied the opportunity.

In B of A's case, at the end of the third quarter of last year, its Tier 1 common capital ratio was 11.4%, or more than twice the regulatory minimum of 5%. By means of comparison, once the stress test's "severely adverse" economic scenario was taken into consideration, B of A's ratio declined to 6.8% -- still 180 basis points higher than necessary. CEO Brian Moynihan has refused to admit what exactly the bank has requested from the Fed in this regard, but most analysts are expecting the bank's now-nominal dividend to double or more. Click here to read more about the likelihood that B of A will increase its dividend.

And JPMorgan fared similarly. While its Tier 1 common capital ratio fell by nearly 40% from 10.4% down to 6.3%, it nevertheless emerged with a 130 basis-point buffer that could be used to pad its shareholders' pockets. A report last week from the Financial Times said the lending giant will seek $7.5 billion in buybacks, and the consensus estimate is that it's looking to increase its dividend by $0.06 per share. To read more about this, click here.

If you haven't picked up on it already, this is a big week for banks. With this in mind, click here to access our comprehensive report on B of A and here for our report on JPMorgan.

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John Maxfield owns shares of Bank of America. The Motley Fool recommends McDonald's. The Motley Fool owns shares of Bank of America, JPMorgan Chase & Co., and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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