Why the Bull Market Looks Very Fishy
The S&P 500 is up almost 60% since March. The Dow just had its best quarter since ’98.
I smell fish. Why?
Reason #1:
Corporate earnings are missing. P/E ratios are rising far above the corporate earnings that support them. This puts the market 35% overvalued, on a cyclically adjusted P/E basis, says Smithers & Co. And if you look at it in terms of its “q” ratio – a comparison of capitalization to replacement costs – the S&P is even more overvalued. As for emerging markets – “they’re off the charts,” says The Financial Times.
Reason #2:
“Consumer confidence not only surprised to the downside in September but the Conference Board index actually fell to 53.1 from 54.5 with both the ‘present situation’ and the ‘expectations’ component failing to build on the August rebound.
Before we go any further on the details, let’s recall the following:
• Historically, by the time the S&P 500 rebounds 60% from the trough, the confidence index is sitting at 92.0;
• The month recession ends, the index is, on both an average and median basis, sitting at 72.0;
• During an economic expansion, the consumer confidence averages 102.0; in a recession, it averages 72.4.
“Just to put a 53.0 reading into proper perspective. It’s still recessionary… The only categories [that] actually saw their confidence level rise in September were the ones in the lowest income strata – less than $25,000 (their confidence rose two points). After all, they’re the only ones really benefiting from all the government intervention into the economy and the markets.”
Reason #3:
Unemployment is still rising. US companies cut 254,000 more jobs in September. And Reuters reports that jobless rate rose in August in all US cities.
Reason #4:
Manufacturing activity in the Chicago area is still in recession. In the United States as a whole, the latest numbers tell us that GDP fell in the 2nd quarter – but by less than forecast. “Less than forecast” might be good news if stocks were at an epic low. Instead, at current levels, it is much like a doctor who tells the family: “Thank God he got medical attention. He’s dead, but not as dead as he would have been without it.”
Reason #5:
The retail stock market investor is not investing.
The mom and pop investor is no longer counting on the stock market for his retirement. He’s seen what can happen. At the low in March, adjusted for inflation, he was back to where he was 40 years ago. That is, in real terms, he had not made a dime from the stock market (aside from dividends) during his entire adult lifetime.
According to TrimTabs, only $2.5 billion has gone into equity mutual funds in the last six months. Bond funds have attracted 13 times as much money as equity funds, says a Morningstar report. “US retail investors…have watched this rally from the sidelines,” the FT concludes.
So who’s pushing up stock prices? Maybe the hedge funds, maybe institutional investors.
But just as the pros jump like lemmings into equities…they could all scramble out fast. Give them a fright…and this rally is over.
Where might the fright come from? One is the housing sector. If foreclosures begin to increase…and prices fall…even the pros may put two and two together. Likewise, a shocking unemployment number could cause them to connect the dots.
Source: The Daily Reckoning
[tag]money, finance, economy[/tags]