Seeking Alpha
Long/short equity, registered investment advisor, portfolio strategy
Profile| Send Message|
( followers)  

Good morning. With stocks having gone nowhere for the past few sessions (last 6 S&P closes: 1520, 1521, 1520, 1519, 1517, 1518) it is fairly clear that the "oomph" behind the current joyride to the upside is waning. The bears tell us that this is a clear-cut and obvious warning that a correction is about to begin. However, anyone who has been in this business a while knows that these types of moves can, and often do, last longer than anyone can imagine possible (hence the famous quote from Mr. Keynes, "Markets can remain irrational longer than you can remain solvent"). And this is especially true when a shift in the market environment is taking place.

Before you start gasping, rolling your eyes, and/or throwing things at your computer screen, let me say that I am not certain that the secular bear market environment, which has been intact since March of 2000, is ending. And I am not terribly sure that the violent, HFT-driven, news-induced market that has dominated the action for the past three years is over either. I am simply saying that changes in market environments often (a) occur when no one is looking and (b) happen via an extended move that most investors don't believe in.

As I've opined a time or two over that past few years, most investors miss changes in market environments because they are busy "fighting the last war." The bottom line is this. Having been burned first by the tech bubble, then the credit crisis, and more recently by the never-ending sovereign debt crisis in Europe, most investors are unable to recall a time when stocks advanced for an extended period WITHOUT a big decline. And given that the corrections seen in the summers of 2010, 2011, and 2012 were not pleasant; my guess is that the vast majority of investors are currently on the lookout for the next big debacle. (In my humble opinion, this is also the reason that the hedge fund community has underperformed for the last three years.)

If you spend any time perusing the opinions, prognostications, and/or views of market analysts, I think you will agree that the "belief" in the current rally amongst traders is hardly robust. In short, most traders - and just about all of the self-proclaimed "fast money" types - feel that the current move has gone too far too fast, is based only on liquidity being provided by central banks, has disconnected from economic reality, and as such, is doomed to fail.

I will readily admit that 2013 has been a one-way market and that the bears have been largely shut out of the game since mid-November. Therefore, I "get" that we are due for some sort of a pullback on a short-term basis. And yes, I also understand that another debacle in Washington or Europe could easily put the bears back in business in a jiffy.

However, there is one big-picture issue that has been bothering me lately. You see, while the bears appear to have an awful lot of material to work with these days, earnings, which are viewed as the life blood of stock prices, are at record highs. Take a look at the data below and you'll likely see what I mean:

S&P 500 Earnings History
Year S&P 500
12-Month
Reported Earnings
1997 $39.72
1998 $37.70
1999 $48.17
2000 $50.00
2001 $24.69
2002 $27.59
2003 $48.74
2004 $58.55
2005 $69.93
2006 $81.51
2007 $66.18
2008 $14.88
2009 $50.97
2010 $77.35
2011 $86.95
2012 $87.96 (E)
2013 $100.71 (E)
(E) = Estimate

To be sure, the analysis of earnings is a very complex subject. The rate of change is important, as is the issue of expectations-versus-reality, and of course, the multiple investors are willing to pay for $1 of earnings in any given environment.

But here is my point. Look at the 12-month earnings in 2000. When the secular bear market began, the 12-month trailing earnings for the S&P 500 were at $50. While times were VERY different back then, the S&P 500 peaked in March of 2000 at around 1527.

Now fast-forward 13 years. The 12-month trailing earnings on the S&P 500 are somewhere around $88. This means that 12-month earnings are currently 76% higher than they were in 2000. And the earnings for 2013 are projected to be over $100, which if my math is correct, is more than 100% higher than the 2000 level. And yet, the S&P 500 closed Friday at 1519.79.

Yes, the market in 2000 was at an extreme in terms of investors being optimistic about the future. And at the beginning of 2009, the market found itself at an extreme in terms of pessimism toward the future. But the bottom line is that the earnings of the S&P 500 are double what they were in 2000 and 2.5 times higher than they were in 1997.

My point this morning is exceptionally simple (if not overly simplistic in nature). For anyone believing that the market simply cannot go any higher, I suggest you study some history. Yes, stocks are due for a pullback. Nobody questions that from a near-term perspective. But the key from a big-picture perspective is to understand that times change and markets change. And with earnings at record highs, it would seem logical that stock prices might find their way to record highs at some point as well.

I am NOT saying that stocks should continue the current joyride to the upside at the rate that occurred in January. However, I am saying that those in a state of disbelief may need to adjust their perspective a bit at some point - assuming we don't encounter another crisis, of course!

Turning to this morning ... Although Asian markets were lower overnight, better than expected ZEW readings on economic sentiment in the Eurozone and Germany have caused markets across the pond as well as our futures market to perk up.

Pre-Game Indicators
Here are the Pre-Market indicators we review each morning before the opening bell ...
Major Foreign Markets:
- Shanghai: -1.59%
- Hong Kong: -1.02%
- Japan: -0.31%
- France: +1.31%
- Germany: +1.05%
- Italy: +0.91%
- Spain: +0.74%
- London: +0.49%
Crude Oil Futures: -$0.18 to $95.68
Gold: +$3.50 to $1613.00
Dollar: higher against the yen, euro, and pound
10-Year Bond Yield: Currently trading at 2.001%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +2.61
- Dow Jones Industrial Average: +8
- NASDAQ Composite: +5.53
Thought For The Day ...

Do not let the shadows of your past darken the doorstep of your future. Forgive and forget. -Author Unkown

Positions in stocks mentioned: none
Source: Daily State Of The Markets: State Of Disbelief