Wall Street bulls seem to have everything on their side these days: An accommodating Federal Reserve that seems to be determined to create money until unemployment drops to the natural rate -- the magic 6.6 percent; an improving labor market; a yen tsunami that provides another river of liquidity; and a stabilization of the euroland. But there are alarming signs that bullish investors seem to have been ignoring.
Major Equity Indexes
Five-day Performance (%)
3-Month Performance (%)
12-Month Performance (%)
SPDR S&P 500 Trust (SPY)
Powershares QQQ Trust (QQQ)
SPDR Dow Jones Industrial Average (DIA)
In a previous piece, we pointed to three such signs: A slowdown in the world economy; investor complacency, as evidenced by the low volatility index (VXX); and a lack of rotation; cyclical and non-cyclical stocks continue to rally, as money is plentiful. In the last three months, for instance, two highly cyclical stocks, Ford (F) and General Motors (GM) have gained close to 13 percent, while two non-cyclical stocks P&G (PG) and McDonald's (MCD) have been following closely behind.
Here we present two more alarming signs: First, a pick up in inflation, as evidenced by a stronger than expected Producer Price Index (PPI) yesterday, and Consumer Price Index (CPI) today. Inflation numbers have also been stronger than expected in the manufacturing base of the world, China. And though markets seem to disregard these numbers, perhaps, focusing on the "core" PPI and CPI that increased in moderate pace, higher inflation will eventually spoil the Wall Street rally by pushing long-term interest rates higher.
Second, a sluggish consumer sector, as evidenced by two factors: First, a much weaker than expected Consumer Sentiment report out of University of Michigan, 71.8 versus 79 the market expected-reflecting, perhaps, concerns over the rise in payroll taxes and the looming government spending cuts. Underscoring that, a disappointing guidance from a leading cosmetics company, ULTA Salon Cosmetics (ULTA) -- consumer spending counts more than two-thirds of the U.S. GDP, and is the fuel for the world economy, especially for Japan and China that count on the U.S. consumer to sell their merchandise.
The bottom line: Not everything is well in the Wall Street land of free money. Investors should be reminded that hype should never be a substitute for due diligence.