Anyone following the U.S. and the world economy closely cannot help but be concerned about Main Street, where the news is getting worse instead of better. Most notably a slowing U.S. consumer sector, capital spending sector, a European economy in recession, and a pick up in inflation.
The slow-down in the U.S. consumer sector is evidenced by much weaker than expected Chicago PMI released today, 52.4 versus an expectation of 56.5; a weaker than expected Consumer Confidence released on Tuesday, 59.7 versus an expectation of 66.9; and a weaker than expected Consumer Sentiment report out of University of Michigan last week, 71.8 versus the figure 79, which the market expected -- reflecting, perhaps, concerns over the rise in payroll taxes and looming government spending cuts.
Second, disappointing guidance from a leading cosmetics company, ULTA Salon Cosmetics (NASDAQ: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, which count on the U.S. consumer to sell their merchandise.
Disappointing top reports from bellwether companies confirm the slow-down in the capital-spending sector.
Oracle's (NYSE:ORCL) revenues, for instance, dropped by 1.0 percent (yoy) and 1.6 percent sequentially. Of particular concern is a decline in new software licenses (-1.5%), and in hardware sales (-16% yoy and 6.1% sequentially). The decline was extended throughout most of the world regions, consistent with reports from other U.S. multinationals. Federal Express (NYSE:FDX) and Caterpillar (NYSE:CAT) reported big sales, misses too, as was Red Hat (NYSE:RHT)
The pick up in inflation is evidenced by a stronger than expected Producer Price Index (PPI) yesterday, and Consumer Price Index ((NYSEARCA: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, focusing on the "core" PPI and CPI that increased in moderate pace, higher inflation will likely spoil the Wall Street rally by pushing long-term interest rates higher eventually.
However, Wall Street doesn't seem to take notice, as major averages continued to move higher in the last five days. Why this disconnect?
Major Equity Indexes
Five-day Performance (%)
3-Month Performance (%)
12-Month Performance (%)
SPDR S&P 500 Trust (NYSEARCA:SPY)
Powershares QQQ Trust (NASDAQ:QQQ)
SPDR Dow Jones Industrial Average (NYSEARCA:DIA)
Nobody can say for sure, as for each trade there are parties that take opposite sides. Here are four plausible explanations:
First, end of the quarter window-dressing. That's evidenced from the market action today, whereby top winners like Netflix (NASDAQ:NFLX) seem to be on everyone's buying list, while losers like Apple (NASDAQ:AAPL) attract little attention.
Second, the continuation of record low interest rates, which makes stocks the only game in town for the yen, the dollar, and the euro tsunamis.
Third, the resurfacing of European sovereign debt concerns, which makes the US the safe heaven, again, for foreign money.
Fourth, investor complacency, as evidenced by the low volatility index (VXX) - investors seem to believe that they do not have to buy any insurance, as the Fed has taken care of that.
But isn't this disconnect a bullish sign for the market? Don't bull markets climb a "wall of worry?"
Yes, in a normal market economy where interest rates are set by market forces. But not in the current economy where interest rates are set by the Fed.
That's why I would use every market spike as an opportunity to take profits or even establish short positions for "hot" stocks.