Why the Bulls Are Skating on Thin Ice

Thursday, we had more "good news" on the economic front. Another 550,000+ Americans filed initial jobless claims -- the 35th straight week above the half-a-million mark.

As usual, data that should be seen as a cause for concern seemed to be the catalyst for renewed buying of equities, and the S&P 500 index climbed to its highest level in six months -- up 54 percent since March 9th.

For me, the current disconnect between Wall Street and Main Street brings back memories of the fall of 2007, when share prices were racing to new highs as credit markets were unraveling and the economy was imploding.

That is not the only reason to think there is something wrong with this picture, of course. The points raised in the following commentaries -- from Minyanville and The Pragmatic Capitalist, both of which are regular stopping points of mine -- also suggest the bulls are skating on very thin ice:

"Answers I Really Wanna Know: Is a Tech Wreck on the Horizon?" (Minyanville):

If technology stocks led the market higher and the semiconductors lead tech, what can we read into...

Altera (ALTR) recently raised guidance and the stock was flat.

Diodes (DIOD) recently raised guidance and the stock was flat.

Microchip (MCHP) recently raised guidance and the stock is flat.

Texas Instrument (TXN) substantially raised guidance and the stock is up a dime.

Since Intel (INTC) raised guidance on August 28th, the mother chip is .40 higher (and well below the initial surge).

85% of portfolio managers are bullish on tech in a recent survey.

An ISI Group survey indicates 88% of respondents believe we’re in a bull market.

"5 Reasons the Rally Is Built on Quicksand" (The Pragmatic Capitalist):

From the desk of David Rosenberg this morning [note: TPC's comments are in italics]:

1. This remains a hope-based rally (with strong technicals). I say that because during this six-month 50%+ rally in the S&P 500, the U.S. economy has shed 2.4 million jobs, which is almost as many as we lost during the entire 2001-02 tech wreck — in just six months. The market’s ability to shrug off the loss of 2.4 million jobs is either a sign that it is treating this as old news or sees the cost-cutting as good news for profits. Either way, what we are seeing transpire is without precedent — the magnitude of the employment slide versus the magnitude of the market advance. Truly fascinating stuff.

It’s remarkable to add that jobless claims were 550K this morning – a staggering number this deep into a recession. But fear not – it was “better than expected”.

2. Companies have not really been beating their earnings estimates — only the very final estimates heading into the reporting quarter. For example, the consensus view for 3Q EPS at the start of the year was $21.00, last we saw the estimates were down to just over $14.00. But there is a deeply rooted belief that earnings are coming in better than expected. This is a psychology that is difficult to break. It is completely unknown (for some reason) that corporate revenues are running at a -25% YoY rate, which compares to the -10% we saw at the worst part of the 2001-02 bear market and the -3% trend at the most negative point in 1991.

It’s also interesting to note the very real weakness in corporate revenues. The bottom line can be manipulated, but revenues never lie….

3. Valuation is a poor timing device but even on “normalized” trailing 10-year earnings, the S&P 500 is trading near 18x, which is now above the historical average of 16x.

Comments

[untrusting ...:]

Interesting. Stock markets rising everywhere in the world on smoke. Just saw a BBC report on Russia. As per report, office rents have dropped in half and vacancies still continue to rise. Banks are being forced to takeover more and more vacant commercial property. Any remaining tennants are dumping old rentals and moving into higher quality commercial properties at one-half their previous rentals and for better space. At some point, even the smoke and mirrors can't hide the worldwide devastation and stock markets have to come crashing down again.

Sep 11 01:02 AM

[jeremiah74:]

i think we are at the stage where momentum, stop losses..etc are combining to drive the equity markets higher. the disconnect is all clear to the smart money, but the even smarter money is managing to squeeze everyobdy else. not sure it can last for very long, but the problem is that the moves now become vertical in many cases. yet, im still short equity indices.. i cant rationalize being long on momentum, something that i cant really 'model'
good luck

Sep 11 03:15 AM

[johngonole:]

I've been quite perplexed myself at the strong stock market surge since March. I've been so perplexed that I've even in my head entertained the notion of a coordinated effort between media, govt, etc.. to convice everyone that things are improving. Could the stock markets rise be engineered by those who need things to improve? Is the FED buying stocks too. Kind of like a way of convincing people to spend again.

I can't help but notice how when republicans are in power we have talk through out the media of just how awful things are (even when unemployment was below the natural rate of employment and people were crashing over the border for all the under the table jobs) yet here we are with the worst numbers I can remember and the media puts a positive spin on everything. All the sudden there is a silver lining in all dark clouds. Where as before any small spot of clouds in the sky on a bright sunny day was repeated over and over.

Of course media bias is one thing we've all known about for a long time. But the stock market rise can't just be from the media's positive spin. I'm just wondering if the govt and/or Fed having been spending their capital buying stocks.

Sep 11 03:35 AM

[Michael Clark:]

The Fed is fighting an audit. Why? For the reason they are afraid we will see that they have been manipulating all the markets -- and probably giving away a lot of American taxpayers' money to foreign banks and bankers -- you know, 'friends of the family'.

No question this rally is fixed.

I think, when the truth comes out, we'll see the fed 'attached some strings' to the bank bailout money, limiting or proscribing short-selling by recipient banks and financial institutions. Why WOULD the market go down if big money can't short-sell and the Fed cushions any selling with a fresh influx on newly-printed money?


On Sep 11 03:35 AM johngonole wrote:

> I've been quite perplexed myself at the strong stock market surge
> since March. I've been so perplexed that I've even in my head entertained
> the notion of a coordinated effort between media, govt, etc.. to
> convice everyone that things are improving. Could the stock markets
> rise be engineered by those who need things to improve? Is the FED
> buying stocks too. Kind of like a way of convincing people to spend
> again.
>
> I can't help but notice how when republicans are in power we have
> talk through out the media of just how awful things are (even when
> unemployment was below the natural rate of employment and people
> were crashing over the border for all the under the table jobs) yet
> here we are with the worst numbers I can remember and the media puts
> a positive spin on everything. All the sudden there is a silver
> lining in all dark clouds. Where as before any small spot of clouds
> in the sky on a bright sunny day was repeated over and over.
>
> Of course media bias is one thing we've all known about for a long
> time. But the stock market rise can't just be from the media's positive
> spin. I'm just wondering if the govt and/or Fed having been spending
> their capital buying stocks.

Sep 11 08:30 AM

[DVW:]

Don't forget that in the tech boom years, stocks of worthless companies flew thru the roof. Why not now? To expect the market to be rational and properly valued is, in my opinion, an error. The market does what it does, prices are bid up or down beyond the real valuations all the time. Afterall, that's how you make money trading.

If the logic bothers you, then stay out. If you have a strong stomach buy the rally and keep your finger on the trigger, or wait for a true shortable moment validated by price, not assumptions. Shorting this market on the way up based on valuation has obviously been the wrong thing to do so far.

Tons of liquidity are being tossed into the world economy. Some is going to stocks so it's only natural that they'd rise. That's ALL that's happening now. No smoke, no mirrors, money always finds a home. When the liquidity stops, or is destroyed, the markets will fall.

Central banks are afraid to raise rates right now because they know it would crash the markets. They're right. It's a game of chicken. Let's see who blinks first.

Sep 11 09:00 AM

[JLarkin:]

Michael, I am confused about the initial claims numbers. You wrote as if half a million jobs are lost every week: "Another 550,000+ Americans filed initial jobless claims -- the 35th straight week above the half-a-million mark."

If we lost 2.4 million jobs in six months, then we lost 400,000 jobs per month, or about 100,000 jobs per week.

I thought 550,000 was an annual number based on the most recent week, i.e. new weekly claims x 52. Can you clear this up for me?

Sep 11 02:17 PM