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:
If technology stocks led the market higher and the semiconductors lead tech, what can we read into...
Altera (NASDAQ:ALTR) recently raised guidance and the stock was flat.
Diodes (NASDAQ:DIOD) recently raised guidance and the stock was flat.
Microchip (NASDAQ:MCHP) recently raised guidance and the stock is flat.
Texas Instrument (NASDAQ:TXN) substantially raised guidance and the stock is up a dime.
Since Intel (NASDAQ: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.