by FS Staff
Following last week's announcement by the European Central Bank (ECB), the stock market has now broken out above its mostly sideways movement since the beginning of the year to new all-time highs. Over the course of this bull market, each time the market has begun to show weakness, many have expected a sell-off to occur only to then find the opposite take place: stocks roar back to life and continue to soar higher.
In a recent interview with Financial Sense Newshour, Gary Dorsch of Global Money Trends says that over the last several years, investors have underestimated the power of two major forces driving stocks higher-quantitative easing by central banks and companies buying back their stock-and that these two forces may propel the market even higher.
Here are some excerpts from his recent interview (click here for audio) that aired to the public on Saturday:
FSN: Gary, the market has now broken out again to all-time highs and continues to push upwards despite all the bearish projections we've heard over the last several years. What's driving the market higher in your opinion?
Dorsch: I think the two major factors that are supporting this market in a nutshell are the Federal Reserve's quantitative easing money injection scheme [and]…the shrinking stock market, which is the enormous amount of stock buybacks being conducted by the S&P 500 companies. Last year the S&P 500 companies bought $475 billion of their own stock and in the first quarter purchased another $160 billion. Close to 80% of all the profits of the S&P 500 companies are being recycled into the hands of shareholders through buybacks and dividends, and this is the most powerful force pushing the market higher. You wonder why the market doesn't have any pullbacks- it's because the major corporations are buying on all dips and they've got plenty of firepower left. So, between the buybacks that are still projected between now and the end of the year, which could be about $350 billion plus injections by the Fed of $180 billion, you've got about half a trillion dollars yet to come into this market between now and the end of the year.
FSN: So, with the Fed's QE and stock buybacks driving the market higher, what targets are you looking for on the major averages?
Dorsch: I would project that it's very possible we could see the Dow hit 18,000, which would be about another 1100 points from here, and for the S&P 500 to hit 2200, in what could be the final euphoria stage of the market where people really just don't even have any fear of risk any more.
FSN: Are there any worrying signs you see technically with this current move higher?
Dorsch: A very interesting technical aspect of this rally is that it is occurring on shrinking volume… and so some technicians would argue that this is not a good sign. It doesn't lend to a lot of participation. The rally is on very narrow breadth. That of the top 500 stocks, only about 25 are having new 52-week highs. This is a very narrowly based rally. I understand all that, but all these bearish arguments that we've been hearing for the last few years have just fallen flat and I think it's because we have underestimated the power of buybacks and QE, even as the Fed winds down its QE, low and behold it has one of its colleagues, the ECB, coming to the rescue just at the right time to do some money injections into the European banking system. Although, it's an intelligent type of QE that the ECB is going to do by funneling it directly into the hands of small business and medium sized businesses as opposed to just randomly giving it out to hedge fund managers as the Federal Reserve does, or investment bankers to inflate stock prices. But this could actually help the European economy, but still, the net result is Europe is going to be keeping its interest rates down.
FSN: Is this what you think has also helped to drive interest rates lower here in the U.S.?
Dorsch: One of the reasons U.S. bond yields have dropped so far this year to the amazement of most economists is that we've seen a drop in interest rates in Europe, in Switzerland, in Germany, and Italy and Spain. And so because of the drop in international bond yields, U.S. bond yields looked relatively good. So some money managers bought U.S. bonds in reaction to the drop in foreign bond yields, and that's also been a supporting factor in a way for the stock market as U.S. corporations can borrow very cheaply. And, in fact, many of the buybacks are leveraged buybacks where the companies are borrowing very cheaply and using it to buy back their own stock. There's not much care about the long-term organic growth of the company. It's all very short-term focus on today and tomorrow and CEOs have a lot riding with their stock options based on the price of their stock. So they're acting in their own personal interest. So, I believe we're sort of at that euphoric stage now where psychology kind of gets out of hand. The Fed realizes that they're blowing the bubble, but they have no inclination whatsoever to stop it through monetary policy and so it could very well be that we see this parabolic final euphoric liquidity surge.
FSN: Gary, with central banks and plentiful liquidity helping to push the stock market higher, many would have thought that gold would've sprung to life by now. What's your take on the yellow metal?
Dorsch: Well, if you take a look at the gold market, I always think first of all the biggest buyers of gold are China and India. They buy a little over more than half of all the gold that is produced in the world and there was a recent report by the World Gold Council indicating that there was a sharp drop-off in demand for gold out of India and China in the first quarter. About an 18% drop in China and a 26% decline in India. Of course, India has had restrictions on imports as a government policy to help India… get its current account deficit under control and it has succeeded in stabilizing its currency. […]
This new government in India is lending optimism that those restrictions on purchases of gold overseas will be relaxed in the months ahead. That could be a supporting factor, but overall in the gold market I think after last year's sharp decline in 2013, watching the amount of gold that is being held in the global ETF such as GLD here in the U.S., the amount of gold now being held in ETFs is down about a third from its peak level in 2011 and it has not recovered. Those numbers are still showing that we are slightly below last year's low and it indicates that investment demand in the western world via ETFs has not yet revived. So, to me, it looks like it's sort of consolidating and has lost its luster and, if anything, I would say traders have made a psychological shift saying the way to profit from massive central bank intervention is you're better off with equities where the company is buying back their own stock. You have that added benefit. You don't have that with the gold. So they know that money is being devalued and it's how do you stay ahead of the devaluation, and equities have now become the favored asset class. I think that's been a big shift where the typical retail investor now has abandoned the gold market and you're basically mostly depending on traditional cash buyers…So, I don't look for gold to do all that much.
$1200 is a very important number because that is the average breakeven cost for miners around the world. Half the miners have an all-inclusive cost above $1200, the other half slightly below $1200. Should it go below $1200 I think you'd really start to see some reductions in production and supply and then some mining companies may ultimately be forced out of business. That would be a tough situation, but that's kind of how it's going to have to heal itself. The mining companies are going to have to think about ways of reducing supply in order to get a recovery in the market so, to me, I don't see the gold market going much above the $1350 level on any possible rally and I see a bottom should be around $1200 because of the breakeven point there. And a lot of traders are aware of that. So I'm not really projecting much for the gold market in the next few months.