By Charles Biderman
After leaving New York last week, I was left with the overwhelming impression that most portfolio managers really believe stocks cannot go down. Why? Because portfolio managers have been fully trained to believe in the religious like School of What Works. And what has been working since 2009 is buying stocks regardless of anything and everything else.
If you ask portfolio managers why stocks have not gone down? The answer can be bottom lined as the Bernanke Put. A key truth for those who believe in today's School of What Works is that the Bernanke Put has been and will keep on saving the stock market.
For those of you who have been hibernating from the financial markets over the past few years, the Bernanke Put means that Wall Street believes that Fed Chairman Ben Bernanke is omnipotent; and that he can do whatever is takes to keep stock prices at around double the March 2009 lows. That is why most portfolio managers believe that any and all bad news cannot ultimately hurt stock prices.
For example, most portfolio managers believe that a fourth quarter sales and earnings collapse is not all that important. So what if sales and earnings have been decelerating since earlier this year after the inventory pipeline had been refilled. Remember, the inventory pipeline had been emptied starting late 2008 through early 2010; leaving corporate America lean and mean. As a result, refilling the pipeline was very profitable. But sales and profits are slowing because with the pipeline full, there has been no increase in final demand. But who cares if sales and profits go down, as long as stocks do not go down.
Most portfolio managers also do not care that the collapse of the European union is inevitable. After all, Mario Draghi is almost as omnipotent as Ben Bernanke and Draghi PROMISED to do whatever it takes to save the euro. But in reality, after-tax European incomes keep dropping with no possible reversal in sight. But, hey, who cares? Stock prices cannot go down.
And then, most portfolio managers tell me so what if companies and insiders have been and continue to sell more shares than they are buying since August. It does not matter to them as long as they believe that the Bernanke Put is alive.
But is the Bernanke Put alive? I have been saying that the Bernanke Put is dead. Ever since the September 15 start of the current form of perpetual easing, stock prices have stopped going up and look to me quite vulnerable for a major plunge.
Let us look at the reality. All that the Fed is doing now is in essence borrowing $80 billion per month, and using the proceeds to buy longer dated mortgages. The result was a drop in mortgages rates earlier this year, but the rate of drop is now barely noticeable.
And that is all that the Fed is doing. Since mid-September other interest rates have not dropped. Neither has the stock market gone up. So where is the Bernanke Put? I say the Bernanke Put is dead.
Companies have been the only source of new cash for the stock market since the end of QE2 a year ago June, Bernanke Put or not. Unless corporate buying resumes, stock will drop sharply at some point in time. Of course, when prices drop enough and companies resume buying, the stock market will stabilize. But prices will be lots lower than here.
When I was in NY last week CNBC's Bob Pisani and Gary Kaminsky proposed talking about all this from the NYSE floor. The powers that be turned us down. Instead, World Wide Exchange graciously had me on at 5 AM.