It's a very gnawing situation but one that can't be ignored. The rally has been fantastic, and the determination to not go down is simply amazing. It's been very good for those that had the nerve to buy or stay the course after last summer's meltdown and the more than decade-long disappointment for most American investors. Yet there are issues that are difficult to reconcile for people employing that most important yet most neglected source of deduction-common sense. It's true we often over analyze things, not just the stock market, and call it common sense. But when we come right down to it, you probably have a gut feeling something is wrong and not reflected in the market-but will be.
For years science explained a gut feeling as a sense of intuition that one doesn't understand how it came to mind and can't apply rationally for why they have such a feeling. But that might be changing as it's pretty clear we learn lessons in life and they accumulate. Moreover, newer theory on the mind understands the connection between the middle prefrontal cortex and how it gives us access to the wisdom of the body. The information received from the interior of the body is used to give us "heartfelt sense" and "gut feeling." Certainly active investors and those still smoldering from the sidelines have enough, tough, lessons that live on the edge of their stomach. Now, it's becoming more difficult to listen to your gut with the tidal wave of enthusiasm from Wall Street.
What the pros seem to be missing and why you should be skeptical is they sound more like politicians and elite media than the same folks that actually missed this rally, too. I'm always wearing rose-colored glasses, so I have to actually always look at the glass being half full or the hype being overdone. On that score, I'm worried about the length of the rally, the volume of the rally, and the rally as it correlates to "good news." Yes, this rally is more a reflection of the rest of the world climbing fast to be what America has been for so long. They want what we got and they are on the march. The good news is we can profit from that unless the administration gets to launch its latest salvo against business and success by punishing overseas success.
This is what your gut is worried about:
* Last week construction spending was a big disappointment
* Last week the ISM number came in below consensus
* Last week personal income and spending came in below consensus and savings dipped
* Last week railcar traffic was negative year over year for the third consecutive week
* Last week Goldman Sachs lowered its 1Q12 GDP estimate to 1.9% from 2.3%
* Last week Bank of America lowered its 1Q12 GDP estimate to 1.8% from 2.2%
* Last week we learned food stamps leaped 384,000 m/m and 2.4 million y/y to 46.5 million in December (14.3M under President Obama)
What about the Good News
Auto sales came in huge for last month, and for the second consecutive month, the data points to a possible 15.0 million unit year, something nobody thought possible coming into the year. There were still mixed narratives beneath the hood. While the media talked this up as yet more vindication for the government taking over GM and Chrysler, the fact is business is cyclical and auto sales are overdue for a bounce. Toss in warm weather, and it made for the perfect backdrop to people whose average whip is more than 11 years old to go kick a few tires. Subprime auto loans are soaring, too. Still, it was good news, right? Well ... Ford and General Motors (last two American auto makers since we gave away Chrysler) lost market share.
I do find it interesting that record high gas for February didn't stop people from buying trucks. Sure, there was a ton of hype for the Focus, which rocked its rivals, but the F Series is a monster selling the most units for the most total bucks. (My mother's Focus has been nothing short of a miracle. the car is so old I've lost count, and she told me she drove more than 50 miles the other day and it didn't miss a beat.)
It's really not a true auto story but late Friday GM announced it would lay off 1,300 workers for five weeks at its Detroit plant that makes the Volt. This boondoggle has cost American taxpayers three billion and counting and the free market continues to reject the product. By the way, for those that are considering buying the Volt just know it takes driving this thing 12 years without gasoline to break even from the premium to buying comparable midsized cars.
Conclusion- White House Okay With Global Warming For Now
So upon further review, it seems to me that we could be set up here for some kind of disappointment. Last year whenever there was widespread enthusiasm heading into important data like the jobs number, we often had our feelings dashed and the market along with it. Also, last year saw a nice start to the year totally derailed first by a spike in energy then by disarray in Washington. This election season, we will be reminded how poorly the nation is fairing on one end and on the other end asked to cheer mediocrity and sold a solution that simply says punish your most successful people and it creates economic growth.
I think warm weather played the biggest role in better retail and auto sales but monster inflation is brewing, and we might only be borrowing from would-be future sales. I do find it ironic that President Obama biggest boost comes from global warming. But, there's a chance he's peaking too soon (in the land of media hype) as the economy and stock market could be peaking too soon, too.
No Reagan- You Say and So Does the Data
I was replying to question of the day comments late Sunday night, it was an onslaught that seemed to offend most and bring back good memories for others. Only one person said Obama was doing a great job and deserved closer comparisons to Reagan than Carter. But the fact of the matter is, there is no comparison. Oddly, the key measure of the economy, Gross Domestic Product, doesn't get talked about much in the news anymore. (Of course neither does runaway debt that casts a shadow now and becomes an anchor later to economic greatness.) Looking at third year GDP growth between Reagan and Obama, it's a landslide and a reminder of what greatness really is- we don't have to celebrate mediocrity.
The bad news is China's effort to engineer a soft landing has led to a new GDP target of 7.5% from 8.0%. For many this is akin to an economic crash, although we'd take that in a heartbeat. The immediate impact is to commodities and commodities-related stocks. But there are wider implications as well. Chinese demand has made the difference for the world over the past three years, and it's unlikely a modest bump in the United States could make up the difference. Moreover, things in Europe are getting worse, not better, as witnessed by manufacturing data out over the weekend.