Today, 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.
- The Bank of America-Merrill Lynch (BAC) fund manager survey finds “a feast for contrarian tactical bears” due to “the strongest market sentiment in two years” by those with “skin deep optimism” and the highest equity allocation since October 2007.
- TrimTabs reports that insider selling grew to $6.1 billion in the month of August, the highest since May ’08 when the DJIA was at 12,000, and the insider selling to buying ratio is 30:1, the highest-level evah.
- According to Goldman Sachs (GS), hedge funds have increased net long exposure to pre-Lehman levels (technology is the most popular spot and there is no short base in the financials).
- Can I officially thank Minyan 3M for his help with the above data?
- Can I share this paragraph of insightful reporting from the NYT article last week?
“Just before stocks turned around in early March, only 2 percent of investors were optimistic, according to the Daily Sentiment Index, which measures the mood of small traders and is run by Jake Bernstein, an independent market analyst. Now, the index shows that about 89 percent are feeling bullish. Investors were equally cheery when the Dow hit its record high in October 2007.”
- Given everyone is short Armageddon, are the conditional elements of a crash higher now than they were in March?
"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.
Market value matters less to me at this juncture. If we were to get a much stronger than expected recovery you could easily argue that the market is cheap. PE ratios are a moving target based on guesses. That is what makes them poor market timing indicators.
4. All the growth we are seeing globally this year is due to fiscal stimulus; not just here in Canada and the U.S., but also in Korea, China, the U.K., and Continental Europe too. For 2010, the government’s share of global growth, by our estimates, will be 80%. In other words, there are still very few signs that organic private sector activity is stirring. For a Keynesian, government stimulus is necessary, but the question for an investor is the multiple one attaches to a global economy that is still relying on a defibrillator. The problem is that governments do not create income or wealth, and today’s stimulus is really a future tax liability. Curiously, that future tax liability is likely going to pose a roadblock for the return to a “normalized” $80 operating EPS estimate that strategists are now starting to pen in for 2011.
This will become a major concern in mid-2010 when the stimulus is done. Whether the U.S. consumer can carry the torch has yet to be seen.
5. While Mr. Market may be pricing in a fine future for the U.S., but when the 3-month Treasury-bill yield is 13bps north of zero, which is completely abnormal, you know that there are still substantial fundamental imbalances that need to be worked through.
I should also add that the credit markets have recovered substantially from their extremely low levels. Nonetheless, the bond market does continue to forecast a very weak recovery. Perhaps weaker than the one the equity market has priced in….
Source: Gluskin Sheff
I think that this market has humbled even the smartest traders and investors. I have been following Todd and Rosenberg since 2006, and both of them have very solid track records. But right now the market is even making them look incorrect to a certain extent. I strongly agree with both of what they've said here, and feel that the market will eventually begin to reflect the horrible fundamentals of our economy again, but timing it consistently is very difficult.
Posted by: jturner | September 11, 2009 at 02:50 PM