Turn on CNBC or read most of the mainstream investment periodicals and you’ll see all kinds of comments about the happy-go-lucky bull market and a plethora of pokes aimed at those who didn’t buy into the recent bull run. For those who regularly read my commentary, it may come as a surprise that I’m highly skeptical of the recent run up, she says with a grin. So why am I being such a party pooper? A true secular bull market is sustained on fundamentals, not liquidity or credit manipulations. The fundamentals these days leave a lot to be desired.
First off let’s talk earnings. Of the 66 S&P 500 companies that have reported so far, a full 80% have beat expectations. So yippee right? Not so faster Mister! These guys have been lowering estimates for the four weeks prior to the kick off for the reporting season. Lower the bar in order to beat? Look beneath the headlines and you’ll see that earnings growth rates are slowing and margins are tightening.
On April 17th, the Bureau of Labor Statistics reported that median weekly earnings for full-time wage and salary workers rose 1.9% year-over-year while CPI-U rose 2.8%. This means yet another year of falling real wages. It is tough to buy into the economic recovery story when household incomes continue to fall.
On April 19th, we learned that the number of Americans filing for unemployment was higher than expected while sales of previously owned U.S. homes fell 2.6% in March for the second consecutive month versus expectations of an increase. You don’t say! Real wages continue to fall, unemployment continues to be a problem but housing isn’t recovering? What the heck do these pundits think people use to buy a home? Or right, debt! Meanwhile, banks have little interest in taking on mortgage risk when they can borrow from the Fed at basically 0% and turn around and buy Treasuries. Look across the pond as the European economy continues to slow and as for China, that slowing story isn’t over yet.
All this and yet the bulls are gleefully claiming that gold is dead. The metal is still up 4.9% YTD as of April 19th and has returned over 18% on an annualized basis over the past 5 years. The major force driving gold up has been the devaluing of fiat currencies, which is not likely to end anytime soon with such enormous amounts of sovereign debt and no politicians within sight willing to articulate and then act upon the painful truths. On April 18th the Financial Times published an article entitled “Big Investors Bet Fed will embark on QE3.” Anyone who has read Bernanke’s analysis of the Great Depression and his criticism of the Bank of Japan over the years has to agree with this notion. Translation, devaluing dollar makes gold look awfully pretty.
The ECB will come under increasing pressure to support more of its dicey members as the reality of the Spanish, Portuguese and Italian economies comes to light. It is incredible to think that the most recent LTRO with over a trillion Euros only bought about five months of market glee. While Merkel may enjoy the support of her constituents when she pounds the austerity table, finger wagging at Spain, an insanely high unemployment rate coupled with massive debt and a slowing economy doesn’t exactly make a nation amenable to more pain. If there is one thing I know for certain, politicians don’t like to lose their jobs. Spain is in free-fall, with its economy too weak to withstand more fiscal austerity, yet without taking that step, the nation won’t be able to find enough private buyers. Spain is too big to fail, but also too big to rescue. Rock, meet hard place.
Lenore’s Rule #12: Never underestimate the destructive potential of a politician in pursuit of a dream on someone else’s dime. I have no doubt that insanely destructive actions will be taken in a vain attempt to salvage the unsalvageable.
Japan has pledged to give a $60 billion loan to the IMF. You just can’t make this stuff up. The nation with the second highest debt to GDP in the world, (second only to Zimbabwe) is going to LOAN money to the IMF? Say it with me, “Printing Press!” China’s official press agency reported that an “unidentified” (seriously have to love this stuff) PBOC official has hinted rather loudly at an upcoming cut in the banking sector reserve requirement ratio. India cut rates 50 basis points earlier this week and Brazil’s central bank cut its policy rate 75 basis points, the sixth straight cut, to a two-year low of 9%, which is only 25 basis points away from its lowest level in 15 years. All this has the markets getting a bit excited, but remember that liquidity can never replace stable politics and sound fundamentals.
Recovery? Global growth? Really? If things are turning so rosy why are central bankers all over the place putting the credit IVs back in and starting up the drips? When central bankers get loose, gold goes up. It doesn’t need to be any more complicated than that. Just some things to ponder from your desperately-wanting-to-be-a-bull portfolio manager.