I was going to open with an apologetic aside explaining why it had been so long in between entries. Only problem is that is exactly how I began my last four entries!! My blogging seems to suffer from the same malady that plagues my golf game; inconsistency. On a personal note, I have been consulting for a few really exciting start up companies and we are expecting our second child. So, I do have some good excuses for my prolonged absence!
Well, these markets seem bulletproof. I continue to have the vast majority of my clients sitting in cash or short term bonds. We made that move when the DOW was around 12,000. Do I wish we would have held on longer and stayed in stocks? Absolutely. Do I regret the move? Absolutely not. I would be crazy, as well as pretty bad at my job, if I didn't regret missing out on sizable gains. That disappointment is tempered by the fact that we did a lot of buying at the height of the summer downswing. The positions we acquired were up, on average, 20%. In times such as these, you have to take the money and run. We are currently waiting for a pull back of more than 10% on the S&P 500 index before we will even consider putting any of our cash in play. Why not get in now as markets and economic data seem to be improving? Let me explain
In past entries I detailed the problems in Europe. As I stated then, Greece is in the process of default. I continue to maintain my assertion that Italy, Spain, Portugal and possibly even France will follow suit. Many "market experts" dismiss my position as overly pessimistic. I, as well as the FEW others that share my opinion, have been labeled as apocalyptic an uninformed, leaning on our ideology and ignoring the raw data. Well, let me address that by stating simply that I am not an ideologue. I am an optimist by nature. Furthermore, the vast majority of my clients have fee based accounts which means that the only way I make more money is by growing their investments. I probably spend more time back testing my theory, trying to prove myself wrong, than I spend doing anything else. I have yet to find any significant data that conflicts with my position. The improving jobs data and unemployment numbers have served as a major impetus in driving these markets higher. Yet, when you look past the headlines and examine the underlying data you will see plainly that things continue to deteriorate. The recent improvement in the unemployment number is ENTIRELY due to the way the number is calculated and not because of a surge in new highers. As more people are laid off, the job pool shrinks. The unemployment number is a statistic that gauges the current job pool, not the economy. What I mean by this is that if a given economy continues to loose 400,000 jobs a month, the rate of loss would continue to grow even if the number of jobs lost stays static. Every week, especially now that we are 3 years into the recession, an increasing number of people are running out of available unemployment insurance. These people are no longer counted as unemployed. Essentially, market bulls are celebrating that new unemployment claims are down to 400,000 from the previous high of 800,000 in 2009. What they fail to mention is that the labor pool is nearly 20% smaller. Mathematically speaking, the number is a charade that measures only current rates of job loss or gain. It is a completely meaningless number when it comes to indicating the state of our economy.
Another "bullish indicator" that optimistic market analysts love to refer to while expressing their bullish sentiments are corporate earnings. There is no question that companies have unloaded a lot of debt or refinanced outstanding debt at the artificially low rates of today. Additionally, we all know that most corporations have rid themselves with massive amounts of those pesky and profit absorbing things we refer to as jobs, which are the single most significant cost for the vast majority of corporations. In order to figure out the health of our economy, we need to be looking at corporate revenues. Revenue is currently down, on average, 15%-20% since 2008 for the companies that make up the S&P 500. Furthermore, the revenue is skewed toward the largest corporations to a much more disproportionate level than it was prior to 2008. This doesn't bode well for our economy when you consider that small businesses are responsible for nearly 70% of our job growth.
So, why does this market continue to go up? Well, why didn't anyone, including the Fed, realize that housing was in a massive bubble that could jeopardize our whole economy? Honestly, I just don't know. I don't get it. I didn't get how in the world people possibly expected the housing market to keep appreciating at 8%-10% a year. I didn't understand how market experts thought that housing could pull back and the economy would keep roaring ahead. I am currently unable to grasp how experts so confidently suggest that this market is undervalued when considering the last time markets were at this level was when we were in the midst of a housing boom, the government had nearly $5 trillion less debt on the balance sheet, unemployment was almost half of its current level, and emerging markets like China were growing at a pace that was nearly double the current rate of growth. It's really amazing if you think about it. So, back to my original question: Why is this market going up? The only thing it can be attributed to is the unprecedented level of money printing and central back intervention. How long can this continue? That reminds me of the old stock traders saying that "the markets can stay irrational longer than you can stay solvent". I personally believe that central banks will keep printing as long as someone will buy their debt. Rather than a housing bubble, we are currently dealing with a sovereign debt and currency bubble. WHEN, not if, that bubble bursts, it will be exponentially worse than the housing collapse.This won't be the end of the world or the end of modern civilization. Rather, a lot of people will loose a lot of money and it will take a considerable amount of time to dig ourselves out. It will also bring about a considerable amount of global conflict and quite possibly another world war. I come to that conclusion not because I have a crystal ball. I look to history as a guide as we are helplessly bound to repeat past mistakes.
Anyone that knows me understands that I am anything but a pessimist. I wish I could get behind this market and we could all make boat loads of money. However, I am married to the facts. Until the facts change, I will remain very bearish and concerned with the course that the global economy is on. For goodness sake, Italy, Ireland, Portugal, Spain, Greece (already defaulted) and Japan would currently be in default if central banks weren't printing trillions of dollars in order for them to make their interest payments. Somehow, we are whistling past the graveyard, ignoring the collapse that is already occurring. Hopefully, we all regain our sanity before it is too late.
