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Guest Post: 5 Questions That Every Market Bull Should Answer
Submitted by Lance Roberts of Street Talk Live blog,
There have been a litany of articles written recently discussing how the stock market is set for a continued bull rally. The are some primary points that are common threads among each of these articles which are that interest rates are low, corporate profitability is high and the Fed's monetary programs continue to put a floor under stocks. The problem is that while I do not disagree with any of those points - they are all artificially influenced by outside factors. Interest rates are low because of the Federal Reserve's actions, corporate profitability is high due to accounting rule changes following the financial crisis and the Fed is pumping money directly into the stock market as I discussed yesterday:
The stock market has rallied sharply in direct correlation to the expansion of the Fed's balance sheet yet economic growth has floundered much to the dismay of the Federal Reserve. As I discussed recently:
"The increases in excess reserves, which the banks can borrow for effectively zero, have been funneled directly into risky assets in order to create returns. This is why there is such a high correlation, roughly 85%, between the increase in the Fed's balance sheet and the return of the stock market."
With this in mind I do have a few questions that would like to ask in order to stimulate your thinking?
Employment
Employment is the life blood of the economy. Individuals cannot consume goods and services if they do not have a job from which they can derive income. Therefore, in order for individuals to consume at a rate to provide for sustainable, organic (non-Fed supported), economic growth they must be employed at a level that provides a sustainable living wage above poverty level. This means full-time employment that provides benefits and a livable wage. The chart below shows the number of full-time employees relative to the population. I have also overlaid jobless claims (inverted scale) that shows despite media headlines to the contrary - falling jobless claims does not mean improving employment.
Question: Does the current level of employment support the current rise in asset prices?
Personal Consumption Expenditures (PCE)
Following through from employment; once individuals receive their paycheck they then must consume goods and services in order to live. Personal Consumption Expenditures is a measure of that consumption and comprises more than 70% of GDP currently.
PCE is also the direct contributor to the sales of corporations which generates their gross revenue. So goes personal consumption - so goes revenue. The lower the revenue that comes into companies the more inclined businesses are to cut costs, including employment, to maintain profit margins.
The chart below is a comparison of PCE to the S&P 500 index. Notice the current divergence of the index from PCE.
Question: Does the current weakness in PCE support the current rise in asset prices?
Import / Export Prices
As we continue to "follow the money" it is important to review what corporations are receiving for the goods and services that are being exported as well as what they are paying for goods and services being imported. More than 40% of corporate profits today come from the exports of goods and services. Therefore, declines in prices received from exported goods directly affect profit margins. However, declines in prices of imported goods and services are a positive for profitability. The chart below looks as the difference between export and import prices. When net prices are rising that is a positive for profitability, again at the top line of the income statement, and a negative when they are falling.
Question: Are very negative net export prices supportive of the current market?
Corporate Profits As % Of GDP
Following the corporate profit story we can look directly at corporate profits. Companies are currently at the highest level of profitability in history and is one of the key stories behind the "ongoing bull market" premise. However, that profitability has come at the expense of "Main Street" as employment and wages have not risen. I have discussed this recently stating:
"Suppressed wage growth, layoffs, cost-cutting, productivity increases, accounting gimmickry and stock buybacks have been the primary factors in surging profitability. However, these actions are finite in nature and inevitably it will come down to topline revenue growth. However, since consumer incomes have been cannibalized by suppressed wages and interest rates - there is nowhere left to generate further sales gains from in excess of population growth."
The decline in economic growth epitomizes the problem that corporations face today in trying to maintain profitability. The chart below show corporate profits as a percentage of GDP relative to the annual change in GDP. As you will see the last time that corporate profits diverged from GDP it was unable to sustain that divergence for long.
Question: How long can corporate profits remain diverged from weakening economic growth?
Margin Debt Vs. Junk Bond Yields
As stated above the Federal Reserve's expansion of the balance sheet has investors ignoring the underlying fundamentals as asset prices rise with reckless abandon. The complete lack of "fear" in the markets combined with a "chase for yield" has driven "risk" assets to record levels with stocks at all-time highs and junk bonds sporting record low yields. This has been amplified as investors have taken on ever increasing levels of leverage. The chart below shows the relationship between margin debt (leverage) and junk bond yields. Margin on stocks is at levels last seen at the peak of the market in 2008 with yields on junk bonds at levels at levels never before witnessed. This didn't end well last time as the reversion in the assets triggered repeated margin calls leading to a cycle of forced liquidations.
Question: What is the possibility of this divergence being maintained indefinitely?
Being bullish on the market in the short term is fine - you should be. The expansion of the Fed's balance sheet will continue to push stocks higher as long as no other crisis presents itself. However, the problem is that a crisis, which is ALWAYS unexpected, inevitably will trigger a reversion back to the fundamentals.
As I stated in "Clues To Watch For The End Of QE Infinity":
"...with margin debt at historically high levels when the 'herd' begins to turn it will not be a slow and methodical process but rather a stampede with little regard to valuation or fundamental measures. As prices decline it will trigger margin calls which will induce more indiscriminate selling. The vicious cycle will repeat until margin levels are cleared and selling is exhausted.
The reality is that the stock market is extremely vulnerable to a sharp correction. Currently, complacency is near record levels and no one sees a severe market retracement as a possibility. The common belief is that there is 'no bubble' in assets and the Federal Reserve has everything under control."
Take a moment to compare what you have heard, and read, with the questions presented here. Draw your own conclusions and invest appropriately.
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Go Zimbabwe Ben go (and all other print-happy central banks), we'll start getting the guillotines ready...
I don't usually make a point of agreeing with the Tylers, 'cause they're usually right...
But when I do, I make a point of agreeing with the Tylers.
This post is good.
i disagree. i believe a crisis is planned for and created by them.
yepp. when you think about it, it is quite obvious.
they all bought in march 2009 and drove up the prices till now. now they need some retail suckers to unload all the worthless shares. while the average joe is looking for something to put his hard earned money in he got suckered into the pomo trap and buys overpriced dividend stocks in good faith to make at least some money.
now at these high levels ->and look at these disconnects between "real economy" and stock market, it is easy to see that there must be some kind of correction in the future. the fed is rigging the game. and they call it free market capitalism??? i lol'd
From Zenbernanke below; "Disagree. Completely. There will be no reversion to the mean or reversion to fundamentals until the fed changes monetary policy. Period. It just won't happen. This very same policy has taken the Nikkei +45% this year."
Exactly right LoP. +1 The only thing correlated to the stock market is POMO. (and global central bank easing)
The problem is to know why hte Fed has to change policy. If money leaves teh finanical assets and start playing with real assets or spent in the real economy Bernanke has ot change course.
I've often heard the theory about dumping on John Q. but just nows occurred to me...how many $trillions(?) market cap out there vs. how much could John & Jane put up even if they were ALL IN?? Ergo, there ain;t nowhere to dump TO....oops, it's the fuckin' Pension plans, etc, right? Still have trouble visualizing HTF it plays out....
"There's money to be made in a Bull market and a Bear market. Pigs get slaughtered" - Gordon Gecko, Wall Street
Don't be a pig. Know when to take your winnings and walk away from the table, or leave the casino.
How long until the Moose Market?
Draw my own conclusions?
When the SHTF, it'll be chronicled here.
What market ? Central planning rules ! Central bankers and their printers are omnipotent. When lunatics take over don't try to make sense of what is going on.
How can there be any inflation when 85 billion printed by FED goes directly to stock market. Then some idiots are putting their disposable cash in market to ride along with FED and scumbag David Tapper.
So why people expect inflation is byond me. This money is not finding path to main street
Hope get a harsh slap across the face from reality.
This might be all well and good but the market has gone straight up since 2009. Zh might have been better advised in telling people to ride the wave until it is over, instead of scaring everyone out of the market. It might be all fake but it is better than losing money by doing nothing.
By the time you log into your etrade account it will all be gone.
Not being in the stock market is not the same as doing nothing.
well if you bought gold back then you still would have made a nice gain.
but i agree with you 100%. but don't worry. the next collapse will come and then you can load your truck again :))
tell me when it will be over and i will gladly ride the wave with you.
great charts as usual, lance, but i think we're all smart enough here to read them correctly w/o circles and boxes highlighting the correlations
What is a circle ?
Where would the economy, inflation, employment stand today if the fed had given all this money to the US citizens since 2008 instead of the banks here and God knows where?
Good question. One thing is for sure, they would have certainly blown away their inflation expectations. Deficits might not matter, but interest on existing debt and existing debt sure as hell does. Eventually, you pay down the principle (with inflated fiat or otherwise), go bankrupt and seriously restructure, or have a jubilee and forgive the debt. The western world is still negotiating/deciding what to do and everyone should recognize the war is simply negociations by "other" means. History is very clear on all this.
OpTwo - Must be clear that QE infinity was / is for the banks. A secondary impact maybe employment ergo the consumer.
Bernanke keeps harping on the "unemployment" rate as one of his critical factors in assessing the relative health of the economy and subsequently his QE policies. This of course is just a left wing political cover. Bernank's primary objective was to save the Banks management.
The Banks would hae survived as Chapter 11 entities and carried on thier basic functions of depositing and lending money, and businesses making payments through their systems, BUT all top management would ahve been fired and their equity prices would have went to zero, until after the re-structuring. This is how the US capitalist system is supposed to work.
The system has been hijacked by the bank top management to save themselves. Bernank is part of the hijacking. Where this immoral policy takes us...who knows...but it cannot be good for anyone...but the banksters have laid their markers down. "We will steal, print, and debt enslave you. We will confiscate your deposits if necessary. If you want to go ahead and stop us....go ahead and try".
Ben: "this bull market ends when I say it ends".
There will be no reversion to the mean or reversion to fundamentals until the fed changes monetary policy. Period. It just won't happen. This very same policy has taken the Nikkei +45% this year.
A bunch of disturbing divergences. I also watch the Baltic Dry Index, which never came back during this anemic recovery.
Forgive me for this comment:
This blog, zerohedge, is very interesting for entertainment and informational purposes, however it's also incomplete and deceiving from a trading related informations point of view.
Basically, it's all wrong, the market is wrong, the fed is evil, the markets are pumped, they are not "real", etc. we all know the story. This end up putting a scary feeling on the idea of buy the uptrend (not in everybody of course, i see many readers here are enjoying the bull market), actually there was and there probably are still (well we're pretty high now, i'm referring to equities) money to be made buying the fucking dips, but well this kind of strong trends are real opportunities and many have missed it because of all this "fake market" "wrong market" and bla bla scary things.
On the other hand, the charts show the real truth, the momentum is costantly growing, the bull market is real, strong, powerful and beautiful. Will it last forever? No of course, but nothing last forever.
My point is that Zerohedge is a wonderful blog i enjoy reading every kind of post here, pretty interesting stuff, but i should say this is still a pretty one-way (bearish) blog, so something is missing.
There is no bullish interpretation except that the market is divorced from the economy and Ben Bernanke and friends have endorsed continued evisceration of the economy by the financial sector, so you might as well get yours too, and hop on board! If that is bullish for you, enjoy! The financial rot that is the reason for the consistent bearish tone of this blog has only gotten steadily worse. This is an historic, epic, culminating global bubble. I'm sure ZH is sorry for not advising you ride it
"The real truth".... </codeword>
Nice try but you gave yourself away. Huffpoo to you too.
SpaceDuck - Indeed the equity market has gone up deppite the Tyler's ominous warnings (backed by valid socio-economic facts). The fact that Bernanke has maintained his immoral policies of debasing savers money and essentially rewarding banks for being banks (bankrupted in 2008) has no precedent in US history.
There have been other cases of QE or its derivative policies pursued by other CB's and Gov't in history. Zimbabwe and Argentina are the most recent examples. However, Bernank has the advantage of having the world's reserve currency in his portfolio. So the probability of collapse into chaos us getting dangerously close to 100%.
The Tyler's have, IMHO, been communicating the increase in probability of collapse and using valid socio-economic facts and observations. The history and culture of the US, as reflected in the fact that it is the world's reserve currency, is truly at stake here.
Yes don't get me wrong i'm very thankful for Tyler's works, and i see of course his warnings about a possible future collapse are backed by real tangible facts, so really thank you Mr. Tyler wherever you are, and keep up the good work!
My point to make it short was that once we know that the financial markets (at least equities) are currently totally detached from the economy, every foundamental fact is irrelevant in order to make trading decisions, the chart show what i called the "truth" (at least the one of the current financial bubbles markets).
I can guess how it will end, of course the usd as world's reserve currency will be defended at all costs, and the best way america defend it's currency is with military actions (the story teach), so my guess is that when the shit will hit the fan, well.. yes i don't rule out the hypotesis of a war.
My original comment was not a critic to ZH, it was an advice to the readers that do trade the markets, stay in the present moment, we all know it will get ugly in the future, but it's not time yet.
so how you do know when to get out then?
easy for you to say, you have not been corzined or cyprus'd yet. things look normal until they don't. this blog tells you that you are in uncharted territory. this blog does not give you financial advice. this blog tells to fuck off and abandon the entire financial system. what part of it don't you understand?
So who will take the losses buying stocks now at the all-time high? Taxpayers? Who?
I'm only buying 'stuff' that's down alot....Why ?..........b/c...
I'm a Cheap Bastard.
My little calculator does not comprehend trillions. Four trillion known and confessed. How much is that divided by every person in US if it had been given to them instead of banks. Party On!
This(money printing) shit is so criminal, on so many levels... The bond market isn't buying it.
{10s are off -2.39%}
Stock price gain in the last 6 months, in many cases even less than 6 months:
- Delta Airlines 106% (not coincidently a component of the DJ Transportation index, necessary for their manipulation)
- Boeing 41%
- Nike 43%
- Best Buy 130%
- Google 40%
- Bank of America 50% (who needs reserves and real accounting anyway...)
- Ford 44%
- Disney 45%
- Norfolk Southern 43% (DJ Transports again...)
Everything is still very "cheap" as companies are investing less in capex, R&D, sales are stagnant while margins are at all time highs - all this while doing some of the most dodgy accounting ever.
Everything is still cheap when our 10 and 30 year treasury bond has a higher yield than France's, gasp!
Everything is still cheap when junk bonds are at all time low absolute yields and issuance at record levels.
Everything is cheap when the stock market hasn't dropped 3 days in a row for the last 99 days - something that has never happened going back to the 1896 (oldest data available).
Everything is cheap when the stock market has fallen only 3 times in the last 19 trading sessions.
Everything is cheap when the stock market has fallen only 33 times to begin the year. Only twice since 1896 has this happened - in 2007, when we were 2% away from the all-time high, and in 2010, when the market fell 10% in the process.
Is this 2010 or 2007?
I can't believe Best Buy and their dead business model is up that much. Talk about fundamentals not mattering. Amazing.
Paper printing produces paper wealth. What more do you need to know?
Not sure how you are getting the corporate profit growth numbers, but the 4th quarter GDP reports shows negative profit growth after taxes.
And when the SHTF, we will be told to buy on the pullback.
I'll wager it's gonna be a Tuesday when it gets started as well.
http://www.marketwatch.com/story/fed-blame-game-leads-to-qe-end-game-2013-05-15?dist=countdown
Instead of firing a shot, the Fed has decided to use smoke signals. The first was the May 8 remark by Dallas Fed president Richard Fisher. The second — and more important — was Jon Hilsenrath's report in the Wall Street Journal which hit after market close last Friday. Mr. Hilsenrath reported that the Federal Reserve has been working on a strategy to taper back its quantitative easing program. Mr. Hilsenrath is widely viewed as being the Fed's mouthpiece, so it's quite likely that this second smoke signal was carefully timed to give investors an opportunity to process the information, to find out what is and is not true about what the Fed has planned, and finally, get used to the idea of life without quantitative easing. Through this carefully-orchestrated series of events, Dr. Bernanke was able to turn the blame game into the end game.
As luck would have it, the first trading day after Jon Hilsenrath's article brought a surprising report on April retail sales from the Commerce Department. The report disclosed that retail sales had unexpectedly increased by 0.1% in April, despite economists' expectations of a 0.3% decline. Not only was there some good news to offset Hilsenrath's bad news, but the Commerce Department report sent a ray of hope to those who were ready to accept Richard Fisher's contention that the Fed could claim "mission accomplished" and that it was finally time to do so.
What happens from here is anyone's guess. It's like Warren Buffet's "good movie" analogy — we don't know how it's going to end, so we need to watch closely.
However, so far this week, major U.S. markets have continued their non-stop melt up into overbought territory with yet another record day. A quick look at the chart of the S&P 500 shows the parabolic nature of this last upward move and the growing possibility of a blow-off top.
The S&P 500 is now approximately 12% above its 200-day moving average, and a gap this large was last seen back in March of 2000, just before the dot-com crash. Will history repeat or only rhyme, or in Yogi Berra's famous words, will we see "déjà vu all over again"?
Stock indices cannot keep going up forever, contrary to what you may have been told by your favorite television stock market commentator, and with the S&P 500 now up nearly 13% year to date, the index is on track for annual gains in excess of 25%.
Perhaps Bill Gross is right with his Tuesday Tweet: "Never have investors reached so high in price for so low a return. Never have investors stooped so low for so much risk."
What will derail the stock bull market is either
1. The bond market going beserk.
2. inflation creeping up and bond yield slowly moving up forcing the fed to change course.
3. Panic about the currency making financial assets versus real asset going awkward
Otherwise it is a great stock market.
In the long run (investmnet) only productivity matters and fundamentals matter, in the short run only monetary, interest rates, currency and credit matter and the fundamentals are irrelevant.
http://www.cdhowe.org/pdf/Commentary_381.pdf
Raising interest rates is never popular, but keeping rates low for too long builds in pervasive problems for the economy. Interest rates in nominal terms are at record low levels and negative in real terms, even though Canada’s GDP is only slightly below capacity. At the same time, there are symptoms of distortions created by low interest rates in financial markets: unfunded pensions, losses by insurance companies, excessive household debt, high house prices, and a bias toward high-yielding equities. Extremely low interest rates mean that the Bank of Canada has a long way to go before they approach a neutral setting. The time has come for the Bank to start raising interest rates gradually to lessen the continued build-up of financial imbalances.