At this point, the market is beyond overextended.
Last week was options expiration (Wall Street’s favorite time to shred options traders). And thanks to Ben Bernanke’s promise to keep the money printers running (“none of what we’ve said implies tighter policy any time soon”) traders shot for 1,700 on the S&P 500 last week.
What’s truly worrisome is that stocks are rallying higher and higher while economic fundamentals get worse and worse. GDP estimates for the second quarter have been reduced to 1% or even lower. Goldman Sachs has growth at 0.8%. Barclay’s sees 0.5%. And Morgan Stanley sees us hitting 0.3% growth.
These are truly horrible forecasts coming after the brutal downward revision for the first quarter (from 2.4% to 1.8%). And when you consider that growth is slowing like this while the Fed is running QE 3 and QE 4, then it becomes quite clear that the Fed is fast running out of out of evidence that QE accomplishes much of anything.
The signs of this are already showing up in corporate results. IBM, Intel, eBay, Google, Microsoft, Philip Morris, Blackberry have all missed revenue estimates. Corporate profits can be manipulated in a variety of ways. Revenues on the other hand cannot be fudged. Either money comes in the door or it doesn’t. The fact that so many firms are missing revenues estimates does not bode well for the market.
And against this backdrop of slowing growth and weaker corporate returns, inflation is once again rearing its head. Crude oil just hit a 16-month high. Home prices are soaring across the US with year over year increases over 30% (the highest on record) in some metropolitan areas. Costs for food are up with beef rising 4%, steak rising 11%, and so on.
In short, the sheer number of negative factors facing stocks today is enormous. And in this environment of slowing growth and falling corporate results, stocks are at all time highs.
This will all end very badly.
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