During market bubbles a lot of details get overlooked. With the Dow hitting a new high of 15,000, we have to ask ourselves what are we missing? How long can this last?
Its hard to miss the ugly job numbers and weak earnings weve seen come out the past few weeks. But for those not paying attention, we seem to be witnessing what some are calling the Obamacare jobs market. The U3 unemployment number (calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labor force) said we are getting better because the rate went from 7.57% in April to 7.51% in May. However, the broader U6 unemployment rate (adds on those workers who are part-time purely for economic reasons) was 13.9%, higher than the 13.8% reported in March. One has to ask how can the Dow run up to 15,000 while we are still facing such a huge under employment problem? These types of numbers are becoming common and yet the U.S. stock market continues to push higher and defy gravity. Isnt that a telltale sign of a bubble? There is a disconnect between whats happening on Main Street and Wall Street and usually its main street that suffers when this disconnect resolves itself.
The only jobs that seem to be available are part time or working as an independent contractor. The Bureau of Labor Statistics press release tells us the labor market is strong and not weak, which I find to be a bunch of hype. There can be no sustainable economic recovery without a recovery first in consumer income and liquidity. People need full time jobs, not part time low paying jobs. 306,000 people joined the ranks of the self-employed. That means that hard working people are working as consultants from home offices. This is not a good thing.
So what is a professional money manager or individual investor supposed to do when the U.S. economy fundamentals have all turned south and U.S. companies revenues and earnings have weakened substantially? Americanshard-earned money is being put into the U.S. stock market for no reason. According to a recent Barrons survey of professional money managers, 74% were bullish and only 26% bears. What is driving these bullish bets? We certainly dont have positive U.S. economic growth. We dont have strong earnings or strong and growing revenue growth. Yet 74% of professional money managers who get paid a lot of dough have placed their bets on the Federal Reserve roulette wheel. They have placed monstrous bets that Bernanke printing money will prevent a recession and prevent a collapse of corporate earnings, but its not working. Are portfolio managers and investors oblivious to what is going on in the U.S. economy? Have central banks manipulated market psychology to such a high level that money managers and the investing public cant recognize a U.S. economic downturn? I think so. The remaining 26% of professional money managers are contrarian, including me. We are pondering what will happen when the 74% bulls return to a place where fundamentals, valuation and the business cycle still matters. It will get ugly. I can only imagine that there will be a massive sell-off and everyone will be heading toward the exit doors all at once.
As economic pessimism grows in the U.S., market giddiness seems to grow. In the last few weeks, blue chip companies have poured freezing cold water on Wall Streets 2013 earnings growth forecast. GE had poor earnings, as well as IBM, Goldman Sachs, Caterpillar, Apple, Conoco Phillips and McDonaldsto name a few. What more do we need to hear from these blue chips, which are singing the blues to me, to confirm that the U.S economic cycle is actually turning down? Even more dire is that of the 271 companies that have reported earnings (as of April 26th), 73% reported earnings above the mean estimate and 44% (this is below the average of over 57% during the last 4 years) reported revenues above the mean estimate. So it is obvious that the stock market is moving higher on helium. There are no hard-core fundamentals driving this market. PIMCO said last week that investors will get hurt if market levels are not justified by fundamentals.
Look no further than to this years Milken Institute conference where private equity titans said they have walked away from this stock market, some more than a year ago. What will sentiments look like when the market takes a dive? The private equity guys are planning on a shift. One, Leon Black, has sold everything that isnt nailed down, $13 B of assets - and refinanced the rest with cheap money. Its clear to me that at these levels, those 74% of money managers that are bullish are not making rational decisions. People jumping into the U.S. market are not making rational decisions - they are Ginny pigs being manipulated by the false signals from Bernanke. Remember what Federal Reserve chairman William McChesney Martin once said, The Federal Reserves job is to take away the punch bowl just as the party gets going. Thus a Dow at 15,000 is a market divorced from economic reality.
Dawn Bennett is Co-Portfolio Manager of
