Economy stalls as stocks soar
The market is ignoring the worst plunge in economic data in 10 months, and the complacency can't last.
The Dow has rallied more than 400 points from last Friday's disappointing March payroll report. The promise of more cheap money from the Federal Reserve and the Bank of Japan is apparently enough to override all other concerns, from the fact that the eurozone crisis is far from fixed to overzealous GDP and corporate earnings estimates.
But it's the denial of the breakdown in U.S. economic data (which had been the lone bright spot with Japan and much of Europe in new recessions) that has been most noticeable. Of the 20 most recent data points released, 18 have disappointed as higher fuel prices, higher taxes and weak economies in Asia and Europe drag.
How long can the disconnect between reality and stocks last? My guess is until first-quarter GDP data is released later this month.
First, here's a list of all the economic data points that have disappointed lately:
Markit US PMI
ISM Empire State
New Vehicle Sales
ADP Private Employment
Challenger Job Cuts
Initial Jobless Claims (four-week average)
NFIB Small Business Survey
MBA Mortgage Applications
Friday, we had four more data points miss expectations. The Producer Price Index dropped more than expected. Business inventories grew less than expected. Retail sales fell at their worst pace since 2010 as sales growth at home furnishing and electronic/appliance stores dropped into negative territory and is on a recessionary trajectory. And the University of Michigan's Consumer Sentiment gauge fell back to 2011 levels.
The curious thing is that, despite all the negative news, analysts and investors are still looking for corporate earnings growth to re-accelerate (from a negative year-over-year growth rate to near 30% growth by the end to the year) as well as GDP growth (from a measly 0.4% in Q4 to near 3% in Q1).
That's just not going to happen.
In my column this week, I outlined reasons corporate profit margins will be under pressure, mainly because of top-line stagnation and higher labor costs.
As for the GDP growth re-acceleration, analysts aren't adequately discounting the drag on consumer spending from higher payroll taxes, reduced savings and a steady increase in core inflation. Just as they expected 2%-plus GDP growth in Q4 as they underestimated the drag from political uncertainty and fiscal cliff fears.
While many are ignoring the writing on the wall and being whipped into a foaming-at-the-mouth frenzy on the idea that cheap money can cover up deeper structural problems in the global economy, some are paying attention. While others are focused on the Dow's relentless push to new highs, these folks are quietly positioning themselves for trouble later this year.
Just look at the huge rotation we've seen over the past few months away from cyclical, economically sensitive stocks like materials and emerging markets into defensives like utilities and health care. As a result, the ratio of the Morgan Stanley Cyclicals Index ($CYC) versus the Utilities SPDR (XLU) has fallen through its lower Bollinger Band, a sign of downtrend initiation, for the first time since the May 2012 sell-off.
Similar moves were seen before big sell-offs in August 2011, mid-2010, and the bull market peak in 2007.
For all these reasons, I maintain by bearish bias.
Be sure to check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at email@example.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
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The Federal Reserve is hard at work trying to maintain the stock bubble and re-create a second housing bubble.
Profit margins are under pressure from higher labor costs ?
My company employ's over 3000 people and we are told there are no raises this year.
The Market isn't paying attention to the reality of the outside world because the Market feeds on itself. All the folks who are trading billions of shares of stock every day are in the business of money not the business of business. They're all trading with each other, for goodness' sake, so it doesn't matter one whit that millions of people can't find jobs, pay the rent, or pay for food. The 1% are flying high... It's only everyone else who's in trouble!
Why don't you tell the truth the only reason stocks are up is all the fed money being put in....
3.1 trillion and climbing started jan. 2011 and 84 billion a month. The feds say this will go one till 2015 oh look just in time for 2016 elections.
I guess the feds knew Odummer is a failure or they are scratching each others back..
How does it feel to be lied to Middle class?
Odummer spoon feeding the rich as middle class starves...
None of this money is getting back to middle class it all goes to planes, cars, boats of the rich wall street losers..
The stock market will go up as long as Bernanke "prints monies to infinity and beyond" keeps printing money. Why do you think the Federal Reserve is loaning banks money at zero percent interest rates???
Look the economy is dead and long buried. Nothing Bernanke is doing will bring it back.
The reality is even worse then you think Anthony Mirhaudari. The only reason Bernanke can print money and get away with it is because it's the default world reserve currency and we have lots of nuclear weapons and we have shown in the past we have and will use them.
However the countries around the world are fast dumping the dollar and taking up the yuan (RMB) as the reserve currency. The US has at most two more years left before the economic Pearl Habor hits us and it would be sad and funny if they target Dec 7, 2015 as the target date.
Almost all of our daily material goods come from overseas from toasters to clothes. Even our best export the Boeing Dream Liner has almost all of it's parts made overseas. Surprised that Boeing has not moved all production to China yet.
40 percent soon to hit over 50 percent of our food is now imported. Farmers are retiring and not being replaced here in the US and the super rich are buying up the farm land and not farming it.
Pretty much when the rest of the world quits using the dollar the financial collapse of the US will be as swift as the fall of the Soviet Union.
No one will buy our debt and they will demand payment in RMB which will bankrupt the US government and the Federal Reserve. Japan is already bankrupt and so is Europe.
We have moved all our manufacturing plants out of the US so there will be no recovery of our economy for centuries. We will become a fourth world country over night.
Get ready for the mother of all financial collapses.
"The curious thing is that, despite all the negative news, analysts and investors are still looking for corporate earnings growth to re-accelerate (from a negative year-over-year growth rate to near 30% growth by the end to the year) as well as GDP growth (from a measly 0.4% in Q4 to near 3% in Q1). "
I find this to be curious as well. They are notorious for exaggerating 1 - 2 two year out on earnings forecasts, but this is a bit over-the-top. It happened in January. I have a guess as to what happened. We know that at the end of last year, all the buzz was about the "fiscal cliff", specifically the possibiliy some of massive tax increases. When the "cliff" ended up being just the 2% payroll tax rollback and a watered down version of Obama's proposal to take more from the "rich", many corporations breathed a collective sigh of relief. The sequester happened, but corporate bean-counters weren't really concerned about government spending cuts, which were over-hyped by Obama to begin with. Its the taxes that made companies nervous.
The thinking was that, although the day of reckoning was again pushed into the future, the absense of massive tax hikes meant the economy, loaded with some federal high-octane bond purchase programs, can proceed unrestrained. All this got factored into the earnings forecasts.
I think the forecasted 30% growth is ridiculous, the question is: When will those earnings forecasts be brought back to reality? That's when we'll some pullback, by my estimation.
The stock market moves at it's own rhythm. Is a PE too high at 15, or 30? And yet we will see the stocks climb higher still. We have seen the market climb a "wall of worry" and it has chastened investors when it falls when it SHOULD HAVE gone up. Sometimes you just have to sit back and enjoy the ride...
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