Which is right: Stocks or economy?

The difference of opinion between Wall Street and Main Street is growing as equities soar but growth stalls.

By Anthony Mirhaydari Jan 25, 2013 3:53PM

Businessman reading newspaper copyright A. Chederros, ONOKY, Getty ImagesThe stock market and the economy have always maintained a tenuous link. Equities are prone to periods of extreme fear and greed, pulling valuations around what the economic fundamentals suggest is "fair value." It gets really bad near major turning points, such as the exuberance and the "subprime is contained" falsehoods of 2007 to the terror and "the bailouts won't work" panic of 2009.

 

I think we're seeing another turnaround point right now as the major averages go vertical and gauges of investor sentiment reach levels not seen since the 2000 dot-com bubble; even as the economy, by some measures, shows signs of falling back into recession.

 

So, which is right about where we're headed?

 

The driver of the disparity is central bank intervention, with the Federal Reserve, the European Central Bank, and Bank of England, and the Bank of Japan all flooding the financial system with cheap cash. Much of the impetus for the market rally of the past two months has been indications the Bank of Japan is about to throw conservatism to the wind and indulge in even more aggressive monetary stimulus.

 

While hedge fund types love this, and a liquidity starved economy loved it in 2008 and 2009, there is just simply too much money floating around to make a difference now. The Fed's balance sheet has swelled past $3 trillion, up from $800 billion before the financial crisis, $1.4 trillion of which is simply sitting at the Fed's vaults as commercial banks have nothing to do with the money but hold it as deposits.

 

Moreover, as the deterioration of the economic data suggests, all this cheap money isn't preventing the natural business cycle from working its will, resulting in new recessions in Europe and Japan, with another one headed for the United Kingdom.

 

Things aren't looking good here at home.

 

 

The bulls Thursday ignored a terrible Kansas City Fed activity survey, which featured an employment index that sliced into recessionary territory. When joined with similarly weak results from the other regional Fed Surveys, thaw overall picture is clear: With more tax hikes and spending cuts on the way, possibly spiked with a government shutdown, the economy is already in trouble.

 

 

If all this is making your head hurt, just know it all boils down to this:

 

  • Sentiment is excessively bullish at levels seen near major market turning points.
  • Fiscal policy will be a growing drag on growth, but here and overseas, this year.
  • Technical indicators remain weak with breadth, volume, and options market activity suggesting caution is warranted. 
  • Economic fundamentals are still deteriorating and have fallen into recessionary territory.
  • With gas prices rising again, the energy market remains vulnerable to the rise of Islamic terrorists in North Africa and simmering tensions in the Middle East.
  • Most of Europe, including Germany, is either in or is falling into a recession. Japan is in recession. And the United Kingdom is falling into recession as well.

Add it all up, spiked with the big price swings, market dislocations, and other drama, and this feels like a major, historical moment for Wall Street and the economy at large. A moment when the belief that central bank intervention can paper over deeper, structural issues by giving hedge funds and investment banks more money to play with about to be shaken.

 

We're seeing the evidence of that play out in real time.

 

Since the Fed launched QE3 and QE4 late last year, the economy has lost serious momentum.

 

And now, with the inflation hawks worrying about the destabilizing effects of all that cheap money, the clock is ticking on the "don't worry, the Fed will save us" meme that has driven this bull market. When it ends, amid political rancor over gun control and the budget in the months to come, it won't be pretty.

 

 

Just like the shattering of the illusion that profit margins at Apple (AAPL) were impenetrable -- amid increasing competition, a saturated smartphone market, and a tapped out American consumer -- has been ugly.

 

 

In response, I'm adding new short positions against industrial materials via Cliff's Natural Resources (CLF), AKSteel (AKS), and the ProShares UltraShort Basic Materials (SMN) to my Edge Letter Sample Portfolio.

 

Disclosure: Anthony has recommended CLF short, AKS short, and SMN long to his clients. 

 


Meet MSN Money at the World MoneyShow

Is it time to give your portfolio its annual checkup? Then join thousands of investors like yourself at the World MoneyShow Orlando, which runs from Jan. 30 to Feb. 2 at the Gaylord Palms Resort in Orlando, Fla. At the world's largest investor and trader gathering, you have chances to hear from Top Stocks writers Jim Jubak, Anthony Mirhaydari and Gene Marcial, and Managing Editor Amey Stone, and dozens of other top investment experts. Registration is free for MSN Money users; sign up on the World MoneyShow website.


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 anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below. 

67Comments
Jan 25, 2013 6:41PM
avatar
I very seldom read Mr. Mirhaydari's column and I have never subscribed to his investment newsletter, "The Edge."  I believe, however, contrary to many MSN Money followers, that he is "right on" target with his analysis of both the economy and the stock market!  I would like nothing better than for Mr. Mirhaydari to be WRONG; my heart says he's wrong, but my head tells me that he is absolutely RIGHT!  Most investors, including myself, are just too emotional; their investment decisions (and mine) are usually based on FEAR and GREED.  Unfortunately, in our exuberance to make up for lost time and profits, we lose sight and sense of the lessons taught by our economy and the stock market in the recent past -- "The Great Recession."  Realistically, what has changed?  If you and I ran our household budget like the Federal Government, and many State Governments, our creditors would force us into bankruptcy!  So, why hasn't the US Government declared bankruptcy?  It controls the US currency -- the almighty $dollar$ -- if it needs more money, it just prints more money!  The value of the US Dollar is quickly becoming worthless, fiat money.  I certainly hope and pray that Mr. Mirhaydari is wrong, but barring some unforeseeable  miracle , I really don't believe he is.
Don Moore
Jan 25, 2013 8:04PM
avatar
There's no doubt, at the end of the day, the economy and stocks are forever linked.  However, there's been a disconnect going on for quite awhile.  The question really becomes, which drags which around by the nose. 

It seems that for the last few decades, everything has been engineered to where stocks drag around the economy.  If stocks are doing well, people have more money to spend, and our consumer-driven economy grows, or so the theory goes.  This worked well for awhile,  especially with the widespread use of the internet to trade stocks.  The average Joe no longer needed to have a huge account balance or make trades through an expensive broker, he could do it on his own, with very little cash.  The powers that be are doing everything they can to prop up stocks, because they believe this is the easiest and most efficient way to boost the economy.

But if you look at the volume, it's in the basement.  Much fewer people are actively trading, and institutional buys make up most of the volume.  IMHO, the era of stocks leading the economy is over and tapped out.  Unfortunately, if this is the case, most are well behind this curve, including the Fed.  Ultimately, we need a balance, where the economy drives stocks and where stocks drive the economy. We need for them to feed off of each other, instead of constantly relying on one to drive the other.  But as long as the Fed insists on creating bubbles, this will not be the case.  Rest assured, stocks cannot continue to lead the way forever.  And the farther ahead they run, the tighter the rubber band gets.  We know it's going to snap back, it's just a matter of when and how violently.
avatar

Institutional investors and some companies are investing  in stocks and their businesses right now because there's no new President. This was bound to happen.

But the average person, Main Street, isnt biting. There's no guarentee in anything with the economy, no feel good indicators. Average folk will continue to be thrifty, save money, and work their buts off as usual.

We are still struggling out here in real world. The stock prices rising higher has nothing to do with us, just the big wigs.

I bring home a paycheck every week. I can count on that, but when a few movers quickly take money out of the market, fear will set in "All will be lost. But I'll still get my paycheck

Jan 25, 2013 4:34PM
avatar
I'm still waiting for the "epic bear market" that Anthony predicted a few weeks ago. A.M. has a chart for every mood it seems.
Jan 26, 2013 8:18AM
avatar

Anthony

 

It's a Chinese Curse. "May you live in interesting times."

 

Anyway, nice article. I read the comments. At some point somebody's gonna be right. I get a few stock market news letters and some of them are very dark reading and even the lighter newsletters offer warnings. And I read the Fed Reserve Board don't all agree with Helicopter Ben. Something's gonna pop!

 

I'm sticking with my idea Guns & Gold. 

Jan 25, 2013 5:09PM
avatar
The stock market doesn't have to reflect the economy.  What you're seeing is wealth & cheap moeny that has to go somewhere & since fixed income is so expensive & yields so low, money is moving into stocks, which people have been avoiding since the 2008-2009 meltdown.  As long as the Fed keeps th punch bowl out, the party will continue.
Jan 25, 2013 5:28PM
avatar
I believe the Fed is soon to slow down its easing efforts. It said so already, when QE3 was launched. It´s supposed to end when projected inflation reaches 2.5% and unemployment 6.5%. With all the money  that has been printed worldwide, it seems to me that we will reach one of those targets pretty soon.
Jan 25, 2013 5:37PM
avatar

The balancing act is just this:

 

When all the money is moving in with exuberation (bubble), we should move out, right?  But when, we don't want to miss all the upswings...

 

Especially when it isn't fundamentals based any longer, it's Fed based.  That messes up the individual investor.  Plus, the most exhuberant reactions in the market come when bad expectations don't happen, rather than when something good does... 

Jan 25, 2013 8:47PM
avatar

It will be next to impossible for the market to go down with the Helicopter Ben printing 85  billion a month.  The market will move higher each month as it adjusts share prices for the increase in money supply.  I would expect the market to move 11% higher this year given the money creation rate. 

 

Now if the Fed were to stop the presses, the market could collapse as everyone heads to the exits at once.  

 

Commodities and Specie offer the same inflation protection from the Fed. 

 

Jan 25, 2013 9:10PM
avatar

Anthony... you cannot ask your header question without also embracing two key aspects... $16 Trillion in phony electronic money in the markets and high-speed computers with worldwide access. For much of the 21st Century to-day, we haven't had ANY economy. In October 1998, banks pulled credit lines for America's mortgage lenders- collapsing them. The gross value of America's Residential Portfolio was $18 Trillion and 1998 finished off with $11 Trillion in mortgages made. Lop the top (mansions) and bottom (shacks) and cross out ineligible properties and borrowers. Essentially, we lent to 100% of the eligible properties. 1999 was a so-so year. 2000 was dismal and in April 2001 we had a stock market crash. We also had issues with gas prices and unit productivity. Between 2001 and 2007 was a Great Phony Credit Time. 2008... loans got called, 84% of men lost their jobs and half the small businesses got loans called and collateral repossessed. All of the debt payments delayed by Dubya now came due and we got TARP'd. Since then, the economy hasn't tangibly recovered, we've gone much further in electronic debt, had no family-sustaining job creation and band-wagon lifts of the major investment facets while choking off nearly all non-institutional or brokerage investing.

 

To answer your question... we are where no sensible economy has ever gone before and no, we don't know how to stop the corruption. Andrew Dickson White chronicled in his book: Fiat Money Inflation in France-- almost everything we are experiencing. It decimated France and they never really recovered. To know this and not react now KNOWING HISTORY, is crazy. We don't need old rich people ruling us, we need to step forward into the 21st Century and embrace it without markets and financiers telling us what to do. Abolish incorporation and make it so financier is not a career. It's not doom and gloom... it's Reality. Snap out of anything but... and figure out your best post-crash Plan B. Gold, guns, ammo, stocks, bonds, blonds and bombs won't matter. Think outside of your comfort zone.

Jan 25, 2013 4:57PM
avatar

For all of Anthony's charts, I never see him examine what stocks are supposed to be valued by:  revenues, earnings, and margins.

 

He loves to look at grand market trends (him and his "head and shoulders" patterns...), but he doesn't like to write about income statements or balance sheets.

Jan 28, 2013 8:23AM
avatar
The economy is right.  The market gets excited when the housing market improves a percentage point.  But, remember this.  As bad as the market was, if you increase new homes or existing sales just a little, it makes it look like the housing market is on the right track.  We are by far, not out of this.  There are still millions of houses in foreclosure, in the process of foreclosure, or about 1/3 give to take in trouble.  There are thousands of Americans still be laid off due to the economy and obamacare.  Hundreds of thousands more are having their hours cut to under 30 due to obamacare.  We are going to hit a recession again.  There is no way that we are not.  Bernanke printing of billions in dollars of money will cause inflation at some point.  obama's handling of the economy will cause a downturn.  The tax increase that just was passed and the potential tax increases that the democrats want will cause a downturn.
Jan 27, 2013 1:28AM
avatar
The market has always been subject to various types of manipulation, politics being just one with QE, 1 2, 3,  while the economy only responds to good government policies that have been absent for more than 4 years and are not part of the plan for the next 4.
Jan 25, 2013 4:58PM
avatar
Everyone is asking what your predicting.  It must come true soon.  Let's see how the market reacts on monday.
avatar

Pretty much 2013 is the last year of anywhere near normal for the USA economy. Soon and it could be as soon as Valentines Day the whole US economy is going to crash and burn as the world rejects the US dollar as the world reserve currency.

 

Pretty much most of the world has already agreed with China to trade with China in yuan and not dollars.

 

It is going to take about a year for this reality to set into the minds of the western banking system but it will start to show up very quickly.

 

In fact the response of the central banks of the USA, Japan and Europe is to flood the market with dollars and yen and euros but that is just going to make the collapse ever so much faster.

 

Already there is wide spread panic as Bernanke and others at the top now realize that the Death Spiral of the US economy is spinning more and more out of control and the world every day is relying on the dollar less and less.

 

We think the US fiscal cliff crisis is over with , the European debt crisis is over with and the total collapse of the Japanese economy is over with. The only trouble is printing more fake monies has made things worse and worse.

 

Which is why no one in the world is trading in dollars now.

 

There is a new slogan now --

 

IN GOD WE TRUST ALL OTHERS PAY IN YUAN.

 

Jan 26, 2013 8:54AM
avatar

"I'm still waiting for the "epic bear market" that Anthony predicted a few weeks ago."

 

You've been in it for several years now, Whitey... the markets gains are predicated on infusions of fiat money, not growth. Haven't you seen the routine Monday contributions? Banks lend to baby mommas and other unsustainable people and put them into homes they previously foreclosed on and repossessed. The Note is swapped at the Fed for it's face value. The Note on the swap favors the bank, borrowing us further into debt but it gives the bank new cash to inflate the markets with. Rinse. Repeat.

Snap out of it... retailers reduce inventory by clearing it out at 90% less than the MSRP on the tag or- less than it's cost with no consideration for overhead. Where do you think that shortfall credit comes from? Same place as the loss-differences in the bank swaps. Everyday we sustain a crafted, controlled and manipulated market, our Dollar dilutes as stupes like you think you are making money. Do the math... if the Dollar deteriorates daily because of the scenario described above, how much are you gaining while the economy is draining away? Answer-- absolutely nothing. And that's the genuine value of your stock portfolio!

Jan 27, 2013 11:39PM
avatar
When the market goes into correction this next time, I believe it won't be a smooth curve.  I believe it will fall off the cliff.  Standard market timers won't have time to react, with huge losses.  Simultaneously, we will see interest rate jumps so there will be bond losses.  And gold even looks iffy right now.  Put on your safety belt and get ready for a crash.
Jan 28, 2013 6:01PM
avatar
Like we said earlier, it wasn't going to be easy to end up in the green today but, oh well...Basically flat to a bit down, we'll take it any day; scumbags could have done a lot more damage...Lets see what tomorrow brings us.
Jan 28, 2013 8:26AM
avatar

"$1.4 trillion of which is simply sitting at the Fed's vaults as commercial banks have nothing to do with the money but hold it as deposits. "

 

BS. Money doesn’t just sit at any bank. They can’t make money that way. The banks are finding creative ways of using derivatives and other structured off-market products to expand the money supply and lend it to others within the financial industry, like hedge funds and hot money investors who speculate in the stock and bond markets. That’s why the markets are up. Too much money being printed by the Fed going to boost the markets and the bank’s profits at the expense of savers and the main street economy.

 

Now the Central Planners at the Fed are complaining and starting to blame investors for not acting prudently and putting the new money where the Fed claims they intended it to go. What a surprise. This grand multi-trillion dollar experiment had been a disaster and there is no way to ever unwind it, which was also presumably part of their original plan.

 

Jan 29, 2013 11:30AM
avatar
This morning not too different than yesterday morning...Plenty of manipulators selling on any rally attempted...We go up, they bring us down...We will see how long this lasts...Decent news so far today...More coming soon...More later.
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

129
129 rated 1
281
281 rated 2
444
444 rated 3
732
732 rated 4
629
629 rated 5
623
623 rated 6
610
610 rated 7
440
440 rated 8
303
303 rated 9
126
126 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
BBBYBED BATH & BEYOND INC10
FOXATWENTY-FIRST CENTURY FOX Inc CLASS A10
TWXTIME WARNER Inc10
COPCONOCOPHILLIPS9
HDHOME DEPOT Inc9
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.