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. 

 


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67Comments
Jan 31, 2013 5:07PM
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To:       V_L
From:  Don Moore

I don't understand your reply to my comments posted on Fri., @ 6:41 PM about  this column by Anthony Mirhaydari.  V_L, I'm not trying to be coy or imply that your remarks are inappropriate or wrong -- I truly do not understand their meaning.  I'm certainly not an expert on either the stock market or the economy; I'm an average American who is just trying to make some sense out of all this chaos   -- our Government, the Economy, and the Stock Market.
Don Moore
Jan 30, 2013 3:15PM
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We are trying to hang in there, still a long two hours to go....Manipulators seeing an opportunity and also waiting on the Fed...Be cautious these last couple of hours...More after the close.

Jan 30, 2013 12:06PM
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No big surprise this morning, like we keep saying, this economy is still very weak, thanks God it is not correlated completely with the market, we would be down big if that was the case....We are down a bit this morning nevertheless....Still very early but be cautious, emotions take over most of the time...More later.
Jan 29, 2013 5:48PM
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Nice rally to close the session...Another one for the good guys....Fed time coming...We will see the next couple of days....Scumbags in panic mode...Always be careful though, do not take anything for granted ; these manipulators are quiet but they will not go away.
Jan 29, 2013 11:30AM
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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.
Jan 28, 2013 6:01PM
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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 4:56PM
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The stock market is only loosely tied to the economy.  I look at the economy (and earnings) as sort of a weak, but persistent, magnet to stocks.  Sometimes that magnet is the dominant force, other times there other other factors overriding the fundamental data.   What we've been seeing lately I suspect is more "greed" and manipulation than anything else.  It can't go on for much longer. A fair S&P should be around 1375-1400.

 

I disagree with Anthony in than I believe the economy will actually improve by the end of the year (for a large number of reasons), but we're just not there yet, and we still have one more (delayed) fiscal hoop to jump through. That's why I'm staying conservative for now unless I see a substantial pull back in the markets.

Jan 28, 2013 2:14PM
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We've been trying to stay in the game...A few minutes before 1300 hrs scumbags called to accelerate the selling...We are still trying to hang in there...Like we said earlier, be cautious...More later.
Jan 28, 2013 11:10AM
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Yes, futures were up a bit after the durable goods came out however, never forget, futures become the past at 0930 hrs...We've been up nicely lately so you can imagine how these manipulators are reacting down here, going nuts...Oh well, too bad for them but, remember, things can change in a NY minute...They started sending sell orders about 15 minutes ago so the Dow and S&P are in the red now...Be cautious today, we foresee a pullback, too many of these peed off scumbags...More later. Be careful out there.
Jan 28, 2013 8:26AM
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"$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 28, 2013 8:23AM
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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 28, 2013 8:01AM
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Bitter and sweet water cannot come from the same spring.
Jan 28, 2013 1:38AM
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Sell your Gold and buy some Apples, this guy doesn't have a clue.
Jan 27, 2013 11:39PM
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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 27, 2013 10:03PM
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And of course the conclusion we should all immediately come up with is that we are no longer living in a capitalistic reckoning America any longer.  All this stuff about capitalism this or that is no longer relevant.  With safety nets like social programs, medicaid, medicare, social security and free lunches for everyone economic capitalistic principle is just nonsense at this point. I believe like always Americans are uneasy about recognizing the dogmas we all live in.  And having known several politicians rather well in my life this confusion is music to their ears.  This love affair with stocks can go on and on and on.  Inflation or a downright abandonment of the dollar is my guess where we ultimately evolve. Timing as always makes both sides right.  
Jan 27, 2013 3:38PM
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God is always right!

 

Socialism is always right!

 

Long live Christian Socialism!

Jan 27, 2013 1:28AM
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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 26, 2013 11:09PM
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This doesn't seem that large a format, and I have to wonder about the size of the authors subscriber base;

 BUT, ISN'T THERE SOMETHING WRONG WITH THEM GETTING THE BUY/SELL info and then the author tries to sway the MSN Masses (to help his picks work)?

Jim Jubak at least waits until after he posts to trade on his ideas; he lets you know up-front.

 

I won't go as far as calling this author unconscionable, but one should be aware this is purely self-aggrandizing...

 

T

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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 26, 2013 11:46AM
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The eventual Federal Budget cutting will bring everybody back to fiscal reality despite the free flowing monetary policy.  They've got to cut another $1-3 trillion over the next 10 years or $100-300 billion a year from a Federal Budget of $3 trillion so that's 3-10%. I'd get ready for sell in May and stay away.
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