A sustained increase in stock prices over a period of time greater than one week is a stock market rally. Market rallies can last months or even years. There are up days and down days, but overall, the market moves higher over a period of time. The late 1990s saw one of the longest stock market rallies in history.
In the first 10 months of the year, key stock indices like the S&P 500 have gone up more than 20%. Others like the Dow Jones Industrial Average have lagged a little, but the returns are exuberant nonetheless.
But as this was all happening, we saw the formations of very troubling trends in the fundamentals that drive key stock indices higher. Companies on key stock indices started to show corporate earnings that were nothing but an illusion. They fiddled with their corporate earnings via massive stock buyback programs and cost-cutting to make them look better.
And as we now near the end of 2013, companies in key stock indices continue to do more of what they have been doing for a while: using “financial engineering” to make their corporate earnings look better. But the real gauge of how companies are doing—if you can’t trust their earnings—lies in their sales.
So far, 366 of the S&P 500 companies have reported their corporate earnings for the third quarter of this year, and only 53% of them have reported sales above the expectations. (Source: FactSet, November 1, 2013.)
Consider General Electric Company (NYSE/GE), one of the major companies in the S&P 500. In the third quarter of 2013, revenues for the company declined 2.3% from the same period a year ago. (Source: Investor Relations, General Electric Company, October 18, 2013.) But the company is buying back its shares!
The board of International Business Machines Corporation (NYSE/IBM), another big component of the S&P 500, authorized an additional $15.0 billion for the company’s stock buyback program. The company’s existing share buyback program already had $5.6 … Read More
The financial crisis of 2008 was the biggest panic America had witnessed since the Great Depression. Dubbed the “Great Recession,” its after-effects linger. In fact, this is the worst post-bust recovery on record.
Today, for investors, especially stock market investors, there are two camps: those who believe we are in recovery, and those (like me) who believe something is wrong with this recovery…it doesn’t feel or smell right.
America, I believe, was forever changed following the financial crisis. There are more people working into their retirement years today than ever before because they can’t make it without working. There are more people on food stamp programs and government handouts than ever before.
As I wrote yesterday, the housing recovery isn’t real. We don’t have first-time home buyers coming in and buying homes to live in (like they should). Instead, large financial institutions have taken up the inventory of foreclosed homes to rent them out for a profit.
And most of the jobs that have been created since the financial crisis have been in the low-paying service sector—in retail jobs and restaurant jobs. Our kids are graduating from college (with plenty of debt) and are unable to find the job they trained for because they are competing against older middle managers for these jobs.
Our Federal Reserve, which I believe could be the only central bank in the world not owned by the government of the country it operates in, says our economic problems can be corrected by printing lots of extra paper money. That’s what the media is having us believe, too.
The real story is that money printing … Read More
First, take out the stock buyback programs, and you’ll see that U.S. companies are seeing their earnings and revenues grow this year at their slowest pace since 2009. (More on that in today’s “Michael’s Personal Notes” column below.)
From a boring (but extremely important) economic point of view:
When a country experiences economic growth, industrial production of electricity and gas utilities pick up as factories and consumers use more electricity and other utilities. This is not happening in the U.S. economy. As a matter of fact, industrial production is contracting!
An index tracking industrial production of electric and gas utilities has declined almost eight percent since this past March. It stood at 103.76 then; in August, it stood at 95.62. (Source: Federal Reserve Bank of St. Louis web site, last accessed September 19, 2013.)
But it doesn’t end there.
Another key indicator of economic growth known as “capacity utilization” shows companies in the U.S. economy are operating below their historical norm. In August, the capacity utilization in the U.S. economy was 77.8%, three full percentage points below the historical average from 1972 to 2012. (Source: Federal Reserve, September 16, 2013.)
And we are seeing layoffs and discharges in the manufacturing sector accelerate in the U.S. economy. In March, there were 83,000 layoffs and discharges in manufacturing. In August, that number rose to 91,000—an increase of almost 10%. (Source: Federal Reserve Bank of St. Louis web site, last accessed September 19, 2013.)
When we look … Read More
The chart below of the Dow Jones Industrial Average depicts the precise moment when the Federal Reserve made its announcement last Wednesday that it was not planning to taper its quantitative easing at this time.
Chart courtesy of www.StockCharts.com
This is really troublesome. Key stock indices have become addicted to easy money and any news about more money printing just drives the market higher. This pattern has been going on since the Federal Reserve first promised it would rev up its printing presses back in 2008.
Unfortunately, as this continues, the fundamentals that are supposed to actually drive key stock indices higher—corporate earnings—are under major pressure. We have been seeing companies in key stock indices playing “tricks” to increase their corporate earnings per share (such as buying back their own stock), but these antics can’t go on forever.
Software giant Microsoft Corporation (NASDAQ/MSFT) has announced the company’s board of directors has approved a share buyback program worth $40.0 billion. (Source: Microsoft Corporation Investor Relations, September 17, 2013.)
CBS Corporation (NYSE/CBS) said it has increased the amount of its share buyback program to $6.0 billion. (Source: CBS Corporation Investor Relations, July 25, 2013.)
These two companies are only two of the many big-name companies in key stock indices that are rigorously buying back their shares. Other names, like Juniper Networks, Inc. (NYSE/JNPR) and Time Warner Cable Inc. (NYSE/TWC), are taking a similar approach.
As I have recently written, it’s not just corporate earnings growth that’s the problem—revenue growth is also lacking. Companies in key stock indices enjoyed double-digit (or close to it) earnings growth in 2009, 2010, and 2011, … Read More
With the summer months drawing to a close, it has been a somewhat warm few months for the stock market with the S&P 500 and Dow recently at record highs.
Yet we are now seeing a pause, which may or may not be an indication that the current stock market rally has fizzled out after sizzling higher on the charts. Now, I would not be surprised to see a five-percent (or more) stock market correction. In fact, I would love to see a stock market adjustment.
Some of the market leaders in 2012 and 2013 are beginning to fade, and this indicates a possible near-term stock market top.
The leadership of the banks is sliding. The chart of the Philadelphia Bank Index below shows the current situation of a potential bearish double-top forming in these stocks. Failing to attract support (at the bottom blue support line to the right of the chart) could see bank stocks drop lower on the charts, and they will take the broader market down with them.
Chart courtesy of www.StockCharts.com
We are also seeing some exhaustion in the previously sizzling housing market. (See “Why the Housing Market Is Eyeing the Fed’s Bond-Buying Strategy.”) The chart of the S&P Homebuilders Index below shows the current downward trendline after the index peaked in May. A closer look shows that a bearish descending triangle may be in the works, which could see the housing sector stocks fall through the lower support line.
Based on my technical analysis, and as I have said in previous commentaries, I would be very careful about chasing housing stocks higher. The … Read More
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