“Oz: The Great and Powerful” is The Walt Disney Company’s (NYSE/DIS) latest flick about a character named Oscar Diggs who is a con artist. He finds himself in the Land of Oz, where he is a magician that’s ethically challenged. It’s quite the analogy to what’s happening today in the U.S. economy.
The U.S. retail sales report showed a big gain in February, making a big jump over the previous five months. Sales of “Lamborghinis” in the U.S. alone grew a whopping 50% in 2012. Many corporations, like Paris-based luxury goods maker LVMH Moet Hennessey – Louis Vuitton SA, are hitting record highs on the stock market for the third year in a row; Rolls-Royce Holdings plc’s annual sales broke another record, the highest in the company’s 108-year history.
On the back of Main Street fundamentals, corporations and the stock market have done an incredible job recovering since the financial crisis and recession. The big banks have had exceptional access to super cheap cash, making mortgage spreads nice and fat. Big banks are doing great on the stock market right now.
Everything is skewed. Countless U.S. corporations are doing well (as we’ve been looking at), but countless corporations aren’t growing at all. Economic conditions are vastly different in many industries. Retail sales seemed decent, but many retailers are dropping on the stock market. And many brand-name retail manufacturers are struggling, too.
Monetary stimulus has been a boon to those who don’t need to worry about gas prices. The Federal Reserve has performed its job perfectly. The stock market is up. Cash is cheap.
The strength in February retail sales was mostly just an expression of the price inflation in the economy. The numbers are adjusted for seasonal variables, but not changes in prices. We all know there’s price inflation, even if government data say it’s tame.
The stock market is moving now on relative news. We’ve had some more fairly positive news, and the stock market is trending higher on that. But none of this is helping average incomes. Corporations will continue to make minimal new investments.
Be very, very wary about headline numbers and their relative changes. These are only surveys, and they don’t tell the whole story. In the stock market, it’s unwise to invest based on surveys.
The only thing that matters is what corporations say about their businesses and how your savings are structured to deal with the risk. It’s tough waiting for earnings results four times a year. So far, it’s looking like a pretty decent earnings season, but corporations with extensive exposure to Europe won’t fair as well.
Jim Rogers used to say that he just waited until a particular market got to an extreme, then he went the other way; in the absence of extremes, he did nothing.
Corporations with good balance sheets, increasing dividends, and desirable products will outperform going forward. In the mid term, all stock market eventualities are possible. Frankly, I think this market can still go higher before a correction. Corporations are in much better shape now than before the financial crisis. American personal incomes are not, and price inflation is creeping in. This is why you shouldn’t believe the numbers; they are an estimated reflection—not reality.
“Oz: The Great and Powerful” Perfect Analogy of the Fed was last modified: August 24th, 2015 by Mitchell Clark, B.Comm.
Mitchell Clark is a senior editor at Lombardi Financial, specializing in large- and micro-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, including Micro-Cap Reporter, Income for Life, Biotech Breakthrough Stock Report, and 100% Letter. Mitchell has been with Lombardi Financial for 17 years. He won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was a stockbroker for a large investment bank. In the... Read Full Bio »
Forecasts Aug. 29, 2015
Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the physical metal.
Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., slower world economic growth will negatively impact revenue and earnings growth of American companies. Domestically, America’s gross domestic product grew by only a meager 2.3% in the second quarter, which will negatively impact an already overpriced equity market.
Estimates Aug. 29, 2015
Trailing 12-month EPS for Dow Jones companies (Most Recent Quarter)