Proof the Stock Market Rally’s Getting Close to the End

government debtThere’s no doubt about it. The stock market had a fantastic January! But here’s the bad news: companies in the S&P 500 that released their earnings reports in January (with 49% of S&P 500 companies reporting so far), have had their worst performance since the economy supposedly rebounded (source: Financial Post).

Just 46% of those companies in the S&P 500 that have reported fourth-quarter 2011 earnings so far have beat market expectations—the lowest reading since the third quarter of 2008. Many companies were citing increased input costs and a new general economic slowdown worldwide because of the eurozone credit crisis as factors that affected their earnings reports.

While it will take a few more weeks for most S&P 500 companies to have the visibility required to make more reliable forecasts for the current year, many analysts are now expecting that revisions to the S&P 500 earnings will be mostly to the downside in 2012.

The Association of American Railroads (AAR) also released its latest report for January, 2012. After experiencing slow railcar growth in the second half of 2011, the AAR saw only 1.1% growth in January, from the same period last year.

 The association further noted that, while auto-related carloads remained strong, grains, chemicals and coal were flat to declining on a year-on-year basis.

 For 2012, the AAR sees a higher rail pricing environment along with higher fuel surcharges on the back of lower volume…which means that the U.S. economy is to remain relatively flat.

 This AAR report confirms the negativity in the Baltic Dry Index, on which I reported on yesterday. Both of them point to 2012 as being a difficult year.

 That is why, dear reader, you should be very wary of the recent stock market climb. As I have been writing since 2009…we have simply been experiencing a sucker’s rally within the confines of a long-term bear market. The divergence between earnings reports and stock prices cannot continue. Should S&P 500 earnings for 2012 be lowered again, then that will affect the current price/earnings (P/E) ratio for the market as a whole.

 This will undoubtedly put pressure on stocks and drive the S&P 500 index lower.

 Let’s keep in mind as well that the strong market rise and strong performance put in by the S&P 500 in January was on low volume. This means that many market participants were hesitant, so kept their cash on the sidelines. After sifting through the hard facts above, it is hard to see how that money on the sidelines will suddenly come rushing into the S&P 500. Without this new money coming in, a true market advance cannot sustain itself.

 Michael’s Personal Notes:

A story of the Super Bowl, America, chariot racing, the Roman Empire, and our destined future…

 Super Bowl XLVI made U.S. television history by pulling in the biggest audience, at 111.3 million viewers (source: NBC). The game was seen by close to 47% of all U.S. homes.

 It is no wonder that, with this many eyeballs, the average 30-second commercial sold for a record $3.5 million (source: NBC). Rapid inflation here.

 For the halftime show, a few more people wanted to tune in because the featured artist was Madonna. That brought total viewers from 111.3 million to 114 million.

 The average Super Bowl ticket was $3,982 in the days leading up to the game (rapid inflation). Face value of the tickets ranged from $800.00-$1,200 (rapid inflation again).

 During the Roman Empire and Byzantine Empire, chariot racing was the most popular sport. The chariot racers were divided into factions—teams—that fans wore the colors of and rooted for: Blue, Green, Red and White.

 Under the Byzantine rule, the hippodrome was built, which seated roughly 60,000 fans. An imperial box was created for the emperor and his family. During the interval between races, the crowd was entertained with various performers: singers; dancers; mimes; clowns; and others. The cost of goods rose during the Byzantine regime, the first real form of rapid inflation.

 The races provided the fans with an opportunity to choose a team color, which gave the illusion of control in an otherwise authoritarian society, as purchasing power fell due to rapid inflation (source: Barbara Schrodt). The races took the citizens’ focus off the financial problems of society as they looked so forward to their weekend sports.

 There was a time during the Roman Empire, roughly between 300 B.C. and 400 A.D., when the number of soldiers skyrocketed to over 300,000, from 20,000. During this time, as more soldiers entered the ranks, their pay and pensions increased 350% (rapid inflation) from 124 Roman denarii (the denarius was the currency at the time) to 438 Roman denarii (source: Kenneth Harl).

 In a desperate attempt to keep their reign, the emperors paid the soldiers with a debased currency, which fed rapid inflation. The amount of silver that went into every coin went from 2.19 grams at the height of the empire to just 0.04 at the end; it was also a low grade of silver (source: Martin Armstrong).

 The emperors, during this time, made financial promises to the people that clearly could not ever be paid. Besides just the pay itself, there was the matter of future pensions, where there was no money (unfunded liabilities). With government debt out of control, the currency was debased, but rapid inflation was the resulting consequence, which destroyed the Roman Empire.

 With government debt in the U.S. at over $15.0 trillion and unfunded liabilities at a minimum of $55.0 trillion (with that number probably larger), we have the same problem the Romans faced many centuries ago.

 World GDP in 2011 was $65.0 trillion (source: IMF). There is not enough money in the world to pay for the U.S. government debt and, if we continue to expand our money supply (create money), rapid inflation will be the result.

 We are not addressing the issues and making the hard decisions to fix these problems as rapid inflation creeps in. One day, the market will force us to make those hard decisions.

 Worse, over 46 million people are on food stamps in this country, with youth unemployment at over 18% (source: SNAP & BLS), while there are the privileged few who can afford to pay for rapid inflation and tickets at the Super Bowl.

 History really never changes; just the players change. To sustain the Roman Empire as it grew and grew, money was printed; the rapid inflation came, the value of money deteriorated, and the empire slowly ceased to be the world’s economic powerhouse of its time.

 The same is happening in America right before our eyes. It will be a long process…but at least this time we know who the next world economic power will be. Go East, young man, to a land where citizens are encouraged to own gold…China.

 Where the Market Stands; Where it’s Headed:

 I see more and more market participants turning bullish. Lawrence Fink, the head of BlackRock Inc. (NYSE/BLK), the world’s largest money manager, said yesterday that investors should be 100% in stocks. Stock advisors are turning more bullish each passing day. Of course, this is all very negative for the stock market—it usually does the opposite of what is expected of it. The bear market rally in stocks could be forming a base here from which to make its final upward push before retiring for good.

 What He Said:

 “The U.S. reduced interest rates in 2004 to their lowest level in 46 years. And what did Americans do with their access to easy money? They borrowed and borrowed some more, investing the borrowed money into real estate. Looking ahead, perhaps the Fed’s actions (of bringing interest rates so low as to entice consumers to borrow more than they can afford) will one day be regarded as one of the most costly errors committed by it or any other banking system in the last 75 years.” Michael Lombardi in PROFIT CONFIDENTIAL, July 21, 2005. Long before anyone was thinking of a banking crisis, Michael was warning that the coming real estate bust would wreak havoc with the banking system.