Can you believe the mainstream headlines these days? I’m reading about the Dow Jones Industrial Average going to 19,000… I’m reading that stocks are rising because the amount of stocks for investors to buy has diminished…
It’s all rubbish!
The chart below of the Dow Jones Industrial Average breaking above 16,000 makes it look like people just woke up the morning of November 18 and said, “I need to rush out and buy stocks today!”
In my opinion, we are looking at the biggest bear market trap we’ve ever seen. The year 2008 is a distant memory. The notion of fear of “missing out” is back.
Investors are pouring billions into stocks…
Chart courtesy of www.StockCharts.com
According to the Investment Company Institute, long-term U.S. equity mutual funds had a net inflow of $5.4 billion for the week ended November 6. In the prior week, which ended on October 30, investors bought $4.2 billion worth of long-term U.S. equity mutual funds. (Source: Investment Company Institute, November 13, 2013.)
As investors are pouring back into stocks, the fundamentals that drive the key stock indices are dissipating. Each day, we hear weak economic news, which suggests key stock indices are moving beyond reality. And the disparity between the performance of key stock indices and the most basic fundamentals continues to grow.
Corporate earnings of companies in key stock indices are very weak. The corporate earnings “surprise” rate (this is the rate that shows how much higher or lower corporate earnings were registered) came in at 1.8% in the third quarter—far below the four-year average of 6.5%.
S&P 500 companies posted an increase in profit in the third quarter of 3.5% more than the third quarter of 2012. But the S&P 500 is up 30% since then! How does that make sense?
It gets worse if we take out all the stock buybacks the S&P 500 companies have executed over the past 12 months. Take stock buybacks out of the equation, and there was no earnings growth in the third quarter!
And we just hit a new milestone in the amount of money investors have borrowed to buy stocks on the NYSE.
Investors are not interested in hearing all this negative stuff on stocks; all they know is the Federal Reserve is printing $85.0 billion a month in new paper money and somehow, that’s good for the stock market. Nothing else really matters.
But history has taught the smart money people one lesson well…and I want my readers to heed this time-proven phenomena: key stock indices have always plunged when the majority of investors and stock advisors have become bullish. We are close to that point now.
Yes, I may be ridiculed today for being one of the remaining bears on key stock indices. But I was also ridiculed in November 2007 when I said, “The Dow Jones Industrial Average, the S&P 500 and the other major stock market indices finished yesterday with the best two-day showing since 2002. I’m looking at the market rally of the past two days as a classic stock market bear trap.” By March 2009, the Dow Jones had fallen by more than 50%, and all of a sudden, I was a hero.
Bottom line: picking an exact stock market top is next to impossible…but we are almost there.
For its fiscal year (ended September 30, 2013), the U.S. government posted a budget deficit of $680 billion…that’s after four years of annual trillion-dollar budget deficits. And with the onset of a new fiscal year, the trend continues. (There are projections the U.S. government will have a budget deficit each year until at least 2038.)
The Department of the Treasury’s Bureau of the Fiscal Service reported the U.S. government registered a budget deficit of $92.0 billion in the first month of its fiscal year 2014 (October 2013). The government’s revenues were $199 billion, and its spending amounted to $291 billion. (Source: Bureau of the Fiscal Service, Department of the Treasury, November 13, 2013.)
As a result of continuous budget deficits, the national debt has skyrocketed to $17.0 trillion, and with the crises that are currently taking place in the U.S. economy—municipal bankruptcies, soaring pension liabilities, and student debt delinquencies—I expect it to go to $34.0 trillion.
On the other hand, there’s the Canadian government. According to its most recent economic and fiscal projection, it expects to have a budget surplus (when revenues are more than expenses) by its fiscal year 2015-2016. It then plans to use this surplus to start paying off the small national debt it has accumulated. (Source: Department of Finance Canada, November 12, 2013.)
Note the difference: while the U.S. government expects to post budget deficits for a very long time to come, Canada—a major player in the global economy—is very close to a budget surplus.
If the U.S. government continues to follow the same trajectory (spending more and borrowing more), it’s not sustainable in the long run, as there comes a point when creditors question the value of the currency they have lent against. If it ever comes to that situation—and one day, it will—the bond market will not be the only victim; the U.S. dollar will face an identity crisis, and the buying power of Americans will be destroyed.
Obviously, all of this won’t come into play right away, but we’re getting there.