Wow! Seems like the stock market is the place to be again.
We broke 15,000 on the Dow Jones Industrial Average yesterday. I hear traders in the pits are wearing hats that say Dow 15,000. Recently, we even wrote about how central banks and bond mutual funds are buying stocks now, too.
Looks like everyone is getting back on the stock market bandwagon. Bullishness amongst stock advisors is at a multimonth high. And the percentage of assets mutual funds have invested in the stock market is near a multiyear high (both negative factors for the market)…
All the sudden, the luxury car market is hot again. Prices for prime New York real estate have hit the stratosphere. Wall Street banks and brokerages are making billions of dollars in new profits and their executives been paid out billions of dollars in bonuses.
I remember 2007 quite vividly. From January to August of that year, the stock market just kept rising. The bulls were plentiful; the bears were rare. But just when it looked like the stock market was the only game in town, stocks started to move sideways; by October 2007, stocks started to collapse.
During 2007, in Profit Confidential, I kept writing about how stocks were overbought and overpriced. And I remember getting letters from subscribers telling me I was “on the wrong side of the fence and wrong about the stock market.” I took the abuse on the chin. But by the end of 2007, as stocks started to collapse in price, I was totally vindicated, and circulation to Profit Confidential had its biggest jump ever.
What I see today is very similar to 2007. But the underpinnings of the stock market are actually worse now than they were in 2007.
Today, we have corporate insiders dumping stock at an alarming rate. Public companies are propping up their earnings with an unprecedented amount of stock buyback programs. Corporate earnings growth has come to a halt. The global economy is slowing. Certain countries in the eurozone are in a depression. Cypress has resorted to taking money away from people who have over 100,000 euros on deposit (could be a new trend), and it doesn’t seem to be a big deal.
The U.S. economy could be contracting right now. The underemployment rate (which is the unemployment rate taking into consideration people who have stopped looking for work and people who have part-time jobs but really want full-time jobs) actually went up last month and still sits around 14%.
The average American consumer is in big trouble. Real disposable income is lower today than it was in 2008. The personal savings rate has fallen more than 70% since 1980. Average hourly earnings of production and non-supervisory employees have crashed 50% since 2008.
So what do we really have? We have a Federal Reserve that has artificially kept interest rates low for years—a central bank that is printing new money and giving it to the big banks or the government. This can’t be sustained.
To my readers, I advise caution. It’s impossible to know the exact point at which the stock market rally that started in 2009 will be over. But I can tell you the higher the stock market goes, the bigger the eventual fall, the bigger the damage to consumer confidence, and the greater the impact on the economy.
Inadvertently, the Fed is creating a huge bubble for the stock market. And all bubbles eventually burst.
What He Said:
“If I had to pick one stock exchange that would rank as the best performer of 2007, it would be the TSX (Canada’s equivalent of the NYSE). Interest rates in Canada remain very low and they are not expected to rise any time soon. Americans looking to diversify their portfolios, both as a hedge against the U.S. dollar and a play on gold bullion’s price rise, should consider the TSX. Most brokers in the U.S. can buy stock on this exchange.” Michael Lombardi in Profit Confidential, February 8, 2007. The TSX was one of the top-performing stock markets in 2007, up almost 20% for the year.