Monday, April 30, 2012

Talking Heads say invest, invest, invest but closer inspection may say no, no, no!



For the Talking Heads on CNBC and some of the other business news sources all things point to the same thing...buy stocks!

Earnings season is in full swing and it appears that the majority of firms that report are in someway beating the average estimates of the analysts who follow them.

To me that would indicate one of two things. Either the analysts, like economists, are really not very good at doing their jobs or else they don't really do the job at all and simply take the guidance the company provides and use that to forecast results.

Because of this phenomenon I don't generally put that much faith in the excitement generated by hosts and guests who for the most part have an "axe to grind" because the majority benefit from the stock market going higher.

It also seems that for those on business programming most reported economic data can also be spun in a positive way and that if there are two conflicting reports, the one showing an improving economy will be highlighted and promoted.

Now I don't want to be negative and it's possible that I am merely a pessimist (although I will defend myself by insisting on the term realist), but when I look and listen to the news that surrounds both micro and macro economic issues to me it appears there is trouble on the horizon.

Whether it's GDP growth, real estate activity and prices, jobs creation, foreclosures and bankruptcies, unemployment and underemployment, debt as a percentage of GDP, country ratings downgrades, inflation including food and energy, quantitative easing, government imposed austerity measures and political turmoil and legislative uncertainty, for me they just don't paint a very rosy picture.

But then when you look at a metric like the S & P 500 it's at levels not seen since the financial crisis hit.

Is it me or doesn't this all seem like there is a giant disconnect somewhere?

Some points of interest!

Given the amount of financial stimulation that the Fed has pumped into the economy with limited apparent impact along with the recently stated willingness to do even more raises a fairly large red flag. While such action may keep interest rates artificially low, they have been at these low levels for some time with little economic improvement to show for it given the magnitude of the cash infusion. This is much like has been the case for decades in Japan. While these low rates may force savers to abandon fixed income to buy equities in search of a better return, to me this inflation of the stock market is artificial (although as the saying goes it is difficult to fight the tape).

Savers including retirees, soon-to-be retirees and those responsible for these people in the form of pension funds and other plans are well behind the eight ball due to these low rates that have them under-performing to a significant degree the implied annual return that they have been projected to achieve. The ramifications from having to make up for this under-performance at some point in the future could be daunting!

Consider also the impact to the federal government when interest rates go up as they will at some point. The cost to finance this massively expanded debt load will then rise to a point where an unsustainable percentage of federal government expenditures will need to go to just this expense.

We live in uncertain and tumultuous times my friends and I leave you with these charts of 10-year sovereign bond yields from some of the more fragile EU countries that seems to indicate that despite all of the moves made by a variety of entities, they are still in quite a bit of trouble!

That means the rest of the EU may be in trouble and you can then extrapolate that out to the rest of the world! Take a look at the yield levels today and those from a year ago and draw your own conclusions (click charts to make bigger):



Chart Source
Cartoon Source






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