By Mike Whitney
US stocks hit a four-year high on Tuesday before lapsing back into negative territory by the end of the session. Normally, a milestone like that would have sent cheers ringing out across the trading floor, but not this time. This time the reaction was more subdued, even somber, mainly because the rally appears to be running out of gas and investors are uncertain whether the Fed will bail them out again or not.
Even though the Dow Jones Industrials and S&P 500 have surged for 6 weeks straight and more than doubled since March 9, 2009 when they hit bottom, (3-9-09; DJIA–closed at 6,547 while the S&P 500 closed at 676) investors know that it’s all smoke and mirrors built on zero rates and liquidity injections. This is why wary retail investors continue to flee stock funds in droves. Mom and pop are convinced that they’re not playing on a level playing field anymore and that insiders are gaming the system. (Check CNBC: “Is the Stock Market Rigged?– “All-America Economic Survey” shows just under half of Americans believe the stock market is rigged for insiders.”)
It’s not just the scandals that are scaring off retail investors. It’s the fact that the whole game has changed. The emphasis is no longer on fundamentals or picking solid, well-managed companies with strong growth and earnings prospects. The way to make money is by flipping stocks every 11 seconds (High-frequency trading) or by betting against your own clients (G-Sax) or, best of all, by figuring out when the Fed is going to juice the market again with another $600 or $700 billion in asset purchases.(QE) That’s essentially what’s happening right now; stocks have been rising for the last 6 weeks in anticipation of another round of quantitative easing. The surge in prices has nothing to do with fundamentals as this excerpt from an article in Reuters illustrates:
“For the second quarter, the percentage of companies beating revenue forecasts was the lowest since 2009. For every company that gave a positive outlook, nearly five companies gave negative outlooks, Thomson Reuters data showed.
Third-quarter earnings estimates are down sharply, and now show a year-over-year decline of 1.8 percent, which would be the first quarter of negative growth in three years….With results in from 95 percent of the Standard & Poor’s 500 companies, just 41 percent have beaten revenue expectations…Investors said the results raise red flags for coming quarters. …
“What this is telling us is that the economy is slowing down, and that doesn’t bode well for the bullish earnings expectations, which we are so used to,” said Pankaj Patel, quantitative research analyst at Credit Suisse in New York.” (“U.S. corporate earnings point to further gloom”, Reuters)
See? Earnings don’t drive the market anymore. What drives the market is the Fed’s printing operations, which is why the 6 week rally has begun to sputter, because investors are worried that the economic data is not quite bad enough to warrant another massive infusion of funny money. The so-called “Bernanke Put” is the belief that the Fed chairman will not allow stocks to slip below a certain point before he resumes his bond buying spree. Keep in mind, that Bernanke’s interventions have already expanded the Fed’s balance sheet by more than $2 trillion since 2009 making it the biggest toxic landfill on planet earth. But that doesn’t matter. What matters is that the investor class continue to make windfall profits on inflated stock prices even while the real economy remains in an irreversible coma.
Of course, some people will argue that the recovery is real, that retail sails and confidence are up and that housing is finally rousing from its stupor. Baloney. The reality is, there’s no demand. Wages and incomes are stagnant and unemployment is above 8 percent, so personal consumption, which makes up 70% of GDP, is still in the dumps. As economist Dean Baker points out, “We lost $1.2 trillion to $1.4 trillion in annual private sector demand. (when the housing bubble burst) Some of this has been replaced by the federal government’s budget deficits, but not enough to fill the gap.” This is why Bernanke keeps pumping the financial markets full of steroids, so stocks don’t reflect the abysmal condition of the real economy which is barely limping along. That’s the real objective of QE, to push equities ever-higher while the real economy languishes in a never-ending slump.
Ask yourself this: How can corporate profits grow, when wages are stagnant? They can’t, not for long at least, because–while production costs may go down–workers no longer have the wherewithal to buy the widgets that business produces. So, sales drop and earnings plunge. (And when earnings stumble, stocks should fall.) This problem can be temporarily patched-over by extending hundreds of thousands of dollars of credit to anyone who can sign his name on a mortgage application, but as we now know, that just paves the way to a world of pain. The only real fix is income growth, wages that keep pace with production. Unfortunately, we’re moving in the opposite direction as Charles Biderman points out in this post at TrimTabs:
“The reason earnings growth has to disappoint is apparent to me when I step back and look at our chart tracking wage and salary growth rate compared with the stock market for the past eight years….In 2011 wage and salary growth dropped from 6% at the April peak, to below 4% in October and then to under 3.3% by January 2012. Since then January wage and salary growth has trended lower. Currently wage and salary growth is hovering over 3% year over year. What is even worse that 3% is before inflation. My guess is that real inflation now that oil prices are surging is at least 3%. That means that after inflation there is no growth in final demand. So with no increase in demand, where will earnings growth come from” (“Corporate Earnings & Revenues Destined to Disappoint in Q3 & Q4″, TrimTabs)
So, there’s no growth in wages at all, which means that earnings will shrink and stocks will fall unless–and this is a big unless–Bernanke continues with his large-scale asset purchases (LSAP) which will sustain the emerging bubble in stocks. That’s the only way he can keep this farce going.
So, how is this all going to play out?
Well, Bernanke is sure to cave in and launch a 3rd round of QE as soon as stocks begin to retreat. That will trigger more stock buybacks by cash-heavy corporations sending equities higher even the real economy chugs along at a miserly rate of 1 percent GDP. It’s worth noting that the stock market has continued to rise even though retail inflows have gone negative.(which means that people are still pulling their money out of stock funds) That’s because–as JP Morgan’s analyst Tom Lee says, “Corporates over the last 20 years have accounted for 87 percent of all the inflows into the stock market. If you look at the last 20 years retail inflows into the stock market have been about $1.5 trillion while corporate inflows have been around $6 trillion.” (You can see the whole video here: (“Chart Attack: Following the Corporate Cash Hoard“, Bloomberg)
Did you catch that? “87 percent” of the money flowing into the stock market comes from corporations, while Mom and Pop only account for a piddling 13 percent of the inflows. In other words, little guys, like you and me, really don’t matter.
The stock market has nothing to do with “the efficient allocation of capital for productive enterprise.” That’s all public relations crappola. It’s a place where people who are filthy rich go to get richer still. And they do it by gaming the system anyway they can or by waiting for Bernanke to game it for them. Either way, it doesn’t reflect what’s going on in the real economy. That’s why no one celebrates these stupid “milestones”; because they’re just fake numbers in a fake system.
NOTE: This just in: Thursday’s headline in the Wall Street Journal reads: “Fed Moving Closer to Action–Minutes show clear consensus for taking steps unless economy picks up”
What a surprise.