Monday, August 15, 2016

Tell me if you've heard this one "Stocks at all-time highs again..."

So, another day another record as the stock market computer simulation continues its one way march to higher and higher levels.  Since the "catastrophic" Brexit vote in late June stocks have been on a relentless tear higher and have bounced over 10% off the post Brexit lows. 

So, a rational person might ask - wow, what kind of great news is driving this enthusiasm?

Could it be....

* the fact that earnings for the S&P 500 fell about 3% in Q2 on the heels of a 5% decline in Q1 (wait don't we want earnings to be growing?)?

* the fact that companies the S&P 500 have never been more leveraged (ie, they owe more debt relative to their cash flow than at any time in history?)?

* data that shows 8 of the 40 worst months in history for year over year retail sales have occurred in the last 2 years (wait, that doesn't sound good at all)?

* US productivity numbers that fell in the latest quarter dragging the 4 qtr average to 0.175% or basically 0 over the past year (hey, I'm sensing a pattern here - this doesn't sound very good either)?

* the Empire Mfg Survey which slipped back into contraction in the most recent month (contraction is the opposite of growing, right?)?

* signs of a collapsing economy in both China and Japan (oh, I don't like the sound of the word collapsing)?

* tumbling US GDP expectations - down from 3% in January to around 1.6% now?

* climbing oil prices based on hopes and rumors vs. the global oil glut?

 Okay, obviously I'm be a little facetious. The data has been abysmal for the past 6-12 weeks and yet stocks continue to be bid.  The simplest explanation is that there are two pillars holding up the stock markets:

1) The worse things appear in the global economy the more the central banks seem to be willing to do anything to support stock prices.  Unfortunately, there is no model for how to manage the global economy when it's growing 1% and stocks are at all time highs. At some point this experiment will unwind but

2) There is active futures buying occurring every night/morning from 2-3am.  This requires only a little capital to sway the markets that are controlled by algorithmic traders.  Once a direction is established overnight, the programs continue to move the market in that direction after the traditional market open.  Until someone decides to call this buyer's bluff, they recent trend may continue.

It may take something dramatic to move our markets back to a reality based environment but for the time being enjoy the stock market recovery that continues without a true economic recovery.

I'll try to provide a heads up when I think trends are shifting.

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