Today the market is rallying to levels not seen since 2007 on the back of some positive economic news. If the market ends the week around these levels it will be the fifth week in a row that the stock market has posted a positive number. Going back to December 24th the market has been on a tear and is up almost 8% during that period. With the proverbial can that is the Fiscal Cliff being kicked out a few months and with unemployment edging up to 7.9% from 7.8% it is no wonder that the stock market is tearing higher!
Additional research from the World Bank shows that they have once again reduced their global growth expectations down to 2.5% from 3.0% for 2013. GDP growth in the US is forecast at 2.5% in 2013 but that will never happen. The tax burden on the US business owner and consumer has still to be felt and with the desire to become more fiscally responsible at the forefront of most budget negotiations the US will be lucky to grow at all in 2013. Looking back at the final quarter of 2012 US GDP contracted by 0.1%. This is the first time since the end of the Great Recession that GDP has contracted in any quarter but no worry we will burst out in 2013 with 2.5% growth!
So why is the market on such a tear? Well let's take a look at some of the headlines that were printed today:
"US market rallies on jobs report"
"Wall Street rallies on upbeat data"
"Dow Tops 14,000"
But we have just seen that the actual numbers are terrible. Also the forecast of GDP growth is wildly out of whack so there is something else going on here and that is the excess cash that is flooding the system is finding a home in stocks. This stock frenzy is being pumped higher by the press and their cheer leading cohorts screaming from the sidelines with misleading headlines such as the above. As long as the data is spun in a way that makes it look good the markets rally. It is much like listening to a politician talk about all that he or she achieved during the past few years!
The market is now within spitting distance of its all time high and this frenzy is driving stocks ever higher. As the market moves higher there is an ever greater disconnect between underlying fundamental value of the company and the stock price. This is pushing the risk of the trade higher and higher. With every tick higher the chance of a severe meltdown increases and this is very concerning to me.
I would love to be all in riding the market higher but the issue is the risk is now totally skewed to a reversal and picking the "right" stock is incredibly tough. Take as an example if you will of Apple. The stock is down over $100 a share during the month of the S&P rise. Another example is 3D Systems which was hammered from $70 to below $60 in a couple of days. Both of these stocks were high fliers in 2012. On the flip of this look at Salesforce which continues to bludgeon higher with a price to earnings ratio of 90. Just as a refresher that means at the current level of earnings it would take 90 years to return you your investment!
With wild swings like these and amid the economic weakness that continues to haunt the globe, rising unemployment numbers and the prospect of higher taxes everywhere I find it incredible that the market is rocketing higher. I certainly will not go so far as to call this a bubble but it is starting to have the look and feel of one and not a place I wish to risk my money. To refute those of you who will cry out about my concern about the market run; if the economic fundamentals were there to support this rise I would find something to cheer about and would be invested but this market is being fictitiously driven higher by a false sense of security that is the Federal Reserve and their ability to create money out of thin air. These are not solid fundamental conditions that warrant an investment and I advise you to remain on the sideline.
No comments:
Post a Comment