Makes perfect sense, right? Of course not but this is the combination we have and it is driving stocks sharply higher. Do you realize the S&P 500, DJIA, Russell 200 and the NASDAQ Composite are only roughly 17%, 14%, 6% and 3% respective off their 2007 highs? How crazy is that? Yet we have a housing sector showing no signs of recovery and no job growth. What else would you expect from the Federal Reserve and the US Stock Markets?
Controlled Stock Market
Does anyone feel like the stock market is being controlled and manipulated higher? I do and you can point to the Federal Reserve and their printing presses. They may not be directly investing in stocks but indirectly with QE1 and QE 2 they are having a major influence on the price of stocks and commodities. It sure feels like we are back to the good old days where nothing can derail the stock market and any minor pullback is being met with a bucket underneath it. Big Ben Bernanke, the Federal Reserve Chairman is getting what he wants, higher stocks. He wants people to feel like they have money/wealth, so they spend it in hope of it creating demand and thus jobs. He is hoping for the feel good effect. Good luck I say.
I firmly believe the Fed is playing with fire. All the liquidity they are pumping into the system is not doing anything for creating lasting real economic growth but rather, creating bubbles in the commodity markets and pushing stocks higher artificially. Eventually, this all ends ugly but they can keep this going for a while. Since August 2010, we have seen the SPX rally by 27%, coffee nearly 50%, sugar 83% and cotton 125%. Does this sound like normal markets? I think not. All the money the Fed is printing is finding its way into all the markets, thus creating bubbles all over the place.
While we are in a 3rd year of a Presidential Cycle, which has produced gains on average of 14% since 1945, I still think we will see a 5%-7% pullback in the first half of the year. Presently, I am starting to see some warning signs but these signs can persist for awhile, especially when you are in a short term blow off phase which I think we are in.
True Economic Growth?
While the economy is showing some positive data points, I personally do not believe we are getting them in the most critical areas such as jobs and housing. Without jobs and housing really improving I do not see how there is any sustainability once the Fed stops the printing press. The Fed is the only thing keeping this economy afloat. Why else would we need QE2?
Some pundits will point to an improving economy and jobs picture with the latest unemployment number of 9% but that was only due to a contraction in the labor force. It certainly appears as though investors are taking January's drop in unemployment at face value but I’m not.
Let’s look at the jobs picture a little more closely. Did anyone realize the BLS (Bureau of Labor Statistics) annual benchmark revision (published in February) removed the over-count that had built up in last year’s monthly reporting due to a variety of estimating and seasonal adjustment factors including the birth-death model? Also, did anyone realize they adjusted the job count for 2009 as well? All in all the BLS adjusted downward the job count by 1.2 million. This means we now have as many jobs as we did at the start of the century, 130.2 million. What a terrifying number! That’s right, zero job growth in the last decade!
During the official recession period of December 2007-June 2009, we lost 7.3 million nonfarm payroll jobs, bringing the nonfarm payroll count to 130.64 million. At that point the National Bureau of Economic Research (NBER) said the recovery officially began. But after 19 months of so-called green shoots, we actually now have 400,000 fewer jobs as indicated by the revised number for December 2010 of 130.2 million jobs. This is what we call a “real” economic recovery? I do realize employment is a lagging indicator, but it is simply way off the historical charts/standards to have lost an additional 5.5% jobs, 37 months after the cyclical peak of 2007.
For all the pundits who talk about an economy in full recovery mode, I would also direct them to take a look at the Baltic Dry Index (BDI); it is sitting near its lowest levels since early in 2009. The BDI is one of the purest leading economic indicators. The index provides one with an assessment of the cost of moving the major raw materials by sea, such as building materials, coal, metallic ores and grains. It is a precursor to production as well as ships available to move the cargo. I know one thing, if the BDI was moving sharply higher we would hear talk of it but because it is languishing at 2 year lows, we hear nothing. This again, points to how lackluster the economic recovery is.
Conclusion
For me it is real simple, no job creation, no meaningful turn in the housing sector and the lack of a meaningful recovery in the BDI points to a non-meaningful economic recovery; and that’s putting it nicely. Honestly, I think the recovery is all smoke and mirrors and the Fed is at the heart of whatever growth(artificial) we have seen. Personally, I think the stock market is priced for a perfect economy, something we do not have. Having said that, I will respect the technicals of the stock market since I know the stock market is not the economy and con confound one longer than one can stay solvent.
I would suggest one to be extremely careful and not get lulled into thinking that it is onward and upward for stocks without any meaningful correction forthcoming in 2011.
I still believe there is plenty of geo-political risk in the Middle East, Euro land debt issues as well as our own domestic debt issues(Federal, State & Municipal) to contend with. It certainly will not surprise me to see a flare up in one or all of these which causes a trend change in the stock market on a whims notice.
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