Wednesday, April 25, 2007

A Growl From The Gallery

What's Wrong with this Picture?
The list of economic woes afflicting the American economy has morphed into a shopping list of bearish data.
Yet, despite the bad news affecting the world's largest economy virtually on a daily basis, stocks continue to hit new highs. What's wrong with this picture? Should we be concerned at all? Should we just ride the wave of new highs as the market discounts all this bad news? I have my doubts.
Housing remains in a secular bear market - and it won't end soon. Existing home sales plunged 8.4% in March, their largest decline in 18 years. Today, fresh data on new home sales will almost certainly paint another sobering picture on this protracted downtrend. Auto sales in the United States for the Big Three continue to sag with unemployment levels in that industry soaring and seriously hurting Detroit's economy. Together, housing and automotive comprises about 18% of the American economy's output.
But let's suppose the market has already discounted the worst of the housing and the auto industry's woes. Well, there's more bearish data and it should raise investors' concerns.
Corporate capital spending continues to decline since the beginning of the year. This suggests that companies aren't positive on economic growth and future earnings. Instead, companies pour hundreds of billions of dollars into stock buybacks and, to a lesser extent, raise dividends to shareholders.
In addition to slack corporate spending, the consumer looks increasingly fragile with most retailers off their best highs since last year. The Conference Board's index of leading indicators dropped below its level of a year earlier, which is a very bearish signal since a negative reading has accurately predicted every recession since 1967. Finally, corporate earnings as measured by the S&P 500 Index have declined to the mid-single digits from double-digits just12 months earlier.
I hate to spoil the party, but I think this rally is mostly fluff. If you strip-out share buybacks and massive private equity trading volume from this market, you have a flat or down market in 2007. The only positive trend for earnings remains a weak dollar - a boon for U.S. multinationals.
Once again, here's my forecast, just in case you're margined and leveraged amid all this hype and considering raising some cash: Expect a brutal stock market correction this summer or fall and then load-up on stocks again in late October. The worst time to be invested in the market, including foreign stocks, is from May to September.
And guess what? Next Tuesday is May 1st

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