Michael Lombardi writes: Is it just me, or have investors completely abandoned the concept of risk and reward?
The reality of the situation is that the key stock indices are treading in shark-infested waters and the risks are piling up daily. I see bearish signals all over, but the theme among investors, even conservative investors, continues to be “keep buying.”
Margin debt—that’s the amount of money borrowed to purchase stocks—on the New York Stock Exchange (NYSE) reached its all-time high in April. Margin debt on the NYSE registered at $384.3 billion as the key stock indices hit new record-highs. (Source: New York Stock Exchange web site, last accessed May 29, 2013.) The highest margin debt ever reached prior to this was in July of 2007, when it stood just above $381.0 billion. At that time, just like today, the key stock indices were near their peaks and “buy now before it’s too late” was the prominent theme of the day
Looking ahead, corporate earnings, which ultimately drive the direction of the key stock indices, don’t look so good. So far, 106 companies in key stock indices like the S&P 500 have provided their corporate earnings outlooks for the second quarter, and more than 80% of them have issued earnings outlooks that are negative! Corporate earnings growth for the second quarter is now projected to be only 1.4%—and the estimate keeps going down! (Source: FactSet, May 28, 2013.)
And this chart doesn’t look good either:
Chart courtesy of www.StockCharts.com
The above chart shows the performance of the S&P 500 utilities stocks through an exchange-traded fund (ETF) called the Utilities Select Sector SPDR (NYSEArca/XLU). Why is this chart important? Utilities stocks are considered safe because the companies in the sector usually have good long-term growth and consistent corporate earnings. But this chart shows how investors are fleeing the safety of utilities stocks—and I think they are running to high-risk stock sectors.
But in spite of all these factors, it wouldn’t surprise me to see the key stock indices go even a little higher because of all the buying momentum. The bear market rally, which began in 2009, has done a masterful job at convincing investors that the stock market is safe again—but it will all end in a collapse. It’s only a matter of when it will happen.
Key stock indices rising on anemic economic growth, poor corporate earnings, and leveraged investors—this is not going to end pleasantly.
Michael’s Personal Notes:
The International Monetary Fund (IMF) has officially lowered its growth expectation for the Chinese economy, the second-biggest engine in the global economy. The IMF expects China to grow 7.75% this year compared to the eight percent it previously projected.
The First Deputy Managing Director of IMF, David Lipton, said, “while china still has significant policy space and financial capacity to maintain stability even in the face of adverse shocks, the margins of safety are narrowing.” (Source: “IMF Forecasts Lower China Growth, Warns on Debt,” Wall Street Journal, May 29, 2013.) This will be the first year since 2009 that China’s economic growth is in the single digits.
France, a key economy in the eurozone and the fifth-biggest in the global economy, is back in a recession for the third time in five years, as the economic slowdown in the country continues to take its toll. In May, consumer sentiment in the French economy reached lows not seen since July of 2008. (Source: France 24, May 28, 2013.)
As I have written before, there is no way the economic slowdown in the global economy will not end up affecting America. The price action in the stock market doesn’t show this, but in the first quarter of 2013, of the 11 companies on the Dow Jones Industrial Average that reported their revenues in Europe, nine of them posted a decline in sales from that region! (Source: FactSet, May 28, 2013.)
Dear reader, while the U.S. economy still hasn’t recovered from the last economic slowdown, more troubles from outside our domestic control lie ahead.
China and France are just a few of the many examples of what’s actually happening in the global economy. Other nations like Japan are facing severe scrutiny as well.
There are several countries in the eurozone that are in an outright depression. The youth unemployment rate in some eurozone countries is close to 50%. In Cyprus, the government has gone so far as to take money right out of its citizens’ bank accounts if their deposits totaled over 100,000 euros.
While you don’t read or hear as much about it as you did last year, the economic issues in the eurozone are dire—and the ramifications for the global economy are very real. Should Germany’s economy soften further, we could see all of Europe come under economic pressure, the winds of which will surely sail across the Atlantic to the West.
Michael Lombardi, MBA for Profit Confidential
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