In an earlier post I had mentioned that the majority of companies I follow – about 50 or so in sum – were having their earnings projections lowered by analysts. Yesterday was no exception; five of seven companies that experienced a revision were revised down. This movement was punctuated this morning with news that Procter & Gamble saw continued decline in its lines of business over the past quarter. The Wall Street Journal reported that “P&G projected further sales declines, saying sales excluding acquisitions and divestitures would be flat to down 3% in the first quarter.”
If a well-managed business like P&G is not able to equal pre-crisis highs, most other business can forget about it. In other words, the business environment over the past quarter was lousy and is projected to stay lousy for the next quarter, yet the stock market has taken off – the S&P index has risen nearly 15% over the trailing three months and over 35% since the beginning of March.
There are several theories that have tried to explain this phenomenon, ranging from wonky and esoteric to downright paranoid. There is the persistent buzz in the blogosphere about high-frequency trading and latency arbitrage, tools that trading houses can use to front-run client orders and perhaps move the market. This is an egregious practice if it’s true; however, I have a hard time believing that this practice can inspire a months’ long market rally that defies any and all common sense. There must be another explanation.
Some folks think they have one in the form of government intervention. The London Forex Broadsheet posits that intervention from the Federal Reserve – by becoming the lender of last resort – “instigated” the stock-market rally. Writing last month in the Wall Street Journal, former hedge fund manager Andy Kessler put it this way:
“At the end of the day, only one thing has worked – flooding the market with dollars. By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn’t put money directly into the stock market but he didn’t have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear.”
As a small retail investor, I try to maintain a more or less traditional view of the markets and ask myself the same question I always ask, “Do these prices represent value in the marketplace?”
The answer today, almost across the board when looking at the market as a whole, is No.
Henry Blodget seems to agree, at least, he did last month, writing that “the market didn’t get nearly as cheap as it usually does at the bottom of a major secular bear market (single-digit PEs). And another leg down would be in keeping with the way other massive crashes have behaved.”
As I asked back in the winter when debating the merits and demerits of Mr. Obama’s stimulus package, what happens when the stimulus runs out and the economy is still broken? Looks like we are going to find out sooner or later. In the mean time, this summer’s hot stock market has all the markings of a sucker’s rally.
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