CapitalistMarks

Is the Stock Market too high?

Posted on 12. Oct, 2009 by scott in economic daydreaming, general musings, markets

Today the DOW hit a new intra-day high for the year.  Coming closer to the benchmark 10,000 level that TV analysts have been touting for months (I predicted it for early summer).

However, the levels of the DOW, NASDAQ, and S&P 500 all seem too high right now.  Consider that optimism is often a contrary indicator and it is pretty darn high for the conditions we currently see in the Macro-Econ0mic environment.

Sure, corporate profits have been higher than expected . . . and certainly higher that the prior quarter.  And sure, more money is pouring into funds and equities as year-end approaches . . . no one wants to miss the boat on this run-up.  But is it justified?

Problem is that while profits are increasing revenues are not.  Consumers just aren’t spending like they used to.  So why the profits?

Companies have cut back on labor costs, benefit packages, technology upgrades and many other ‘line items’ to cut costs.  This has led to the higher profits in spite of lower renenues. . . as it should though probably only for a short time.  However, the higher profits come at the expense of higher unemployment, less responsive customer service, slower order times for new products and so on.  How long can this continue?

Not for long I think.

Soon investors are going to start realizing that too.  They will start taking profits, as I did over the last few months (admittedly early though I feel comfortable sitting on the resulting cash).  Then what?

Three months or more out is the concern.

The Christmas season will probably be good because confidence is higher right now.  The all-important consumers will buy lots of stuff.  But, whoops, those #’s are already in the system.  I know, because I’ve been on that train with my own business in the past.  Retailers placed their Christmas orders months ago and most have taken delivery so they can start playing the ’sale’ game early.  This means that the impact of the holiday season for manufacturers and distributors and most of the rest of the economy is already accounted for.

Only retailers are going to benefit from now through the end of December.

Hence, while profits may be up this quarter (not revenues, remember) and the lagging Christmas retail #’s may be good, beginning in January things may start to look bleak once again.  Sales will decline, orders too.  Unemployment may take a few months of even worse levels.  You know the drill.  We have been living it for nearly two years.

Oh, yeah what about the market?

The stock market  is a leading indicator . . . reflecting the views of investors out six months or so.  We’ve already had some good numbers for the 3rd quarter and Intel — a bell weather tech stock — is expected to show positive numbers tomorrow.

But the economy just doesn’t seem strong enough to followup despite all the optimism (one key here is that stock analysts are notoriously slow in picking up a change in sentiment).  If the numbers don’t keep picking up then the market will start reflecting that well in advance (and the new year is ONLY three months out!).

Which means any time after this week (i.e. after the good numbers that are expected this week are digested and reality sets in) the crap could hit the proverbial fan.

My opinion?

I think there is going to be a pull back of around 20% or more. A lot worse than the 5% or so that CNBC’s Cramer is hyping.

My cash may be golden in a few weeks or months and then I won’t feel so bad about missing out on theimpressive run-up since the March 9 low.

Buy low, sell high.  That is a LOT harder than it sounds!

Let me know what you think.  What the heck do I (we) do with cash in the next pull-back?

Ah, boy, ain’t life great.

Tags: market pull back, market run up, stock market leading indicator