As much as the media headlines would lead you to believe the world is ending, the earnings season has not been nearly as negative as expected. Surprised?
Data in the last couple of days has remained a mixed bag as the gears slowly shift in our vast economy. Inventories continue to be drawn down. Oil has bounced a bit but will face a lengthy ceiling of capped supply – sure to be uncorked once we get back to the $50 a barrel range.
Many are too quick to assume the market is rising because of increased optimism. Literally nothing in the investment flow data suggest even remotely this is the case. Instead, bonds continue to get massive inflows and equities get dinged at a moment’s notice.
Commodity prices are continuing a slow and choppy rebound from their lows of several months ago. Oil prices have risen as much as 50% since panic lows in the mid-20’s even though there is much supply waiting for a bounce as highlighted above. Thousands of wells have been drilled and unfinished. Wait until a bit more of a price bounce and we will see just how robust the oil world is here in the US…still.
Some industrial metals prices are up over 25% in just the past 3 months. At the very least this begins to shave away at the stability of the latest “Apocalypse Now” fears and the global economic collapse thesis.
Maybe even more of a focus should be this: it could be hinting that economies around the world are beginning to improve on the margin…yes? Assure yourself that would be an “out of left field event” which we covered in your notes earlier this week.
The chart above shows the “credit crisis” being assumed in the oil patch during the Q1 market dump – uh – panic, is receding just as quickly as it arose.
Note that credit spreads continue to fall, partially thanks to stable to rising commodity prices. The 2-yr swap spreads, a solid leading indicator of economic and financial market health, continue to be encouragingly low.
Even as equities in general are trying to get back in gear but hitting some near-term resistance, it is equally hard to suggest things are optimistic.
After all, 10-yr Treasury yields continue to be extremely low (wavering just above and below 1.8%), hinting that there’s still a deep-seeded, dire view of the future in place.
As I have stated on many occasions here, we will thank our lucky stars someday for the massive fear levels created by the 2008-2009 crisis.
It is this fear which has created a massive demand for low-yielding bonds – negatively so in some cases.
Why else would you ask for such a low rate of return if not for a terrible assumption of the future.
On this point, PE ratios are only moderately above average – clearly not pricing in the fact that corporate profits are very strong relative to GDP.
Indeed, the surprise is that what’s driving the market higher is not optimism but just a bit of receding pessimism.
How do we know?
There remains over $8.25 Trillion sitting in bank accounts earning zilch.
As the baton is slowly being passed from the Baby Boom forces to the Generation Y forces supporting our future economy, the chart below shows business-related bank lending remains on an upward track.
This hints at expansion seeds in the works just as fear remains the focus at the drop of a hat.
Speaking of Debt
More in the crowd will side with the fear-mongering associated with debt levels than the growth shoots often created by debt.
The magazine cover rule comes into play here as Time has once again proven its case below:
I love Jim Grant’s stuff – always have – always will. But, in the past – these types of covers tended to come right before growth spurts which increased revenues to the government thanks to your friendly neighborhood tax bill.
Someone Missed Something?
More on the encouraging front, note that jobless claims continue to fall even as Gen Y begins to look for work. Not sure where the bad news is here:
And just before we all head off for the weekend, did somebody in the masses forget to check the memos?
The market has slowly but surely crawled back from the “worst start in 80 years” but yet the bulls are almost nowhere to be found.
The snapshot below shows the latest:
We are only mildly above the very low bullish readings seen at the crisis lows in March of 2009 – some 10,000 points ago on the DOW.
Sorry – but that’s nuts – and great news indeed for long-term investors.
Be grateful for the cloud of fear across the horizon – the longer it lasts – the better.
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Meanwhile, I will keep beating the drum for these thoughts:
Pray for a correction wave – more panic ahead – maybe even a summer swoon on top of same.
Given the earnings season not being horrible I am concerned we may not see it.
If we are lucky enough to get another roller-coaster ride, grab some TUMS (the flavored kind go great with Bourbon) and use the selling to your advantage.
I close the week with this reminder:
Think DEMOGRAPHICS – not economics.
We are in great shape for a surprisingly positive future.