Published: October 16, 2009 05:11 pm      

Too many reports don’t make sense

EDMOND — “Life is hard. It’s a lot harder if you’re stupid about it.” This not-so-delicate comment comes from “the Duke” — John Wayne. I’m not sure how much the Duke knew about the stock market, but we can probably apply this to the way some people approach investing. Many people fall for every lame-brained comment they just saw on television or some blog. Be careful not to confuse entertainment with actual useful news.

There is a very funny book about cowboy wisdom entitled “Don’t Squat with Yer Spurs On!” The best piece of advice the book offers is “No matter who says what, don’t believe it if it don’t make sense.” It’s good advice.

A lot of what you are hearing every day “don’t make sense,” and you shouldn’t believe it either. My “B.S.” detector is going off the chart. We hear that the recession is over, the consumer is back, housing has bottomed, and we are seeing the beginning of the next great bull market. In light of the facts, those arguments “don’t make sense.” Let’s take a closer look.

The Dow hit 10,000 this week, finally back to where it was a year ago. Wall Street just about threw a parade over it. There is a saying among technical traders that “the trend is your friend.” Another way of saying the same thing is “Don’t fight the tape.” It would be better to say “The trend is your friend until it isn’t.” The “isn’t” part is coming.

No one knows for sure what the stock market is going to do, particularly over the near term. Still, I have a pretty good guess and I think we’re getting ready for a major pull back in the coming months.

Could the market go higher for awhile? Of course. The market can remain irrational for a long time. But ultimately fundamentals matter and stocks are too expensive. Too expensive for what? Too expensive for the current and foreseeable fundamentals. They “don’t make sense.” The stock market is divorced from economic reality.

Forty Four economic forecasters were interviewed recently by the NABE (National Association for Business Economics) and 80 percent of them said the recession is over. That “don’t make sense.” These are the same people who didn’t forecast the biggest single event in modern financial history.

Actually, the expansion we saw leading up to the recent crash was not normal economic growth. It was what we call a bubble and was caused by the biggest credit expansion in history.

Now it’s going the other way. The bigger the bubble, the more damage it does when it blows up. We’ve just lived through the biggest bubble in history. Get ready for the biggest bust.

Recent news tells us that consumer spending has moved back up to 71 percent of GDP. Say what? How could consumer spending be going up? Has your spending gone up? Do you know anyone whose spending has gone up? Not even rich people have increased their spending. That “don’t make sense.”

Here’s what really happened. Consumer spending is going down. The difference is that the other parts of the economy have gone down even more.

In the second quarter, consumers spent $195 billion less than they did the year before. That’s a 1.9 percent drop. In the 20 years before that, consumer spending increased at an average rate of 3.3 percent per year.

You can do the math. That’s a decrease of over 5 percent of GDP, which is a loss to the economy of about $700 billion. Do you think maybe that could be a problem?

We hear that the economy is recovering and the next bull market is underway. But how is that possible? Consumer credit is contracting at a record pace and unemployment continues to go up with no one, not even the Fed, expecting a reversal anytime soon. That “don’t make sense.”

These are not the circumstances in which stocks sell for 27 times earnings (which they are now) and then move even higher. These are the circumstances in which stocks crash.

According to David Rosenberg, “The S&P 500 is already trading at valuation levels that would ordinarily be consistent with an economic expansion that is five years old as opposed to a recovery that, at best, is in its infancy stages.”

“Never before has the S&P 500 rallied 60 percent from a low in such a short time frame as six months. And never before have we seen the S&P 500 rally 60 percent over an interval in which there were 2.5 million job losses. What is normal is that we see more than two million jobs being created during a rally as large as this. By the time we are up 60 percent, the economy is typically well into the third year of recovery.” If this is not a market bubble, I don’t know what is.

We hear that the worst is over for the housing decline. Really? That “don’t make sense.”

According to Zillow real estate research, 30 percent of foreclosures are now concentrated in the top one-third of U.S. home values, nearly double the 16 percent share when the problems in residential real estate surfaced three years ago.

Prime loans now represent 58 percent of foreclosure starts, up from 44 percent a year ago. Even the “regular” folks are having trouble paying the mortgage.

Some people think I’m too negative or they just hope I’m wrong. I hope I’m wrong too. That would be better for all of us. But I’m not here to be a cheerleader. I’m just trying to be real and sound the alarm.

Could I be wrong? You bet. But if you believe I’m wrong, then you have to believe that the problems I just described above, and many others, will be solved in the next year or so. If you believe that, then you should go with your convictions. But if you’re just hoping I’m wrong and hoping the market will continue to go up, you are in danger.

Hope is not an investment strategy. My job is to sound a warning if there’s danger ahead. It’s up to you whether you act on it. The red flags are flying. Remember the Duke and be careful. Now that makes sense! Thanks for reading.



NICK MASSEY is a financial adviser and owner of Householder Group Financial Advisors in Edmond. He also is a guest analyst on CNBC and Bloomberg. Massey may be reached at www.nickmassey.com.