Not much changed last week, literally. The S&P500 was almost unchanged; it nudged up by 0.28% for the week. Volume was not strong, and certainly much lower than it was during the sell-off during the late spring and early summer. The VIX (or fear) index dropped, interestingly, to lows last seen during the weeks before the Flash Crash and during the spring of 2008, after Bear Stearns crashed, but before Lehman blew up.
On the macro front, inflation data sent a mixed signal: while producer prices rose by more than expected, consumer prices came in lower than expected. The key takeaway is this–firms’ material costs are rising, but they can’t pass on these costs to consumers. Soon, we should start to see corporate profits getting squeezed, and surprising to the downside. Retail sales were slightly better than expected, again because of the continuing largesse of the federal government (with its record high transfer payments). Housing starts were pretty much as expected; housing permits (further upstream from starts) were well below expectations. The Philly Fed survey came in ahead of forecast, but prices paid and inventory builds point to profit pain around the corner. The leading indicators were slightly worse than expected.
Technically, the divergences continue to build. As prices touch post-crash highs, momentum, oscillator, money flow, and breadth indicators are all flashing caution signals. The ICI report on equity mutual fund flows, last week, confirmed that more money left stock mutual funds than entered–for 32 consecutive weeks.
Yet stock prices have continued to melt up, despite the huge array of fundamental and technical pitfalls that have usually been associated with weaker performance.
It’s almost as if stock prices are suspended in mid-air, and daring anyone to prove that the ground beneath them is a mirage.
The stock markets are taunting naysayers by telling them that the music at the party is playing, so they’d better get out on the dance floor.
And just what could possibly turn off the music? Especially right now, now in the distant future?
The bulls say nothing can really shut down the party. Just keep dancing.
The bears say the Eurozone is on the verge of collapse. After Portugal falls, Spain will be next, and if the Euro survives the demise of Spain, then it certainly would not survive the implosion of Italy which would be next. Japan is teetering on the brink of a sovereign debt crisis; government debt to GDP is over 200% and looking to pile on much more. China’s financial system is a government-controlled house of cards being stressed by runaway inflation; if China cracks, Canada, Australia, and Brazil will get suck down with it. Finally, the US government is spending, borrowing and printing like there’s no tomorrow. State and local governments are facing a fiscal Armageddon; they can’t print money to temporarily paper over the problem. The US banking system is completely insolvent; the too-big-to-fail-banks have never properly accounted for their real estate security losses, and the federal government will not be able to provide life support indefinitely. Corporate profits are near all-time highs, but that’s because government-sanctioned accounting forbearance artificially inflates corporate profits by almost 30% in the S&P500, making the oft-claimed argument ” but the S&P is cheap; see the P/E ratio is under 15″ a total joke.
But other than that, even the bears could agree that there’s nothing to worry about.