The market direction outlook for today was for weakness and a slightly positive close ahead of the unofficial start of second quarter earnings when Alcoa reports after the markets close today. Instead news out of Europe that the German economy continues to contract has investors worried about US Stocks. With the Dow push just above 17,000 and then a move sideways over the past two trading days, investors have decided to take some profits. The problem here is the growing nervousness as more and more headlines, like the one below from Marketwatch keep investors concerned. With profits up handsomely in the last month and to start off July, investors decided to take some risk back by closing some positions.
While everyone knows that stocks historically are overvalued in general, the question really is, how well will companies perform in the next quarter. We are about to find out. In general investors are fine with mediocre returns as long as they meet estimates, which again in many cases have been lowered on many stocks. However it is important to also understand the bull side of this market. Three of the strongest factors aside from the accommodative stance of the Federal Reserve which obviously has been the deciding factor for stocks since the crash in 2008 to 2009 are:
1) The huge amounts of cash many companies have accumulated in the past 5 years. Many companies, particularly large cap blue chip companies are sitting on mountains of cash. These “mountains” are historically at the highest levels recorded. A large part of this has been caused by the slow return to normal employment conditions as companies benefited from slashing the labor force. The second leading cause is the number of companies that controlled and reigned in overhead costs at the start of the recession.
2) The third leading cause of companies building mountains of cash was the re-issue of debt. Long-term debt obligations for most large cap companies has been rewritten at historically low-interest rates. Indeed as the demand for bonds with higher yields has been so strong, many companies were able to issue longer-term debt beyond 5 or even 10 years. This rewrite of debt boosts the bottom line and increases available capital.
3) A lot of companies are earmarking some of their mountains of cash to repurchase their own stock which not only increases shareholder value but also slowly reduces the PE Ratios (Price to earnings) of their stocks which allows the stock, over time, to increase in value but maintain a reasonable PE.
The Party Bears Hate
This has resulted in probably the most hated bull market in history. Federal Reserve intervention which started with Ben Bernanke and now continues under Janet Yellen is continually blasted by economists, analysts and many investors alike yet rarely have these “bears” come up with a better plan to have saved the economy. The stance of “let the big banks fail” is foolhardy without any thinking of the eventual outcome of letting pillars of the economy collapse. The belief that wall street is to blame for all the ills of the economy is simplistic thinking. The ills were and still are widespread and reach into almost every facet of the economy from home builders who built far too many homes, to homeowners who over leveraged themselves, to financial institutions that lent without due process of repayment and ridiculous scheduling and all kinds of “tricks” to make debt “affordable” for many who could not afford their obligations. Still though it is easiest to lay blame on one or two groups and banks are an easy target.
Since the recovery commenced in 2009 in stocks, the bears have written about the “next shoe” to drop. Indeed even on March 9 2009 with the S&P at 676.53 the doom and gloom crowd warned that this was just the start of what would be a “bear super-cycle” that would wipe out trillions more, destroy pension funds, collapse what was left of housing and see at least another 25% plunge in stocks. For the past 5 years bears have taken every pullback to mean the “second shoe” is finally dropping. What they have missed though is a gain of $1309.06 in the S&P index since that close on March 9 2009.
Eventually bears will be right and stocks will suffer a severe correction and then the bears will feel better, but until then these bears have missed stellar returns.
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