Lead Forward

Wall Street bulls ignoring economic reality

Kagan McLeod, National Post

BULLISHNESS DOESN'T ACCOUNT FOR PICTURE.

William Hanley, Financial Post · Saturday, Jan. 15, 2011

I was aiming to stroll down to the beach here in Waikiki on Wednesday and have my regular early-morning swim in the breakwater. Then, it was to be a quick breakfast and off to the Sony Open at the nearby Waialae Golf Club for the PGA's first full-field tournament of the year.

But the weather, which has been very changeable lately, refused to co-operate. Driving rains for several hours left me surfing the Web, instead of actually being in the surf, and then watching and listening to the shouting heads on CNBCTV, instead of watching the pros on the links.

Hawaii is no paradise. I recall a few years ago here that we had something like 46 days with at least some rain. Because there is a lot of weather here, it is not perfect.

But trolling the Net and listening to the shouting heads, as I did this week, I've been getting the impression that the stock market is, in the opinion of many, if not perfect, then pretty close. "We're in this virtuous place," intoned one CNBC panelist on Wednesday as the benchmark S&P 500 index rallied and continued to add to last year's gain of 13%. Another guest added this year is when "the pessimism bubble bursts" and the small investor will "get enthusiastic about stocks" so "it's time to stop being defensive."

Such bullish talk naturally rings warning bells for this skeptic. If the stock market could make a double-digit advance in a year when there was a pessimism bubble and investors were defensive, what might happen this year when the small investor gets enthusiastic about stocks?

Yes. You were wondering about that, too. To this counter-intuitive mind, might not a bursting of the pessimism bubble and a wave of optimism perhaps not create, well, a situation in which stocks struggle?

The small retail investor, being the conservative unsophisticate, is the last to get into rallies and the last to get out of retreats -- if he/she gets in at all. By the time this investor enters the fray, the easy money has usually been made and the smart money is thinking of taking some profits.

To be sure, the underpinnings of the market are fairly strong going into 2011, even if large pockets of the U.S. economy are struggling mightily after the financial crisis, stock crash, subsequent recession and further build-up of national debt. As the fourth-quarter earnings season started this week with Alcoa Inc. "surprising" the Street with stronger-than-expected profits, analysts are expecting the S&P 500 stocks to make 30% more than they did in the 2009 fourth quarter.

Most corporations are flush with cash, making large chunks of their profits overseas in currencies that translate well into devalued U.S. dollars, and have figured out many ways to do more with less, especially on the labour front. So, while earnings advances will be harder to come by as the year progresses because the year-earlier comparative figures are higher, profits will more than likely continue to be strong, "surprising" people to the upside.

One of the CNBC panelists went so far as to say the economy was "just ripping along" and another said U.S. GDP could grow by 5% this year. That would surprise just about everyone, especially those like David Rosenberg who see lots of reasons why the economy-- and perhaps the stock market -- may encounter even more headwinds this year.

Rosenberg, chief economist and and strategist at Gluskin Sheff in Toronto, Wednesday published a dozen sets of charts in his daily newsletter that give weight to his concerns. Most notably, the housing and employment pictures, as highlighted starkly in the charts, remain dismal and look to be as such perhaps for years to come.

And yet with Wall Street in rampant mood, the plight of millions upon millions in Foreclosureville and Joblesstown once again underscores the growing sense that the United States is telling a tale of two situations, a best of times for some, a worst of times for others.

Whether this situation in which the rich get richer and the poor get food stamps is sustainable is moot.

Federal Reserve chairman Ben Bernanke, while emphasizing that the recovery is slowly gaining strength, has also acknowledged that employment might not return to normal levels till 2016. And it's widely accepted that the housing market, which also has winners and losers, probably will remain generally depressed for a couple more years at least.

So far in this jobless and housingless recovery, the consumer, who accounts for 70% of the economy, has been able to hang in and increase spending, finding ways to get around tight credit and stagnant wages. And the market bulls believe that can continue.

Right now, as 2011 gets rolling with solid gains, the consensus Wall Street forecast has stocks up about 10% for the year, continuing the market recovery that began in March 2009. Another 10% in 2012 would get stocks back to where they were at the top in 2007.

We'll see. As with here in Hawaii, there'll be lots of weather to make things interesting.