Media types are screaming from their electronic bully pulpits are telling us how Dow 10,000 is an indication that the economy is on its way back and the markets are back to normal. All Dow 10,000 means is that the DJIA has reached 10,000 for the third time (1999 and 2003 as well). The investing public has been guiled into believing that the markets are efficient. This is always true. The least efficient are the equity markets. Due to the diverse group of investors (coming in all stripes), the equity markets are more influenced by fear and greed than any other markets. This is why they exhibit the biggest booms and the biggest busts. They also attempt to be forward looking. When things look bleak, the equity markets try to get ahead of the curve and often slump severely. When conditions show even modest improvement, equity investors will pour money into equity markets. Today was a good example.
JPM reports better-than-expected earnings and the market loves it. Pay no attention to deteriorating asset quality and the probability of reduced trading revenue this quarter. Keep in mind that JPM is probably the best of the banks. What about economic data? Retail sales rose a modest 0.5%. However, because it beat the street consensus of 0.3%. Never mind that the prior report indicated a rise of 1.1%. How about import prices? The data wasn't so bad thanks to a year-over-year decline of oil prices, but oil is creeping higher and the weakening dollar can be inflationary among imported goods.
Forthcoming economic conditions may justify Dow 10,000. After all, it is not such a lofty number. The DJIA first reached that level 10 years ago! Still, no equity bull can answer my question: How will consumers spend without a job and without easy access to credit? They don't have an answer, at least one they want to give. Jobs improve AFTER consumers who can spend, do spend. The problem is that there are so many people out of work and running out of unemployment benefits and credit, they cannot spend enough to generate enough business to warrant rehiring of displaces workers. Also, the days of easy credit are over. Investors will no longer buy vehicles backed by liar or ninja loans (No Income, No Job or Assets), no matter what their credit ratings. The days of using one's home as a piggy bank which is refilled with equity every few years is over. The days of no money down unconventional loans are over. Thank goodness!
The truth is that the reduced borrowing and increased spending is good for the country in the long run. We have been on one big 25-year economic speed trip. Now we are going through withdrawal to come clean. It is painful, but necessary. If permitted to sober up, the U.S. economy will be more fundamentally sound in a few years, but the days of families earning $75,000 per year driving $50,000 vehicles and living in $500,000 homes are over.
Current conditions have fixed income investors reaching for yield. They see opportunities where none may exist. Beware high yield bonds. Yes, they have had quite a run, but now may be the time to sell before reality sets in rather than buy. I have also seen investors buy low-coupon preferreds at discounts thinking that they will reap a windfall WHEN they are called at $25. Here is a tip. An issuer needs to save between 75 and 100 basis points to make a par call economically feasible. This means that preferreds with coupons below 7.00% have a great chance of being traded by my grandchildren. Investors buying GSprB or ATT at yields dipping below 6.00% are borderline stupid.
Enjoy tomorrow's earnings releases. GS and C report.
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