A Bull Market That’s Missing Parts

The longer the rally persists, the more dangerous it becomes.

The S&P 500 is up almost 60% since March. The Dow just had its best quarter since ’98.

Yesterday, the Dow slipped 29 points. Is the rally finally rolling over? Or is this a genuine bull market, just taking a pause?

If it is a real bull market, then it’s a funny looking bull – one that’s missing parts!

For example, corporate earnings are missing. P/E ratios are rising far above the corporate earnings that support them. This puts the market 35% overvalued, on a cyclically adjusted P/E basis, says Smithers & Co. And if you look at it in terms of its “q” ratio – a comparison of capitalization to replacement costs – the S&P is even more overvalued. As for emerging markets – “they’re off the charts,” says The Financial Times.

Another missing part is the consumer. This from David Rosenberg:

“Consumer confidence not only surprised to the downside in September but the Conference Board index actually fell to 53.1 from 54.5 with both the ‘present situation’ and the ‘expectations’ component failing to build on the August rebound. Before we go any further on the details, let’s recall the following:

  • Historically, by the time the S&P 500 rebounds 60% from the trough, the confidence index is sitting at 92.0;
  • The month recession ends, the index is, on both an average and median basis, sitting at 72.0;
  • During an economic expansion, the consumer confidence averages 102.0; in a recession, it averages 72.4.

“Just to put a 53.0 reading into proper perspective. It’s still recessionary… The only categories [that] actually saw their confidence level rise in September were the ones in the lowest income strata – less than $25,000 (their confidence rose two points). After all, they’re the only ones really benefiting from all the government intervention into the economy and the markets.”

It’s not hard to figure out why consumers lack confidence; this bull is lacking in jobs, too. A worse-than-forecast report came in from ADP Employer Services yesterday. It said US companies cut 254,000 more jobs in September. And Reuters reports that jobless rate rose in August in all US cities.

The bull is also missing production. Another report told us that manufacturing activity in the Chicago area is still in recession. In the United States as a whole, the latest numbers tell us that GDP fell in the 2nd quarter – but by less than forecast. “Less than forecast” might be good news if stocks were at an epic low. Instead, at current levels, it is much like a doctor who tells the family: “Thank God he got medical attention. He’s dead, but not as dead as he would have been without it.”

Another important part this bull market is missing is the retail stock market investor. Hey, this rally has no legs at all!

We have insisted – with no proof, up until now – that the mom and pop investor is no longer counting on the stock market for his retirement. He’s seen what can happen. At the low in March, adjusted for inflation, he was back to where he was 40 years ago. That is, in real terms, he had not made a dime from the stock market (aside from dividends) during his entire adult lifetime.

We guessed that he was not buying stocks.

Now, here’s the evidence: according to TrimTabs, only $2.5 billion has gone into equity mutual funds in the last six months. Bond funds have attracted 13 times as much money as equity funds, says a Morningstar report.

“US retail investors…have watched this rally from the sidelines,” the FT concludes.

Wait a minute. Someone is pushing up stock prices. If not the retail trade, who? We don’t know. Maybe hedge funds. Maybe institutional speculators. The pros have a different outlook. If this rally turns out to be real, and they miss it, their jobs and reputations are in danger. If it turns out to be phony, on the other hand, they risk clients’ money. On balance…they are better off getting in than staying out.

But just as the pros jump like lemmings into equities…they could all scramble out fast. Give them a fright…and this rally is over.

Where might the fright come from? We can think of several possibilities. One is the housing sector. If foreclosures begin to increase…and prices fall…even the pros may put two and two together.

Likewise, a shocking unemployment number could cause them to connect the dots.

Then, look out below…

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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3 Comments on "A Bull Market That’s Missing Parts"

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“If this rally turns out to be real, and they miss it, their jobs and reputations are in danger. If it turns out to be phony, on the other hand, they risk clients’ money. On balance…they are better off getting in than staying out.”

Very good point Bill.


And where are all these institutions getting their money from? Could it be the Federal Reserve printing it up and handing it out at 0%?

Something smells rotten…


If a Casino is empty, do you expect the owners to advertise “come in, all the poker machines and tables are deserted!” or “come in, people are winning big?” .. it’s a dodgy rally. Nonetheless, I know people have made nice money from it, but most of them pulled out last week.

Agreed, John, the markets are really out of sync with any measure of reality, even consumer “sentiment” (ie: consumer gullibility). Sitting on the sidelines is a wise move unless you have money to burn.

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