Why I'm Cynical Toward This Unsupported Stock Market

By George Leong

I hate to talk negatively and am usually not a doom-and-gloom type of guy like Nouriel Roubini, “Dr. Doom.” Roubini, an economist, is the Wall Street equivalent of the character Grumpy from Snow White and the Seven Dwarfs. Yet the more I see what is happening in the stock market and global economy, the more I’m becoming cynical on the stock market.

Just take a look at the earnings season so far. According to Thomson Reuters, about 50% of S&P 500 companies have reported and 67% have managed to beat the earnings estimates, but this is based on lowered expectations from Wall Street. In a normal bullish stock market, you want to see rising estimates. So, sorry folks—corporate America is not exactly sizzling. More like simmering.

And on the critical revenue end, about 56% have beaten estimates, according to Thomson Reuters. First, 56% is not great, and second, the growth has been pitiful and relatively muted for an economy that is supposed to be growing yet the stock market is edging higher.

Can you imagine what the corporate situation would look like if the Federal Reserve didn’t pump all of this liquidity into the monetary pipeline? The stock market would be dead.

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Recall that the U.S. gross domestic product growth (GDP growth) was a mere 1.8% in the first quarter. Now the estimates are calling for the growth to stall at a mere one percent in the second quarter, according to Reuters. (Source: Mutikani, L., “Second-quarter U.S. GDP to slow sharply on tax burden,” Reuters, July 30, 2013.) These estimates don’t really give me a bout of renewed optimism or confidence. The truth is: the numbers stink.

The only saving grace may be the reluctance of Mr. Bernanke (quite possibly the most hated man in America) to pare down the central bank’s buying of bonds. This means that the flow of money continues, and the addiction to it may not be tested until sometime later. Could you imagine beginning to wean an addict off cocaine—and then changing your mind?

Look, I don’t want to sound like the Second Coming of Dr. Doom, but you must admit that the underlying fundamentals don’t support the record highs in the stock market.

And to make matters worse, the global economy still looks fragile. Household spending and industrial production is declining in Japan. There’s even speculation that Japan’s expected GDP will be cut. Hurry, Prime Minister Abe, the country needs cheap money.

Then you have South Korea, one of my favorite little tigers in the Asian economic zone, reporting a year-over-year decline in its industrial production.

While I may not be Dr. Doom, I’m starting to feel a bit queasy on the stock market. So, be careful—and make sure you take some money off the table and use put options.

This article Why I’m Cynical Toward This Unsupported Stock Market was originally published at Investment Contrarians