Today's Market
by Dr Invest


Only now have analyst begun to admit that there are flaws in our U.S. economy, and only after a continued troubling downturn in the market. Shiller, professor at Yale, acknowledged that he was getting out of U.S. stocks, later saying that investors were continuing to invest in stocks out of fear. Stocks, he said, are the only game in town and that investors were exchanging risks for returns.

David Rosenberg took a step back to highlight four of the biggest obstacles facing the bull market.

Rosenberg, a typically bullish analyst  outlined:

1. Earnings momentum has slowed. Bottom-up consensus forecasts for S&P 500 operating earnings growth in the first quarter have fallen to -3.1% from +5.3% year-over-year. "The second quarter has been sliced to -0.7% YoY as well, so technically speaking we could be looking at a mild profits recession here in the US – this is down from the +5.9% estimate at the start of the year," he wrote.
2. Valuations are high. The trailing P/E ratio is 20x, compared to the long-run norm of 16x. "It actually is not all that uncommon to see the equity market up in years when EPS growth is flat-ish (as the consensus now believes for 2015) but that requires price-to-earnings multiple expansion."
3. Economic data has been disappointing. The Citigroup Economic Surprise Index is at the lowest level since August 2011, and in that month, the S&P 500 dipped in a way that led some to think the economic cycle was turning.
4. The strong dollar is hurting profits. "There is such a thing as too much of a good thing," Rosenberg wrote, and the dollar bull market is not over. He advised investors to avoid sectors that have EPS forecasts below zero, including Utilities (-6.6%) and Telecom (-0.8%.)

Up until last week, no analyst would acknowledge these grim figures. There was only the acknowledgement of a economy reaching velocity to break free of the recessionary levels held the past five years. Even president Obama touted how strong the economy had become under his leadership with employment reaching new highs. The problem is that the improvement in employment has come in part-time jobs that are relative low pay. Companies, seeking to avoid paying for the healthcare of full-time employees have begun to offer only part-time positions. Now heads of households must hold two part-time jobs and then those jobs pay less. When those jobs are recorded, they are recorded as though two people are now employed, when only one person has two jobs.

You may have a short memory, but back in the recession of 2008 there was a change in the way statistics were reported that made the GDP appear more robust, a kind of rewriting of the rules. Most of these changes were because of politics, so our economy would appear more robust. 

The reality is that people are making less income and they are being taxed more. Rules have been rewritten in the U.S. tax code so you pay more... more in fees if you don't have medical insurance... more in fees if you sell a second home (NIT), fees called medicare surtax, and redefining pretax income. (For instance, before 2014 your company could pay for your heath insurance and it would not be counted as income to you. Now the $10,000 to $15,000 your company pays for your health insurance must be added to your total income. So if your company paid $10,000 for your health insurance and your salary was $50,000 a year.... your total income would now be reported as $60,000. Effectively, your are being taxed more, even if taxes were not raised.)

Taxes put a drag on growth. Add to the mix a over valued dollar and declining consumer purchases and you have a recipe for disaster. So hold on to your hats, because the wind is picking up. Politicians and Wall Street brokers will continue their mantra that the economy is taking off. Don't believe it!

(note: the above information is for entertainment purposes only and not to be used in anyway as investment advice.)