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Friday, March 8, 2013

Earnings not QE

I am constantly seeing people proclaiming the market would not be this high if not for the FED interventions.  I have talked about fundamentals being the main driver a number of times.  I still firmly believe that is the case.  I ran across this chart that makes it more clear.


Even though SPX is still below its 2007 high, earnings have way surpassed the numbers from back then.  The reason why stock prices are what they are is because of earnings, not QE or anything else.  I don't see any mystery here what so ever.  No market manipulation (there may be lots of earnings manipulations, but that is a different story, LOL) were needed to get here. Whether stock prices go up or down from here will depend on earnings, not QE or anything else.  Estimates for the future have a rather rosy outlook. Notice that earnings have fallen now for two quarters in a row.  What happens if they don't take off to the upside again.

I also ran into this interesting chart.


The last three times earnings declined two quarters in a row we were in or about to go into a recession. In
Global recession? I provided quite a bit of evidence that suggests we are in a global recession.  It seems pretty likely the U.S. is also in a recession or is about to be.  The pundits on TV that proclaim things are getting better are desperately looking for bag holders.  Judging from all the inflows into equity mutual funds I would say they have done a bang up job.  When all the available economic data is taken into account it really is impossible to say we are not in a recession.

The point is that stock prices got to where they are because of fundamentals.  The fundamentals have now turned down.  If they continue on that path and there is no reason to believe otherwise at the moment, stock prices will follow QE or no QE.  I think people are going to end up being shocked at just how little QE has to do with stock prices in this case.  If the dollar was tanking that would be another story.  However, despite all the QE going on, the dollar index is doing rather well.

If the global recession deepens there will be no global stimulus.  Everybody got together and tried that the last time.  The only result was a ton of new debt and no self sustaining recovery.  Many countries are now in financial trouble because of all that new debt.  I just don't believe they will be turning around and doing it again.  I think the next recession will run its course, however long that takes.


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