Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Early Investors set to win big as FDA fast-tracks this ancient medicine - 3rd Dec 20
New PC System Switch On, Where's Windows 10 Licence Key? Overclockers UK OEM Review (5) - 3rd Dec 20
Poundland Budget Christmas Decorations Shopping 2020 to Beat the Corona Economic Depression - 3rd Dec 20
What is the right type of insurance for you, and how do you find it? - 3rd Dec 20
What Are the 3 Stocks That Will Benefit from Covid-19? - 3rd Dec 20
Gold & the USDX: Correlations - 2nd Dec 20
How An Ancient Medicine Is Taking On The $16 Trillion Pharmaceutical Industry - 2nd Dec 20
Amazon Black Friday vs Prime Day vs Cyber Monday, Which are Real or Fake Sales - 1st Dec 20
The No.1 Biotech Stock for 2021 - 1st Dec 20
Stocks Bears Last Chance Before Market Rally To SPX 4200 In 2021 - 1st Dec 20
Globalists Poised for a “Great Reset” – Any Role for Gold? - 1st Dec 20
How to Get FREE REAL Christmas Tree 2020! Easy DIY Money Saving - 1st Dec 20
The Truth About “6G” - 30th Nov 20
Ancient Aztec Secret Could Lead To A $6.9 Billion Biotech Breakthrough - 30th Nov 20
AMD Ryzen Zen 3 NO UK MSRP Stock - 5600x, 5800x, 5900x 5950x Selling at DOUBLE FAKE MSRP Prices - 29th Nov 20
Stock Market Short-term Decision Time - 29th Nov 20
Look at These 2 Big Warning Signs for the U.S. Economy - 29th Nov 20
Dow Stock Market Short-term and Long-term Trend Analysis - 28th Nov 20
How To Spot The End Of An Excess Market Trend Phase – Part II - 28th Nov 20
BLOCKCHAIN INVESTMENT PRIMER - 28th Nov 20
The Gold Stocks Correction is Maturing - 28th Nov 20
Biden and Yellen Pushed Gold Price Down to $1,800 - 28th Nov 20
Sheffield Christmas Lights 2020 - Peace Gardens vs 2019 and 2018 - 28th Nov 20
MUST WATCH Before You Waste Money on Buying A New PC Computer System - 27th Nov 20
Gold: Insurance for Prudent Investors, Precious Metals Reduce Risk & Preserve Wealth - 27th Nov 20
How To Spot The End Of An Excess Market Trend Phase - 27th Nov 20
Snow Falling Effect Christmas Lights Outdoor Projector Amazon Review - 27th Nov 20
4 Reasons Why You Shouldn't Put off Your Roof Repairs - 27th Nov 20
Further Clues Reveal Gold’s Weakness - 26th Nov 20
Fun Things to Do this Christmas - 26th Nov 20
Industries that Require Secure Messaging Apps - 26th Nov 20
Dow Stock Market Trend Analysis - 25th Nov 20
Amazon Black Friday Dell 32 Inch S3220DGF VA Curved Screen Gaming Monitor Bargain Deal! - 25th Nov 20
Biden the Silver Bull - 25th Nov 20
Inflation Warning to the Fed: Be Careful What You Wish For - 25th Nov 20
Financial Stocks Sector ETF Shows Unique Island Setup – What Next? - 25th Nov 20
Herd Immunity or Herd Insolvency: Which Will Affect Gold More? - 25th Nov 20
Stock Market SEASONAL TREND and ELECTION CYCLE - 24th Nov 20
Amazon Black Friday - Karcher K7 FC Pressure Washer Assembly and 1st Use - Is it Any Good? - 24th Nov 20
I Dislike Shallow People And Shallow Market Pullbacks - 24th Nov 20
Small Traders vs. Large Traders vs. Commercials: Who Is Right Most Often? - 24th Nov 20
10 Reasons You Should Trade With a Regulated Broker In UK - 24th Nov 20
Stock Market Elliott Wave Analysis - 23rd Nov 20
Evolution of the Fed - 23rd Nov 20
Gold and Silver Now and Then - A Comparison - 23rd Nov 20
Nasdaq NQ Has Stalled Above a 1.382 Fibonacci Expansion Range Three Times - 23rd Nov 20
Learn How To Trade Forex Successfully - 23rd Nov 20
Market 2020 vs 2016 and 2012 - 22nd Nov 20
Gold & Silver - Adapting Dynamic Learning Shows Possible Upside Price Rally - 22nd Nov 20
Stock Market Short-term Correction - 22nd Nov 20
Stock Market SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend - 21st Nov 20
Why Budgies Make Great Pets for Kids - 21st Nov 20
How To Find The Best Dry Dog Food For Your Furry Best Friend?  - 21st Nov 20
The Key to a Successful LGBT Relationship is Matching by Preferences - 21st Nov 20
Stock Market Dow Long-term Trend Analysis - 20th Nov 20
Margin: How Stock Market Investors Are "Reaching for the Stars" - 20th Nov 20
World’s Largest Free-Trade Pact Inspiration for Global Economic Recovery - 20th Nov 20
Dating Sites Break all the Stereotypes About Distance - 20th Nov 20

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Solving the Great Disconnect Between Stock Market and Economic Reality

Stock-Markets / Stock Markets 2010 Jul 31, 2010 - 03:26 PM GMT

By: Mike_Larson

Stock-Markets

Best Financial Markets Analysis ArticleWe have a “Great Disconnect” on our hands.

On Monday, the Federal Reserve Bank of Dallas released its latest manufacturing survey. This wasn’t old, stale data; the survey was conducted in mid-July. And the results were awful, with the headline index plunging to -21 from -4 a month earlier. That was the worst showing in a year.


Yet the Dow Jones Industrial Average jumped 101 points. That happened in large part because FedEx boosted its 2010 earnings target.

Or how about what happened a few days earlier? The ECRI released its latest weekly leading index, and the results were dismal once again …

The index slumped to -10.5 percent, the worst reading going all the way back to May 2009. Every single time this indicator has slipped into double-digit negative territory, a recession has followed. Every single time.

Yet that Friday, the Dow ramped 102 points. A few reasons? Honeywell and Verizon topped earnings targets, while companies such as Ford talked about a brighter 2011.

In spite of all the lousy economic reports, stocks have risen.
In spite of all the lousy economic reports, stocks have risen.

The disconnect showed up yet again on Tuesday when the Richmond Fed released its regional business activity index for July …

The index slumped for the third month in a row, with new orders plunging and capacity utilization slumping big-time. Consumer confidence also tanked, with the Conference Board’s index slipping to 50.4 from 54.3. That’s the worst reading since February.

The market response? A collective shrug. The Dow finished slightly higher, while the S&P 500 lost all of a point.

You can get the bullish spin on the disconnect from CNBC. Pundits claim investors are ignoring the bad economic news because things are about to turn, and because company comments should outweigh macroeconomic data.

My take is entirely different — and if I’m right about what’s really going on, it has serious implications for your investing strategy!

Companies Can’t — or Don’t Want to — See the Train Bearing Down on Them!

If you were to climb into a time machine and go back to late 1999 and early 2000, you’d hear corporate executives waxing extremely bullish about their prospects. The heads of Cisco, Intel, Amazon.com, and many others saw nothing but rainbows and blue skies ahead. This continued even as leading economic indicators began to slump.

Sure enough, the economy eventually fell apart. And all those bullish pronouncements proved not to be worth a warm cup of spit!

Or how about Enron and WorldCom?

Bernie Ebbers kept up the hype on WorldCom stock until the bitter end.
Bernie Ebbers kept up the hype on WorldCom stock until the bitter end.

Those stocks initially soared when their executives said business was booming. But reality came crashing down eventually. Once again, investors who listened to the chatter coming out of corporate boardrooms got their heads handed to them.

What about a more recent example — say, in home building, or mortgage lending? You should go back and listen to the conference calls, or read the transcripts from 2005 or 2006. These guys were falling all over themselves talking about the new paradigm in housing … the surging sales … the soaring prices.

They continued to spout happy talk even as the underlying, empirical economic data and leading indicators began to roll over. Result: Yet another pasting for anyone who listened to the supposedly clued-in execs.

It’s hard not to conclude that corporate America is full of liars, cheats, and charlatans. And in SOME instances, that’s exactly the case. But more is going on here …

For starters, corporate execs extrapolate too much from current trends. If sales are improving or even booming, say, because of the biggest government bailouts and stimulus packages in the history of the world, they tend to view the trend as sustainable. That forms the basis of their forward projections, including the ones given on earnings conference calls.

But that tendency is precisely the most dangerous at turning points in the underlying economy!  

Investors who believe optimistic CEOs — even as the economy is entering a recession — will invariably get killed. Those forward projections will end up being sharply revised, and the companies’ shares will tank.

Here’s something else to consider: CEOs depend on positive market perceptions of their prospects. That’s because most of these guys have thousands and thousands of company shares in their portfolios.

If a corporate CEO came on the phone during a conference call and said: “You know what guys? Business stinks, and it’s getting worse. Better sell your stock … fast!” what do you think would happen?

The stock would tank, and his or her personal wealth would evaporate. So of course most CEOs are going to talk a big game.

Asian markets have become the mainstay for many multinationals.
Asian markets have become the mainstay for many multinationals.

In the current economic environment, something else is going on too. The U.S. economy is stuck in the mire. But overseas economies … particularly in Asia … are still doing well.

So multinational companies that have exposure to those healthier regions are temporarily able to offset their lousy U.S. operations with foreign strength. That was definitely the case with FedEx, to cite just one example.

Your Job and Mine: Cut Through the B.S.!

As investors, we have a very important job. We have to cut through the B.S. coming from corporate America and make judgments about what’s REALLY going on — then act on those judgments before the guys in the corner offices around this country tell us: “You know what, you were right.”

When I survey the economic landscape, I see:  

  • Consumer confidence falling to multi-month lows,
  • Regional manufacturing indices falling off a cliff,
  • Banks lending less money, and mortgage and consumer credit plunging, and
  • Durable goods orders falling, and job creation completely MIA.

And against that, I hear plenty of optimistic comments from corporate execs who stand to benefit by talking up their prospects.

It should be pretty clear by now where I’m casting my lot … and where I think you should too!

Until next time,

Mike

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules