Real-time data extremely bullish, unlikely to last

Feb
06

By Charles Biderman

 

“God bless the United State of America” is how many politicians end their speeches. And indeed, God certainly must be blessing us, just look at the stock market. Right now, surprisingly, everything seems to be coming up roses, particularly those key metrics that determine what is really going on.

 

The first surprise is that corporate buying has picked up dramatically. I had thought that net corporate selling would continue and surge into February. Instead, there has been almost $40 billion of new corporate buying announced over the past week, led by the $20 billion Dell leveraged buyout. The second related surprise is that corporate selling remains lighter then we had thought.

 

Therefore recent corporate activity has been extremely bullish. Is this spike in buying a one – off event? Could be. The Dell deal has been worked on for quite some time. But then again there have been at least three other billion dollar cash takeovers.

 

I am also surprised that we are still seeing positive inflows into both mutual and exchange traded US equity funds. My opinion had been that inflows were boosted directly and indirectly as a result of higher 2013 tax rates, and those inflows would stop by the end of January. Instead, February equity flows still are positive, although nowhere near the huge inflows of January

 

Lastly and perhaps the biggest surprise, at least to me, is that withheld income and employment tax payments were still up over 6 percent during the past two weeks through early February.

 

Those of you who have been regular followers of my blogs know that I had been expecting wage and salary growth to be slumping by now as a result of higher 2013 tax rates pushing lots of taxable income into 2012. I also had been saying that higher employment taxes this year would lower take home pay.

 

Well, despite higher taxes and 2013 income being recognized in 2012, wage and salary growth is not slowing. Why? I have no idea. I called my favorite official senior Washington economist, who has been a friend and confidential source since the late 1990’s. He also has no answer as to why there has been no slowdown in wage and salary growth.

 

Remember, there are always inadvertent consequences to major government actions such as boosting top bracket income and capital gains tax rates for 2013. In anticipation of the year end rate hikes, over $100 billion in extra income poured into the economy late last year. That boosted what normally comes in during December by about 20%. The spike in income means that tax collections have also surged. It is no surprise that the US government can now tout that the deficit could be less than $1 trillion this year. Of course for that to happen wage and salary growth needs to stabilize at these high levels, something I think is unlikely, but then again, we are in uncharted territory.

 

One possible reason for the current spike in wages and salaries could be another inadvertent consequence of the tax hike. And that is that the yearend income surge has had a ripple effect on the economy. Another possible reason for the gain is that business owners decided to take in 2012 more than just regularly scheduled income, bonuses and dividends. They also may have raided the cash from their business balance sheets, assuming that higher rates are here to stay.

 

I’ve discussed before how the new mantra in the financial markets is that central bank money creation is all good, and the belief that, therefore, that nothing bad can happen anytime soon to the global financial markets. Add to that the strengthening of the US economy.

 

The results? It seems likely stock prices will keep going up over the near term.

 

The bigger question is not whether reality has been suspended forever, but for how long? Take home pay right now is growing by about $400 billion annually. How can the US keep creating $1 trillion a year to pay our bills. The current US deficit will be $17 trillion soon, not counting Federal Reserve debts of $3 trillion. The Fed will supposedly sell its bonds in the market place after the economy picks up. Where will a US economy that generates $7.5 trillion in after tax income get enough money to not only pay off Fed holdings, but $17 trillion in government debt?

 

Despite all this bullishness, those of you who subscribe to Biderman’s Market Picks know that at least our model portfolio is still above water while we wait out this insanity.

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7 Responses to Real-time data extremely bullish, unlikely to last

  1. matt on February 6, 2013 at 10:50 pm

    have you looked at how the jobs being created has prgressed downward? the people emloyed at home as gone down? the number of unemployed has gone up ? dig real deep into last weeks jobs numbers and go back several months charles. theres also a housing bubble thats getting ready to burst . we are about to be destroyed by the dictator and its all being done on purpose

  2. Paul on February 7, 2013 at 12:53 am

    The Fed is probably never going to sell its bonds, and it is never going to stop buying new ones. The treasury only needs to pay interest on bonds the fed does not own, and the more bonds the Fed buys, the more diluted the pool becomes.

  3. Dennis King on February 7, 2013 at 9:48 pm

    Maybe we are in a true cyclical recovery with interest rates going up a little. Maybe a little inflation creeping in would be a good thing. Maybe Paul Krugman is right and government deficits do not matter. Maybe the dollar did not reverse today, and competitive devaluation of currencies is a non-event. Maybe the Middle East will break out in peace.

    Man, this Kool Aide is mighty tasty.

  4. Adrian Lopez on February 8, 2013 at 7:19 am

    The U.S. Federal Reserve has been doing its part to inflate the banking system, most recently with its announced program to purchase $40 billion per month of mortgage backed securities (MBS). But the Fed’s total balance sheet size of $3.02 trillion pales in comparison to the size of the ECB’s balance sheet, which equates to $26 trillion as of December 2012. While the Fed’s holdings have increased 6.7% since the September 2012 Jackson Hole conference, the shrinkage of the ECB’s balance sheet over that same time period has more than made up for the Fed’s money printing.
    The reason why this is important is because there is a very strong correlation between the combined size of the ECB and Fed balance sheets and the movements of the world’s stock markets. When the balance sheets are growing, that is overwhelmingly a bullish factor for stock prices.
    When balance sheets stop growing or start shrinking, it is a little bit more complicated. Past episodes of shrinking balance sheets in 2008, 2010, and 2011 all were associated with big drops in the SP500 and other indices. As 2013 gets underway, the SP500 is continuing higher and challenging its 2007 all-time high, but it is doing so in an environment when the combined balance sheet size has not been rising
    http://www.mcoscillator.com/learning_center/weekly_chart/ecbs_shrinking_balance_sheet/?utm_source=McClellan+Chart+In+Focus+-&utm_campaign=0eb0507a28-CIF_ECB_s_Shrinking_Balance_Sheet2_7_2013&utm_medium=email

  5. Dan on February 8, 2013 at 8:39 pm

    Hard to believe we are in a recovery with a total socialist/Acorn lawyer in the White House, but look at charts on leading economic indicators:
    copper
    transportation
    energy

    They are all up. Emotionally, I find it hard to believe that this economy can grow, because of massive debt, money printing and all the other unprecedented negatives in most of the fundamental aspects of the economy, but the charts don’t lie.

    How long it lasts, I have no idea. I know interest rates must go up at some time and the gov’t is still pumping up the housing market under threat of lawsuits over non-existent discrimination, just like the previous housing boom. I think we are in multiple bubbles right now and afraid the bursting of these bubbles will make 2008 look like a party.

    • Ed_B on February 12, 2013 at 6:37 pm

      Perhaps we have slipped further down the rabbit hole than we know. The world can be a very strange and complicated place at times. We seem to be in a place where fundamentals are of minimal importance to stock prices, which Fed and Gov policies are warping and distorting the market beyond recognition.

      Of the people I know, the more experience they have with investing, the less they seem to be able to relate to this bizarre “system” that is at work today. The young folks seem more adaptable and open to the idea money can be zapped up out of thin air and in unlimited amount with no adverse complications.

      Those of us who are paying attention, such as John Williams of Shadow Government Statistics, are well aware that inflation is currently at about 9.5% and heading higher. The placebo numbers of 2.5% inflation and 7.9% unemployment, created by the Fed and the Gov, are likely zapped up from thin air as well to ensure that there is no sheeple stampede, such as is happening in Venezuela at the moment and starting to happen in Argentina. Things like the economic problems in South America have me wondering whether or not the Fed / Gov policies are having greater impact over-seas than they are here at home. Not that these problems won’t get around to affecting us here but perhaps we just are not the first ones to be impacted by them.

  6. William on February 19, 2013 at 2:19 am

    Agree. Data is bullish. And a number of financial metrics are confirming that:
    - the yield curve is flattening again.
    - short term interest rates have risen.
    - the EUR/Yen rate has gone up.
    However, an number of other metrics are giving a warning signal:
    - The USD fails to weaken (significantly)
    - The Eur/Yen rate seems to be turning down.
    - the silver/gold ratio seems to be heading down.

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Charles BidermanCharles Biderman is the Chairman of TrimTabs Investment Research and Portfolio Manager of the TrimTabs Float Shrink ETF (TTFS)

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