The Great and Wonderful Oz Has Spoken

Is it just me being cynical or did the retail sales data Monday really post no gain ex-auto? If you take out the rise in gasoline prices the number gets worse. And to make myself sound worse, what about the revisions to the data? The first positive revision to June sales in 15 years? I don’t want to be negative about this report, but it was anything but encouraging about the economic picture near term.

Monday Goldman Sachs joined JP Morgan in cutting the GDP growth for Q2 back to 1%. A week ago Barclay’s cut the forecast to 0.4% growth. Is there any wonder the market is reacting to the Fed’s comments to cut stimulus? I know that the forecasts are for the third and fourth quarter to be stronger and pick up momentum, but… I guess this is the good old baking term for biscuits, they have to squat to rise. However, if the batter is not just right they will get cooked in the squat and be flat burned biscuits. Simply put the retraction in second quarter estimates isn’t instilling any confidence in the guidance for the second half of the year. If anything it is putting the current Fed activity into perspective.

Then why are we back at record highs for the broad indexes? Is it the “great rotation”? Is money flow from bonds to stocks driving the indexes higher? Sentiment is definitely positive with the VIX retracing back below the 14 level currently. But, it is looking more like Linus in the Charlie Brown special, ‘The Great Pumpkin’, he waited all night for the great pumpkin to arise from the pumpkin patch. Investors are awaiting the great rise in the economy, jobs, spending, etc. but they are not showing up in the data. The numbers don’t matter until they matter. And at some point going forward they are going to matter. In the meantime there are all kind of reasons being given to rationalize the current rise in stocks. None of which instill confidence from my view.

All of this data is a challenge for me as I believe the fundamentals do eventually determine market direction and value placed on assets. However, downtrends don’t gradually build they are created by a catalyst that builds in the background while everyone is happy trading the upside of the indexes, rational or not. There are two undercurrents to this market that remain a disturbance to me as they undermine the fundamental growth of the economy. First, higher interest rates. There is a reason that the Fed wants to maintain lower rates… you need growth greater than 1% GDP (second quarter revisions) to offset a rise of 1-2% in yield on Treasury bonds. If there is a catalyst brewing relative to downside, it is higher interest rates in absence of growth in the economy. Second, higher gasoline prices. Crude is at $106 and could climb to $125 based on some analyst. Higher prices at the pump are a tax on the consumer. That takes money out of the spending economy and slows everything. We have all learned in the past run up in oil prices… it impacts everything, not just what you put in your car. Both of these issues are in play and if they continue watch for the eventual impact on the economy/growth and in turn, stock prices.

That said, we are still hitting new highs and the overall sentiment is positive. Go with the flow until it stops. You don’t fight the trend, and you don’t fight the Fed. Both are fully engaged to keep the investor believing in the upside story of … ‘The Economic Boom’ alias, ‘The Great Pumpkin Patch’. Just remember the data doesn’t matter… until it matters and if the economy just squatted to rise (great biscuit terms), the batter better be just right or it is going to burn some investors. Remember the Fed and Wall Street mixed the ingredients to make the batter…