March 16, 2015

Would be short if not for QE world wide

The liquidity provided by the world's central bankers (and its ramifications like historically high corporate share buybacks) has been an essential stock market offset to the deteriorating earnings picture and disappointing progress of the real economy.

More and more cowbell has elevated price-to-earnings multiples, despite 2015 likely being the fourth-consecutive year in which global and domestic real GDP has missed (by a wide degree) relative to consensus expectations.

More indications of the role of liquidity and its impact on stocks has been seen in the last week. Specifically, Friday's hot labor data (pointing to a more immediate hike in the federal funds rate) was the proximate cause for a deep market dive on that day and on the Tuesday that followed.

When weaker economic data (in the form of retail sales) were released yesterday and the tracking estimates for 1Q 2015 were reduced (pointing to a possible delay in the rise in the federal funds rate), stocks roared higher on Thursday.

Bottom Line

But as we look at 2015-16, it seems to me that aggregate profits must grow into valuations in order to justify current stock price levels, as the expansion in P/Es in the face of subpar economic and profit growth seems extreme relative to the corresponding fundamentals. Profits, not growing valuations, must now do the heavy lifting.

Were it not for the unprecedented global easing, I would be substantially short. But, for now, in a free-for-all of central banking easing (which has contributed to plethora of negative-yielding sovereign debt) there continues to be limited natural price discovery in the markets (particularly in the face of deterioration in the real economy) and I am forced to maintain a relatively market neutral position.

A market whose foundation and celebrity are based on global easing is an unsound market and its pricing (of numerous asset classes) is artificial.

Tick-tock, tick-tock.