It’s all decided. Play now. Pay later.
Let’s see, stocks moved up again yesterday. The Dow rose 111 points. Gold fell $6 an ounce. As usual, Bloomberg had a reporter in the playground:
It still seems that the Fed has created this good news is bad news, bad news is good news scenario,”Randy Bateman, who oversees $15 billion as chief investment officer of Huntington Asset Advisors in Columbus, Ohio, said by telephone.
“The anticipation is that the Fed will retain its purchasing of $85 billion in monthly Treasury and mortgage securities, which is going to continue to help the housing market. That will be taken fairly well by the market.”
The S&P 500 climbed in 13 of the past 15 sessions, as companies beat estimates in the current earnings reporting season and signs of slower economic growth fueled bets the Fed will maintain stimulus measures after its two-day meeting that started today. The rally has pushed the index up 24% this year, leaving it poised for the best annual gain in a decade.
Well… there’s the good news. Where’s the bad news that causes this good news? Bloomberg continues:
Data today showed retail sales dropped 0.1% last month, restrained by the biggest decrease at auto dealers since October 2012. Wholesale prices unexpectedly fell in September as food costs retreated. Inflation has been running below the Fed’s 2% objective in the near-term, giving policy makers room to maintain monetary stimulus.
Hmmm… yes… bad. Janet Yellen does not like to hear about falling prices. She thinks her job is to make them go up. She wants more inflation, not less. So, there will be no tapering anytime soon. You can count on it.
A Free Pass to Corporate America
But everyone knows that the Fed’s $85 billion-a-month bond buying spree can’t last forever. And everyone knows that there will be hell to pay when it stops.
Why?
Because government finances, stock market prices, the bond market and the housing market depend on the Fed’s EZ money. And nobody wants to find out what happens when the Fed stops. Apocalypse Now? No, the feds prefer an Apocalypse Later situation…
The press referred to the recent threat of a government shutdown as Apocalypse Now. But it didn’t happen. The feds decided to go for Apocalypse Later. They kicked the can down the road to January.
There will be no fiscal apocalypse either. Not as long as Congress still has a foot to boot the can with. The apocalypse will be delayed… postponed… and held off for as long as possible.
In the meantime, corporate America is enjoying higher corporate earnings (although top-line revenues remain challenged).
Where do these higher earnings come from? Believe it or not, much of it comes courtesy of Fed policy. As Bonner & Partners editor-in-chief Chris Hunter has reported, since the March 2009 low, 60% of the expansion of corporate America’s operating earnings has been due to a reduction in interest expenses on debt.
And US corporations haven’t been shy about taking on new debt either. As Chris reported yesterday, corporate America (excluding the financial sector) has taken on $1 trillion in new debt over the last three years. This has brought the total debt load to $14 trillion – about twice the level it was at when Alan Greenspan issued his infamous “irrational exuberance” warning in 1996.
This Trend Can’t Last
The cost of credit is so low that even the most reckless and least creditworthy corporations can still get loans… and stay in business. Junk bond defaults are running at only 1.6% – one-third the average level of the last 30 years.
Meanwhile, the first 282 companies reporting earnings this season showed earnings up 5.7% on revenue increases of only 3.5%. How can you increase profits 60% faster than sales?
Easy: You borrow cheap money and lower your debt-service costs. Everyone knows that can’t last. Corporations can’t continue to borrow so much money at such low rates. But everyone is perfectly happy to postpone that apocalypse too.
Stock market investors are no dopes either. They know this Fed-driven bull market must come to an end sometime. By many different measures – P/Es… swollen margin accounts… enterprise-value-to-revenue ratios… investor sentiment – the stock market is already in the danger zone.
What will happen?
Either the Fed will begin to taper – probably causing a crash. Or investors will get tired of investing real money in a phony trend.
Either way, when the apocalypse comes… it will be later.
Regards,
Bill
