By Michael Lombardi, MBA for Profit Confidential
The euphoria among stock advisors and investors alike seems to be increasing as key stock indices
proceed to move into uncharted territories. I see it all as a bearish
indicator. Just look at the chart below of the Chicago Board Options
Exchange (CBOE) Volatility Index (VIX), often referred to as the “fear
The VIX is fairly close to where it was in 2007, just before one of
the worst market sell-offs in history hit the key stock indices. Since
the beginning of this year alone, the fear index has fallen almost 30%.
This index is screaming that investors are too bullish towards the key
As Warren Buffett once said, “Be fearful when others are greedy, and
be greedy when others are fearful.” (Source: Buffett, W.E., “Buy
America. I Am.,” New York Times, October 16, 2008, last
accessed March 13, 2013.) And the VIX is saying investors are far too
complacent about stock prices today.
The reality of the situation is that there is a significant
disconnect between the stock market and the economy—they are moving in
opposite directions. Unemployment, consumer spending, and the housing
market are still under major stress.
In addition, companies listed on the key stock indices are under
profit pressure. According to FactSet, companies in the S&P 500 are
expected to show negative earnings growth in the first quarter of
2013—the second time this has happened in three quarters. The expected
growth rate is -0.6%. Just this December, the earnings growth rate for
these companies was estimated at 2.2%. (Source: FactSet, March 8, 2013.)
Furthermore, of the 107 companies in the S&P 500 that have provided outlooks for their corporate earnings,
77% of them have issued a negative outlook. The percentage of S&P
500 companies issuing negative outlook is much higher than the five-year
average of 61%.
Dear reader, to me, it seems we are seeing history repeat itself.
Back in 2007, stock advisors were expecting key stock indices like the
Dow Jones Industrial Average to reach 20,000—instead, it took a turn and
dropped by more than 50%. Now, the predictions are much higher, with
one stock advisor calling for the Dow Jones Industrial Average to go up
Key stock indices might continue to run a little bit higher—that’s
exactly what bear traps do; they lure investors in and then leave them
Add corporate insiders selling stock at a record pace and companies
buying back their own shares to prop up earnings to today’s bullishness,
and it makes me even more skeptical about the rise in the key stock
indices. The stock market can stay irrational for now, but I continue to
hold a bearish view on the market and practice caution.
Michael’s Personal Notes:
In the last three months of 2012, the United Kingdom (U.K.)
experienced a contraction in its gross domestic product (GDP). Another
contraction in the current quarter will put the U.K. into another
recession. (Source: Reuters, March 12, 2013.) So far this quarter, the
economic numbers don’t look good for the U.K., as manufacturing fell
1.5% in January.
Of course, many eurozone members are deep in recession.
Jens Weidmann, President of Germany’s central bank, the Bundesbank,
said this week, “The crisis is not over despite the recent calm on the
financial markets.” (Source: Kuehnen, E. and Carrel, P., “Euro woes not
over, German central bank says, as piles up crisis fund,” Reuters, March
12, 2013.) First it was the debt-infested nations that caused economic
chaos; now stronger nations, like France, are struggling to keep up as
they face high unemployment rates.
The situation elsewhere in the global economy is deteriorating
quickly, and it’s not just the U.S., U.K., eurozone, Japanese, and
Chinese economies that are suffering. According to JPMorgan Global
Manufacturing and Services Purchasing Managers’ Index (PMI), the global
economy’s output dropped to its lowest level in four months in February
2013, reaching 53.0, compared to 53.2 in January. (Source: Markit, March
5, 2013.) Any reading below 50 marks contraction.
Demand drives economic growth. If there is bleak demand in the global
economy, a recession becomes a very likely scenario. The major economic
hubs in the global economy are suffering through an extensive recession
or are seeing their economies slow. It’s not very convincing, to me, to
believe there is any economic growth in the global economy.
If the global economy does fall back into recession, and there is a
big possibility it could, it will have a major impact on the U.S.
economy, especially on American-based multinational corporations. When
countries in the global economy see a decrease in exports and imports,
the companies that sell and manufacture goods come under scrutiny, as
their profits decline.
Major U.S. companies, like those on the S&P 500, are already
displaying negative profit growth—which will lead to more uncertainty.
And I doubt excessive money printing will help these companies this time
What He Said:
“When I look around today, I see falling stock prices…I see falling
house prices…and prices for retail goods stores declining. The media has
it all wrong blaming (worrying about) inflation. In my opinion, the
single biggest threat to the U.S. economy and to the Fed in 2008 is
deflation. You can bet the Fed will expand the money supply and drop
interest rates aggressively as deflation starts to rear its ugly head.”
Michael Lombardi in Profit Confidential, December 17, 2007.
Michael was one of the first to warn of deflation. By late 2008, world
economies were embedded in their worst state of deflation since the