The Dow Jones index has just powered through 13,000 this week - but how indicative is it of the true state of corporate America? John Authers in the FT points out the Dow’s many flaws as a benchmark, saying: “Ultimately a landmark for the Dow signifies little or nothing.” It is “weighted by share price, not market value, so the biggest companies do not have the biggest impact.” He points out that a full third of the 1,000 points that took the Dow from 12,000 to 13,000 came from gains “in just four companies - Altria, Boeing, Honeywell and ExxonMobil.”
On the other hand, the S&P 500 “by far the most important index” is yet to set a new record - though it is not far off it.
Meanwhile, Alan Abelson of Barron’s warns in The Business that the current optimism on Wall Street is “one of those irrational phenomena… that defies rational analysis.” He goes on: “What’s stoking mounting enthusiasm for stocks among the investment masses has little to do with fundamentals and just about everything to do with the billions of often-borrowed money available to the freewheelers who control private equity and hedge funds.”
Abelson cites David Rosenberg of Merrill Lynch, who points out that what’s happening just now is the opposite of what happened in late 2002, early 2003. Then, the market kept falling even though economic data was improving. Today, the market keeps rising, even though the economic data are getting worse.
“Technicals, sentiment, M&A and liquidity can take you only so far. As we saw four to five years ago in reverse, the economic backdrop very often wins out in the end.”
And that backdrop isn’t looking too healthy. The housing market continues to be a drain on the economy - three builders, Pulte Homes, Beazer Homes and Ryland Group posted quarterly losses this week as they were forced to write down property values and “abandon land purchases”, reports Bloomberg. Two declined to give any forecast for the coming year, while Beazer’s chief executive Ian McCarthy said the housing market was “extremely challenging”, with no recovery in sight.
Pulte, the fourth-largest US homebuilder, saw new orders fall 21%, with average prices down 1.8% during the quarter. Ryland, the biggest builder for first time buyers, saw new orders dive 26% over the same period.
Yet shares in all three picked up. One of the main reasons is that investors, still flush with cash and hunting for the next big gain, are desperate to bottom-fish in a sector they think is bombed out and ripe for a comeback.
But fools rush in, as they say. The US housing slump is far from over - with more than 50 subprime lenders taken out of the market by bankruptcy or fire-sales since the start of last year, getting an entry-level mortgage is becoming harder. Credit conditions have tightened too, amid widespread fraud in home loan applications. Fewer buyers means falling prices - and that will hit consumption, and then profits, and finally share prices.
Wall Street might be ignoring the warning signs just now - but as Abelson says: “all that can be said with certainty is that one fine morning we’ll wake up and reality will be back with a vengeance.”
On the other hand, the S&P 500 “by far the most important index” is yet to set a new record - though it is not far off it.
Meanwhile, Alan Abelson of Barron’s warns in The Business that the current optimism on Wall Street is “one of those irrational phenomena… that defies rational analysis.” He goes on: “What’s stoking mounting enthusiasm for stocks among the investment masses has little to do with fundamentals and just about everything to do with the billions of often-borrowed money available to the freewheelers who control private equity and hedge funds.”
Abelson cites David Rosenberg of Merrill Lynch, who points out that what’s happening just now is the opposite of what happened in late 2002, early 2003. Then, the market kept falling even though economic data was improving. Today, the market keeps rising, even though the economic data are getting worse.
“Technicals, sentiment, M&A and liquidity can take you only so far. As we saw four to five years ago in reverse, the economic backdrop very often wins out in the end.”
And that backdrop isn’t looking too healthy. The housing market continues to be a drain on the economy - three builders, Pulte Homes, Beazer Homes and Ryland Group posted quarterly losses this week as they were forced to write down property values and “abandon land purchases”, reports Bloomberg. Two declined to give any forecast for the coming year, while Beazer’s chief executive Ian McCarthy said the housing market was “extremely challenging”, with no recovery in sight.
Pulte, the fourth-largest US homebuilder, saw new orders fall 21%, with average prices down 1.8% during the quarter. Ryland, the biggest builder for first time buyers, saw new orders dive 26% over the same period.
Yet shares in all three picked up. One of the main reasons is that investors, still flush with cash and hunting for the next big gain, are desperate to bottom-fish in a sector they think is bombed out and ripe for a comeback.
But fools rush in, as they say. The US housing slump is far from over - with more than 50 subprime lenders taken out of the market by bankruptcy or fire-sales since the start of last year, getting an entry-level mortgage is becoming harder. Credit conditions have tightened too, amid widespread fraud in home loan applications. Fewer buyers means falling prices - and that will hit consumption, and then profits, and finally share prices.
Wall Street might be ignoring the warning signs just now - but as Abelson says: “all that can be said with certainty is that one fine morning we’ll wake up and reality will be back with a vengeance.”
I am long at 1.99060 currently at around +78.5pips. hehe......
