The Dangerous Game

Gas prices are up. The market is up. So if everything is so bad, what gives?

I have written and spoken so many times in public regarding what I perceive to be the structural weaknesses in the economy, as well as the stock market. Yet the numbers seem to contradict that point of view, to wit:

1) The Dow is only 6% from its 2007 all-time high, and over 102% back above its 2009 low.

2) The S&P reached an all time high 1402.60 on March 15th.

3) Economic growth seems to be ticking upwards this quarter.

4) And although it is government numbers, it is even conceded by the private reporting agencies such as ADP that unemployment is going down.

5) Profits, and the stock market, are UP!

Now what may slow all of this positive economic data is rising gas prices. Nothing has been able to stem the tide of the price at the pump. But even the government can’t fudge all the numbers all the time. So why should the average investor be concerned?

Multiple reasons, here are a just few:

1. “Smart Money” has already moved on. Inside money, the shares controlled and/or held by the corporate leadership within a company has been in decline for the last year. Something is telling the owners to “liquidate.”

2. Market is up, profits are up, but not revenue. Reuters reported this past week that while corporate earnings have been solid for the last year, and up almost 40% year over year; and the stock market as we said above is roaring, revenue is up only 1.2% year-over-year. That means profits are being squeezed from either productivity, wage freeze, or layoffs (or not hiring). Since US worker productivity is at its lowest in a decade, down 0.7% since 2007 (http://www.bls.gov/lpc/prodybar.htm), that means the money is coming out of employees.

3. Underlying fundamentals remain weak. I know I am beating a dead horse, but let us assume all or part of Obamacare is struck down (which is still a 50/50 bet). And then let us assume all of the positive economic numbers continue for the remainder of 2012. Let’s also assume the frightening possibility that Obama is re-elected President. What happens next? Housing remains in shambles with the leading authority on the subject Robert Schiller claiming this past week that prices will not return to the norm “…in our lifetime.” If the Federal Budget agreement holds you will have massive layoffs in the Defense industry and manufacturing since the Defense budget is getting slashed. The Bush era tax cuts will be rescinded, and massive tax hikes will occur across the board. Obama’s projected budget assumes deficits so high in the next several years that a currency crisis is almost surely in the cards. The energy sector is booming IN SPITE OF the President’s EPA, so expect a crack down on energy in January 2013. (The administration already quietly put new regs on coal plants this week, effectively eliminating any potential new coal mines or coal-powered electrical plants from ever being built.)

All of this without the implementation of Obamacare. How does a business person, or the economy, flourish under this set of facts. It can’t.

I am extremely bullish – on America. I believe we can overcome any challenge, any obstacle. But when we can overcome a problem, how long it takes, and how much it costs – ALL depends on when we get started on solving that problem. Right now, we are simply adding to it.

Lots of positive economic news, but be careful what you wish for. My money is on protected principal investments, because I can make sure we benefit from the market upswing, lock in the gain, and not lose anything when the market drops.