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Sunday, March 17, 2013

Market highs not so good

Tony Paradiso

Did you see that the Dow hit record highs 27 days in a row? That’s an exaggeration, but if you have the misfortune of regularly being compelled to tune into CNBC, you might not think so. They only remind viewers about every 30 seconds that new highs have been achieved.

You’ll also be told that this rally is only partially due to the flood of Fed money. There is a grain of truth to that argument, but a microscope is required to see it. ...

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Did you see that the Dow hit record highs 27 days in a row? That’s an exaggeration, but if you have the misfortune of regularly being compelled to tune into CNBC, you might not think so. They only remind viewers about every 30 seconds that new highs have been achieved.

You’ll also be told that this rally is only partially due to the flood of Fed money. There is a grain of truth to that argument, but a microscope is required to see it.

This week, the bubbleheads cited surprisingly strong consumer spending as a reason for optimism. News alert: The number of grains of truth just doubled. I think that constitutes a “grains of truth” bull market.

February retail sales did increase a robust 1.1 percent on a seasonally adjusted basis. But lightly scratch the veneer of that headline and the reality becomes as blatant as a red wine stain on a white rug.

By briefly examining the components that comprised the increase, you quickly realize that most of the surge had nothing to do with consumers feeling good about the economy. For example, rising gas prices fuel a 5 percent increase in gas station sales. Excluding gas – and other non-core items such as autos, and building materials – the increase in retail sales becomes a more modest 0.4 percent. Not terrible, but no reason for stock markets to reach daily new highs.

The mix of purchases also was interesting. Consumers decided to brown bag it more so they could afford to buy cars. Restaurants, bars, department stores and sporting-goods retailers all saw sales decline last month. But perhaps also a result of rising gas prices, Internet sales were up a healthy 1.6 percent.

But here’s the most alarming aspect of the report: to sustain their spending, consumers used credit cards, late-arriving tax refunds and dipped into savings. This shift sent the personal savings rate to its lowest point since before the 2008 recession.

Does that sound as positive as the business media would portray? The lesson is twofold. Be wary of what you hear in the business media because – with the possible exception of the Wall Street Journal news division – everyone has an agenda. And don’t ever take a headline at face value. Always dig a layer or two deep.

I’ve been “bullish” on the economy but not to the extent that would warrant the casino-game known as Wall Street reaching all-time highs. I’m expecting growth for 2013 to be in the 2.5 percent to 3.0 percent range. That’s better than last year but not exactly what one would consider setting the world on fire.

Also consider that the last time the Dow hit a record high was in October 2007. Then, the economy had been growing – albeit artificially – at a rate of 4.4 percent in 2004, and at a 3.2 percent pace in 2005 and 2006. And the quarter before the market tanked, quarterly GDP registered 3.6 percent.

So why has the stock market shattered previous highs? Oh, that’s right, there isn’t another investment vehicle that offers a better risk/reward ratio.

Here’s a good analogy. Every year, a major football, baseball and basketball team win the championship. Sometimes, measured by historical standards, the winning team isn’t very good. It’s just better than the rest in a given year.

Now, a championship is a championship. Except that the chances of that team contending the next year isn’t great. More than likely, it will recede from being “championship caliber” back to the ranks of not-quite-good-enough contenders. That’s today’s stock market. So enjoy basking in a championship season that’s the result of poor alternatives.

Another positive economic headline last week touted a decline of 10,000 in filings for jobless benefits. This was the fourth drop in five weeks, and it brought the four-week moving average – which smoothes volatility – to its lowest level in five years. That’s all welcome news.

Additionally, the Jolts (job openings and labor turnover survey) report indicated that layoffs and other discharges in January hit their lowest reading since the Labor Department started tracking the data in 2000. To that the natural reaction would be “wow.” Or should it be “whoa”?

Interestingly, the current level of jobless claims has historically been associated with much lower unemployment rates. In 2006 and 2007, when jobless claims were between 290,000 and 320,000, the unemployment rate was in the 4s. So what’s different now?

Unlike in pre-recession days, employers are simply not hiring. According to the Jolts report, total hiring has leveled off over the past year. In fact, the monthly hiring rate has pretty much been in flat-line mode since 2009, well below pre-recession levels.

One other interesting tidbit. According to the Labor Department the number of people voluntarily leaving their job has turned up since mid last year. Usually voluntary job departures are an indicator that people are confident of getting another job. Too bad the job creators are not as confident as the people they will – hopefully – hire.

Maybe another Bush-like tax cut would do the trick.

Author, professor, entrepreneur, radio and TV commentator Tony Paradiso can be reached at
tparadiso@tds.net.