Washington, DC -- (ReleaseWire) -- 04/23/2014 -- We actually got a call last week from a really bright analyst saying, "You know, we are entering into something called a 'Grand Cardinal Cross,' and this is where four planets, Pluto, Uranus, Jupiter, and Mars oppose one another in the shape of a cross." Apparently it's this tension that's happening up in space that's actually creating tremendous instability in our stock markets according to him. Of course we don't believe this, says Dawn Bennett, CEO of Bennett Group Financial Services, but the height of denial and stupidity is reached when investors and stock analysts are talking about being cosmically prudent, "because Saturn is 16 degrees to Scorpio." Really?!
Look, horoscope investing and being cosmically prudent aside, no one in the end is going to ring the bell at the top of the market for investors and then ask them to very kindly and politely please exit the building in an orderly fashion. When this pretend recovery and market rise ends, few actually will be ready and even fewer will be able to withstand the losses. It certainly feels like we're living in a make-believe, pretend economy, and as an investor, it's important to recognize the situation honestly, because, as of now, no reading of the economic tea leaves suggests a surge in economic growth is coming.
Even a highly critical analysis of the data makes most question whether there has even been a recovery at all. We're heading into earnings season, and the gap between current first quarter reality and forward-looking, unicorn-fueled expectations for continued growth has reached a new peak of fairytale faith and it is widening.
Not a day passes without some talking head opining on corporate profit growth. This is keeping the market afloat because with every reiteration, these so-called market geniuses confirm that they are clueless about how profits are created in the U.S. We're not talking about accounting gimmicks and the bottom-line fudgery that are financials; We're speaking to actual earnings, and when you strip away all the one-time, non-recurring boosts, things are way worse than reported.
According to a report last week from Société Générale, the French multinational banking and financial services company, "U.S. profits have begun to decline on MSCI trailing basis, one of the key measures we monitor." MSCI is the Morgan Stanley Capital International index which is the primary benchmark index for global equity markets. It continued, "We have long believed that the profit cycle is probably the most important leading indicator for the economic cycle, as profits drive the highly volatile business investment component of GDP. The consensus believes that the U.S. has been on a long economic recovery, but we believe it's already quite advanced and vulnerable to events in Asia and the United States. Falling U.S. MSCI profits are an extremely important straw in the wind that investors will ignore at their own peril."
What they're saying is MSCI profits are starting to fall. Then, it's more than just equity strategists who should be getting worried, because the growth in profits is closely associated with the business investment cycle. People will get used to almost anything if it goes on for long enough, and the process doesn't take long for the common investor to miss signs they don't experience directly. Very much like the boiling frog metaphor applied to investors.
So, know this in advance: U.S. companies will have to increase profit margins to all-time record highs in order for analysts’ estimates to be met, which is why we view the US markets with continued skepticism. At the end of the day, valuations and economic conditions are extremely inconsistent even though the markets are rising, and they can remain that way for a while, but not forever.
Last week alone should be enough warning to move out of the way; initial jobless claims plunged to the lowest levels since 2006; most of the growth stocks were slammed last week, and leading pounding were momentum stocks and biotechs, which are the largest holdings in most investors’ stock portfolio.
The third warning out there is Japanese stocks which are in free-fall, down about 15 percent from their highs, and trading at six-month lows and that is only the tip of the Asian iceberg …what about China continuing to report dismal economic data?
Most U.S. investors believe we have reached escape velocity, but this market carries a far higher risk than any star chart or cosmic reading supposes, so investors need to be prepared and stay away from the ridiculous nature of stock market horoscopes. Investors need to trust savings and retirement accounts with experts, not with tarot card readers.
Securities offered through Western International Securities, Inc. Member FINRA & SIPC. Bennett Group Financial and Western International Securities, Inc. are separate & unaffiliated companies.
All market data references are sourced to Bloomberg terminal database.
Bennett Group Financial Services LLC, based in Washington, D.C., is a comprehensive financial services firm committed to providing opportunities to clients’ as they seek long-term financial success. Its customized programs are designed with the potential to help grow, lower overall risk and conserve client assets by delivering a high level of personalized service and skill. For more information, call 866-286-2268 or visit www.bennettgroupfinancial.com.
About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program on www.WMAL.com called Financial Myth Busting http://www.financialmythbusting.com. She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett or firstname.lastname@example.org