The S&P 500 - When Will the Opera Lady Sing?

Many consider the US S&P 500 at a watershed now. Optimists are predicting another 25% up < the most mentioned figure >. Some, and they have gotten fewer by the day, are predicting the current S&P 500 level of 1043 to sink between 700-400 in the next 12 months. 

But the real questions that should be asked is what the hell is keeping it up.

World stock markets as a whole are up even more than the US. However the Baltic Dry Index is down 42% from June. For the uninitiated, BDX is an indicator of world trade activity as measured by shipping rates. Sometimes it's a good bench mark, many times misleading. This is probably one of those times it is misleading. First there's a super excess of ships out there, with some carriers offering a free freight ride on a return trip. Second, over the last six months, China has been stockpiling commodities and thus increasing freight traffic; for what reason is anyone's guess. Some think it's increased production, others think they're betting on a commodity hyperinflation; Guido thinks it's because they don't know what to do with all those excess trillions of dollars < which is related to the commodity inflation idea >. 

Keep in mind though, that the BDX is down from a high of over 14000 last year, to its' current level of about 2400 now. This is not only due to excess ship tonnage. The world economy, as measured by producing tangibles, is still depressed. 

This is the same for other economic measures, especially the US, almost 1/3 of the world economy. Unemployment, the key to this depression, is up everywhere. In America, even prime retail areas in Manhattan have a 15% vacancy rate and it's rising. The latest Federal Reserve Beige book figures show everything from construction to consumer sales declining or flat at best. 

So why has the S&P 500 continued going up since March? Simple. It's all the excess  money out there courtesy of the Federal Reserve. Many  money center banks claim there has never been so much liquidity for the past 2 decades since the 1987 market crash. They ought to know. They've got most of it, and they've been the ones principally bidding up the US markets. 

Now, Guido guesses, they'd like to unload their holdings on the nice little guys out there who were burned last year. What they may not realize is that most of these little guys may already be broke or scarred to death of not making the mortgage payment. 

Much of this has been said before over the past few months, some even by Guido on this web site. But it bears repeating. The current level of stock prices is not in touch with economic reality. In fact it's more out of touch than the current figures suggest. Financial firms compose approximately 30% of the S&P 500. Rather then showing the "stellar" earnings they did in the last quarter due to accounting shenanigans and rigged deals with the Federal Reserve, these financial firms should have disastrous losses. With this realistically factored into the calculation, some guess the S&P 500 p/e ratio should be 125 or more. That's stratospheric. No American bull market even reached half that level. 

Even little kids playing make believe are more in touch with reality.

"Couldn't be happier, right here."

"Couldn't be happier, right dear?"

"Look what we've got,"

"Our own fairy-tale plot"

"What more could we want?" 

"We couldn't be happier, RIGHT HERE." - The Broadway musical Wicked

< Again, as always, this article is for information purposes only. It is neither a recommendation or investment advice.>