International Forecaster Weekly

The Other Planet

So how does the paranormal relate to the markets? Because up is down. Bad is good. Worse is better. Everywhere we look we see disconnects that simply boggle the mind. For instance last week we got the durable goods report. It was horrid. We saw the Richmond Fed Report hit and it too was horrid.

Bob Rinear | May 1, 2013

A couple days back I made mention to our subscribers about this being a "Twilight Zone" sort of market. Several wrote in to chuckle along with me about it, considering that so many things don't make too much sense.  Some however seemed too young to understand the analogy.  So for those of you who aren't familiar with the "joke" let me give you a quick outline.

The Twilight Zone is an American science-fiction/fantasy/anthology television series created by Rod Serling, which ran for five seasons on CBS from 1959 to 1964. The series consists of unrelated stories depicting paranormal, futuristic, Kafkaesque, or otherwise disturbing or unusual events; each story typically features some sort of plot twist and a moral.

The two most remembered things about the series was the shows introduction music which was absolutely original for the time, and Rod's spoken introduction to the show. Many don't know that there were 5 separate intro's they used and the following was my favorite one when I compare the show to what we're seeing in the global markets right now...

"There is a fifth dimension beyond that which is known to man. It is a dimension as vast as space and as timeless as infinity. It is the middle ground between light and shadow, between science and superstition, and it lies between the pit of man's fears and the summit of his knowledge. This is the dimension of imagination. It is an area which we call the Twilight Zone."

So how does the paranormal, futuristic or otherwise disturbing or unusual show relate to the markets? Because up is down. Bad is good. Worse is better. Everywhere we look we see disconnects that simply boggle the mind. For instance last week we got the durable goods report. It was horrid. We saw the Richmond Fed Report hit and it too was horrid. Day after day bright terrible "overall" economic news. Yet stocks and markets around the globe moved higher. In fact, in a week with 5 completely terrible economic reports, we ended the week challenging the all time highs.

When Monday rolled around, the first item of influence was the income and spending report. As usual it was completely upside down. They hoped to see incomes rise 0.4%, but no, it didn't it came in at 0.2%. But spending which they figured would be "0" came in + 0.2%. So we spend more than we make, something that always makes Wall Street happy. But then the "Twilight Zone" moment hit. The Dallas Fed report of economic activity hit the wires. The number was supposed to be "flat". Well it wasn't flat. It dropped to -15.6, the single biggest drop and analyst miss in history. So, what happened? The market soars to an intra day high, with the S&P just 3 points shy of its all time ever high. Should the DOW gain 106 points on a day when the Dallas Fed crashed to historic levels? Is that normal market activity?

It is in a parallel universe. It is when up is down and bad is good. It is when the market couldn't care less about the real economy and realizes that as long as the Federal Reserve is willing to push a trillion dollars into the "system" the bankers will take a big part of that money and buy stocks with it. Hey, why not, they really don't have anything to risk. Don't forget folks, when the banks buy up stocks, they only keep a portion of them. They pledge the rest to the Fed for reserves.

I was reminded of that by one of our good readers, Kirk. I was writing that while we don't have any physical evidence that our central bank… the Fed… is actually buying stocks, they have in the past said that there were any number of unconventional things that they could do, including buying assets not usually considered something they are chartered to do. But what they have said they'd do is accept virtually anything from the banks as collateral they could pledge against reserves. Included in that "anything" they specified stocks in late 2008 as being acceptable.

So as everyone and his brother is looking for return, even global Central banks have had to admit they are actually in the equities markets and buying up stock. So yes folks, in the big scheme of things we've entered an economic twilight zone. A time where true economic activity means nothing, a time when Central banks have admitted buying individual stocks and looking to increase that. A time where bad news is good because it keeps the Fed's foot planted firmly on the gas pedal of ever accelerating printing. Terrible news is even better. A Time where any hints of rising economic activity is "boo'ed" because it might slow the Fed's printing. It's a truly perverted situation; one Rod Sterling would have drooled over showcasing on his TV show. I'm convinced he'd have named the episode the "parallel but inverted planet" or something similar.

As we're plodding through earnings season, we're seeing a repeat of a show we've seen too many times. More companies are beating on the "earnings" report, but missing on the sales or "revenue" part of the equation. Well folks, as wildly interesting as "new accounting" has become, there comes a time when you just can't cut, make up things, fire folks, dispense with costs, declare revolving costs as one time charges, etc. In simpler terms, there's a time when all the magic accounting in the world doesn't change the fact that you didn't sell anything. So far into the season, 55% of the companies that have reported have missed the revenue estimates. That would be horrifying enough if that was just the single issue here. But it isn't. See, just about 75%of the companies that reported, have lowered their guidance since the last report. They do that to make it easier to "beat the estimates" but even with that many companies cutting their forecasts, 55% of them still can't beat the revenue guess. So, their stock is "down" right? PFFFT. Nope. Most move higher despite the news.

If you read a list of the companies that have missed earnings this time around, it's a veritable who's - who of big time companies. IBM, CAT, GE, PFE, CMI, AAPL, GOOG, P&G, XRX,JPM, SBUX, SFW, etc etc and on and on. Yet in the Twilight Zone, that's fine. The market just rambles on to hit all time highs. Why? Because earnings don't matter. Nothing matters except Bernanke bucks, and as long as they're flowing, the market is the only place they can get return. It is now so "in your face" a lot of the perma-bulls on CNBC don't even make up their stupid stories any more, they just say it flat out "we're going up because of the Fed, not because of economic might".

On Tuesday the Chicago PMI came in at 49. That was the first time it was under the magic "50" number since the 2008 crash. When heaped on top of all the other lousy economic data points, the logical conclusion would be that the market rolled over and finally started a true correction. Yet there was a reason that we weren't down 400 points. The Federal Reserve was in session one of their two day meeting on monetary policy. Already there had been "rumors" from some of their mouthpieces like Jon Hilsenrath that the Fed wasn't interested in backing out of QE, and others were even suggesting that with the low inflation and bad economic news the Fed's might decide to do MORE stimulus. So they didn't want to really sell the market a day ahead of what might be a monumental announcement out of the Fed.

The bottom line is that indeed we're in a Twilight Zone market. Anything connected with fundamentals is background noise. Earnings don't exist, and no one cares; they aren't buying earnings they're buying stocks...stocks that they can "make" go higher. If you ever needed a sound reason to buy Gold and Silver, I cannot think of a better one.  Our game plan has been the same for the last dozen years. We use the stock market to make profits, we take the profits and buy gold and silver. Even in the Twilight zone that sounds reasonable.