Good day people. It’s time to warn against stupidity. Usually this is a straight up political blog, but when I see something play out that is ridiculous, I feel it is my obligation to point it out.
We are nearing the end of the earning season for U.S. markets. This is when all publicly traded companies disclose their earnings for the quarter. Since 2008, this has been a rather volatile time. Big swings go with the beats and the misses of the season. This quarter has been nothing short of a bummer. 70% of the companies reporting are missing their previous forecasts and, or guiding down for the remainder of the year. The crazy thing: The market is up huge! Both the DOW and S&P are at four-year highs. What? That doesn’t make sense right?
Well, we are rallying off of the promise of more bailouts. Seriously. The ECB is promising to bail out nations like Spain and Greece, and the Fed is promising that they will step in at any sign of GDP slowing. Get this, the market is getting excited as GDP slows because they are counting on the FED stimulus. Am I the only one who sees the crazy in this?
In addition to markets being at 4 year highs on the promise of ECB and FED stimulus we are heading towards the “fiscal cliff.” This is the stupidity of our national government. This time last year they couldn’t agree on a national budget and we got down graded by Moodys. Is there any reason to believe that we will not do the same this year? I think not. Especially because both sides are digging in to make it a political issue for the upcoming Presidential election. Matter of fact, it was supposed to be decided this month. Instead, our government went on a five-week vacation and promised to fix it upon their return. All I can say is that there is a fat chance of that happening. Even when they appointed a small group of congress members to do this last year, neither side budged an inch. Why would it be any different this time?
What I am most worried about is the fact that markets are becoming complacent. What do I mean by this? There is an indicator in the market called the VIX. This is an instrument that measures the “fear factor” of the markets. When people are hedging towards the down-side and buying puts to protect their long trades, it raises. As of today, it is about 15.5. The average for the past four years is 20. It is a pretty good idea of people’s protection should the market start going backwards. Let me repeat the above statement. 70% of our companies are reporting missed forecasts and, or guiding down for the rest of the year. In all rational thought, this should elevate the VIX.