While key stock market indices creep higher, the fundamentals suggest the complete opposite. But despite valuations being stretched, insiders selling, corporate revenue growth being non-existent, and the U.S. economy contracting in the first quarter of this year, the S&P 500 is up seven percent since the beginning of 2014, the Dow Jones Industrial Average is getting closer to the 17,000 level, and the NASDAQ is back above 4,000.
As I have written before, a company can buy back its stock to prop up per-share earnings or cut expenses to improve the bottom line, but if revenue isn't growing, there is a problem. In the first quarter of 2014, only 54% of S&P 500 companies were able to grow their revenue. (Source: FactSet, June 13, 2014.)
Going forward, things aren't looking bright either. For the second quarter of 2014, 82 S&P 500 companies have already provided negative guidance for their corporate earnings. I expect this number to climb higher.
And consumer spending, the driver of the U.S. economy, is very weak, as evidenced by negative gross domestic product (GDP) in the U.S. economy in the first quarter of this year.
So if the overall environment is negative for the equities, who is buying stocks and pushing the stock market higher?
The answer (something I suspected some time ago): central banks are buying stocks.
A study done by the Official Monetary and Financial Institution Forum (OMFIF) called Global Public Investors 2014, states that central banks and public institutions around the world have gotten involved in the stock market in order to diversify their assets. (Source: Official Monetary and Financial Institution Forum, June 16, 2014.)
Why would central banks want to get involved in the stock market? The main reason is their decline in revenues on their reserves due low interest rates. Central banks have lost between $200 billion and $250 billion in interest payments as bond prices have declined.
Here's an excerpt from a Profit Taker e-alert (a Lombardi publication) that went out on June 17, 2014, reporting on the extraordinary situation of central banks getting involved in the stock market:
"World central banks, including even China, have secretly, through intermediaries, been buying $29.0 trillion of equities to diversify their portfolios in recent months.
At the $29.0-trillion level, this suggests that the central banks could now potentially control one out of every two shares purchased recently in the western markets. This not only means that central banks have single-handedly driven up equity markets (at a time when the fundamentals DO NOT JUSTIFY IT) but also that, should they exit all at once, they could effectively collapse world stock markets.
This means the central banks have 'cornered' equity markets. This has never before happened in history.
How crazy is this? How do we even quantify this insanity? When the average Joe buys stocks, he buys with money he has already earned and already paid taxes on. When the central banks want to buy a trillion dollars of stock (and it seems they actually do want to, and fairly often at that) they simply push a button and the money appears on the screen, digitally. Like a magician's trick.
The central banks operate entirely based on our confidence in them. Who needs real money, hard money, when you have confidence—hey, maybe that's where the term 'confidence game' comes from?
And when the average Joe buys a stock, there is no way his single purchase can move the price higher. When the central banks buy in the trillions—again, notice the word TRILLIONS—they push the market higher by their own momentum, thereby making profits as they create digital money from thin air. At will."
The stock market is taking on the shape of a bubble. I really don't see much upside potential—unless the central banks continue to buy rigorously. But then whom would they be trading against? Themselves?
All manipulations come to an end. The stock market rally that began in 2009 is gasping for air. Don't buy into it. Capital preservation should be your main priority right now.