In Jim Cook's Archive


The investing public is universally bullish on the stock market. The media and the talking heads on financial TV are also extraordinarily bullish. Nobody thinks a bear market is likely. A contrarian would see this as a sure sign that trouble lies ahead for stocks. Similar bullish statements have preceded all market crashes.

Years ago when I got my securities license a healthy price/earnings ratio was 10. Under 10 times earnings was a buy, over 10 was too frothy and a time to sell. PE ratios today are 16 for the Dow and a historically high 20 for the Nasdaq and S & P. Furthermore, corporate earnings are forecast to nosedive this year. Past markets have collapsed based on shrinking earnings growth. This deteriorating earnings picture bodes ill for the stock market. Many signs point to a severely faltering economy which can only make matters worse. The current slump in U.S. government bond yields indicates the economy is losing momentum. By most measures stocks are grossly overvalued and probably in a bubble.

When you superimpose the Fed’s interest rate uncertainty, the Greek fiasco, falling oil prices, the soaring dollar and an Asian economic slowdown, you have plenty to worry about. Then there are the things we don’t hear much about, such as the trillions in derivatives, bank solvency issues, sovereign debt and opaque central bank actions. Any Black Swan event can collapse a market bubble.  Too many people were wiped out in the crash of 2001 and 2008 not to exercise extreme caution these days.
Here’s a few other opinions. From Charles H. Smith, “This long-term weakening of the economy is the direct result of financialization and the Federal Reserve’s policy of propping up impaired debt with more debt and constantly bringing demand forward with zero interest rates. The U.S. economy is slowing to stall speed – the point when gravity overcomes the lift provided by central bank free money. This deceleration is evident in a number of indicators such as gross domestic product (GDP), which is now at 0% according to the Federal Reserve Bank of Atlanta’s GDP Now model. New orders for consumer goods has fallen off a cliff, eerily repeating the free-fall of the Great Recession in 2008.”

From Phoenix Capital Research, “The global economic implosion continues to worsen. China is growing at 3%… possibly even lower. One of the only remotely accurate Chinese economic data points is rail traffic. Well, Chinese rail freight has fallen at a pace not seen since the Asia Financial Crisis. In fact, it’s even worse today than it was in 2008. This tells us that China’s economy is collapsing. China is an export economy with much of it going to the U.S. So it should be little surprise that the U.S.’s import data just posted the worst collapse since Lehman Brothers.  If it is collapsing then global trade should be doing the same. And it is. The Baltic Dry Index, which is a proxy for global trade, has fallen 80% in the last 18 months. It just recently hit an all-time low (even lower than during the 2008 collapse). And against this backdrop investors are completely bullish. The Investors Intelligence Survey shows the lowest number of bears in history.”

From Zero Hedge, “A month ago, when looking at the latest Factory Orders numbers, we noticed something very disturbing: the annual rate of increase, or rather decrease, in factory orders dropped to -2.3%. The last two times this happened was in 2008, just after the failure of Lehman, and in 2001, just as the U.S. was again entering a recession. In fact, if there is one reliable, false-negative proof indicator of key recessionary inflection points in the U.S. economy, it is the annual change in Factory Orders. When one looks at the Factory Orders series on an annual basis it becomes obvious that the U.S. is already in a recession.
From Tim Wood, “The masses do not understand the environment in which we operate, as is evident from the extreme bullish sentiment readings, this is the most dangerous stock market environment since the inception of the Industrials in 1896 and it is not going to end well.”

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