A Feast in Time of Plague

11/08/2011 10:23 am EST

Focus: MARKETS

Igor Greenwald

Chief Investment Strategist, MLP Profits

Strong profits and low interest rates have brought stocks a long way off their lows. But never forget who’s underwriting this comeback, writes MoneyShow.com senior editor Igor Greenwald.

It’s good to be a large, public corporation. S&P 500 earnings are at a record, and revenue per share rose this year at an unprecedented 11% clip.

If you’re biotech giant Amgen (AMGN), you get to borrow $6 billion at 3.79% to buy $5 billion of your own stock. And the announcement alone boosts your market cap by $2.8 billion.

At ten times forward earnings, Amgen’s priced a bit cheaper than the S&P 500 at 11.6 times its estimated profit in 2012. And it’s hardly the only one gorging on cheap debt to unlock value for shareholders.

No wonder the market is up 17% from its October low, and angling for more. The profit slump that looked like a distinct possibility a month ago has once again been postponed indefinitely.

At some point, austerity in Europe and the US will take its toll. At some point, Asia and South America will run out of magic beans.

But that point is not next month if Europe doesn’t completely disintegrate. And for the underperforming hedge funds that have bought every dip this fall, that’s almost all that matters.

What’s fascinating is how out of touch the stock market has been with the national mood. According to the Investment Company Institute, mutual fund investors took more than $86 billion out of equities between June and September, more than they pulled out in the last four months of the bear market in 2008 and 2009. They’ve continued the withdrawals right through the October rally.

The latest NBC News/Wall Street Journal poll showed 73% are convinced the country is headed in the wrong direction, up from 50% following the killing of Osama bin Laden in May and just five percentage points shy of the three-year-old record.

Consumer confidence is already back at the levels of the last recession, deteriorating markedly last month. At least the National Federation of Independent Business Survey has ticked up marginally, because a smaller majority of small-business owners now expect worse conditions six months from now. But the pessimists still outnumber optimists by 16 percentage points, after trailing them as recently as February.

The hopeful way to look at all that angst is that it could at some point fuel quite a boom should things pick up. The danger is that the sentiment is particularly vulnerable to further disappointments.

Europe’s economy is “practically in free fall,” notes European Central Bank board member Yves Mersch. Austerity is now deeply entrenched in the UK and France. German industrial output is in decline and Portuguese retail sales are imploding.

China faces a major economic adjustment from atop a tottering real-estate pyramid.

Meanwhile, US energy prices have crept back up to the same costly price point that undermined consumer confidence and spending in the spring. The congressional supercommittee is still trying to thread the needle between a deal that might eventually bring austerity to Washington and a failure to compromise that raises payroll taxes come January.

States are continuing to add to the unemployment rolls. Private-sector demand for workers is tepid, cooled by health-care costs that are still out of control.

For stronger stocks, the going gets tougher from here as they bump into the summer resistance levels. To punch through those, the individual investor would have to get back into the game. And we’re nowhere near that point.

The marginal buyer and seller out there is still the hedge fund and computer algorithm. And markets under their spell never seem to trend for long.

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