This column originally appeared on Real Money Pro at 8:40 a.m. EST on Feb. 19.NEW YORK ( Real Money) -- This morning's opening missive is an expression of market opinion based on a compilation my most recent observations. I like to produce this "Where I Stand" column at least on a monthly basis as a means of summarizing and keeping subscribers up to date with my investment outlook. I continue to hold to a contrarian and bearish view of future worldwide economic growth and on the direction of U.S. corporate profits. At the core of my concern is that a global economy built on a foundation of excessive monetary easing is one of low quality, decaying fundamentals and not likely to be effective or self-sustaining. To me investors are not being realistic in their expectations (and almost magical thinking) that an aggressive printing press can relieve and trump the profound challenges and headwinds to global growth without any negative consequences. I remain concerned that much of the current investor optimism expressed in a rising stock market is not consistent with the underlying economic and profit data.
The EconomyDomestic economic growth is stumbling under the weight of structural headwinds, a continued deleveraging and the uncertainty of tax and regulatory policy. I see little improvement ahead. "In case you haven't seen a sales report these days, February month-to-date sales are a total disaster.... The worst start to a month I have seen in my seven years with the company." -- Jerry Murray, Wal-Mart's ( WMT) vice president of finance and logistics (in an email to Wal-Mart executives on Feb. 12, 2013) Fourth-quarter 2012 U.S. real GDP contracted. Disappointing and subpar growth lies ahead, with the important consumer sector adversely impacted by tepid wage and salary income growth. Despite the props of a 5% year-over-year increase in home prices and a steady increase in stock prices, lower to middle income consumers are further suffering from:
- a jobs market that is not improving much;
- a 2% reduction in disposable income (due to the expiration of the payroll tax holiday);
- a marked reduction in refinancing activity (worrisome, as it occurred coincident with a modest mortgage rate rise);
- several months of consecutive gasoline price increases; and
- the specter of additional fiscal drag ahead (in March when the spending sequester will likely take effect).
Corporate ProfitsToday, despite analysts and strategists unrealistic optimism, participants' confidence in the markets is elevated as investors have cared little about slowing growth. I believe that reality will prevail, however, as ultimately corporate profits are the mother's milk of the markets. Not only were fourth-quarter 2012 S&P profits and sales disappointing but forward guidance has been poor. The current disconnect between stock prices and the slowing pace of earnings growth is reminiscent of the second half of 2007. The difference between then and now is 2007's emerging weakness was centered in the financial sector. By contrast, in late 2012 and expected in early 2013, the profit weakness is more broad-based. At the start of the earnings season, the consensus forecast for fourth-quarter 2012 S&P 500 profits was about $25.50 a share -- now, with over 80% of the companies reporting, $23.50 a share looks more likely. (Missing fourth quarter 2012 by 8% is not a rounding error.) A disappointing picture for S&P earnings lies at the core of my ursine market vision. In the fullness of time, an earnings cliff is not likely be ignored. Consensus, top-down and bottom-up 2013 forecasts for the S&P 500 are at $108 a share, $107 a share and $112 a share, respectively, up from about $103 a share expected in 2012. My projection is for $100 a share or less for S&P profits -- well below 2013 consensus and under the anticipated actual 2012 earnings. Markets discount the future, not the past, and stocks today are arguably as expensive as they were in 2007 based on:
- the loss of business sales momentum;
- the risk of mean reversion in profit margins;
- how far operating profit forecasts have fallen in the last few months; and
- that a projected hockey stick recovery in consensus profits is unlikely.