Considering that profit margins are at historic highs (pretty elevated) and stock market valuations are at least fair, the guess is that there shouldn’t be tremendous upside unless earnings are really coming thru.

Corporate Profit as percent of GDP.

Corporate Profits as Percent of GDP

Corporate Profit vs S&P 500.

Corporate Profits vs S&P 500

In brief, what we have ssen so far, earnings down and stock market up (multiple expansion). Trailing twelve month price-earnings ratios.



The charts are trailing earnings, not forward looking. However, it is difficult to believe in further profit explosion driven by sales when both U.S. and global GDP is constant downgraded (inflation is low). Corporate profits and margins are already at all time highs and show clear signs of peaking. Corporate management themselves are cutting forward looking guidance.

Valuation (multiples) over time.

Stock Multiples

But this isn’t normal times.

“The current liquidity driven exuberance” could keep the markets irrational longer than logic, technicals or fundamentals would dictate” (Jeffrey Saut)



The weakening Manufacturing PMI in China seems to go hand in hand with inventories, or the large build up in inventories. The excess level of inventories can be sorted out by additional demand or China needs to cut back on excess production capacity. The other day we got the news that “China has ordered over 1,400 companies in 19 sectors to reduce excess output this year as part of the government’s strategy of re-balancing the economy.” It does not appear that the Chinese authorities see a quick increase in demand in the near future.

China PMI and Inventories


“…they’re not focusing on the quantity of growth but the quality of growth.” If that’s the case and in other Words, they are focusing on the quality of the GDP and have no interest in inflating numbers by building bridges that lead nowhere.

“China has ordered over 1,400 companies in 19 sectors to reduce excess output this year as part of the government’s strategy of re-balancing the economy. The firms affected include those in the steel, ferroalloys, electrolytic aluminum, copper smelting, cement and paper industries. “This is a real move and is very specific,” says ANZ economist Raymond Yeung. “They maintain the overall tone that they’re not focusing on the quantity of growth but the quality of growth.”

Driven By Emotion Rather Than Logic

Retail investor’s actions are driven by emotion rather than logic. Record inflows at all time highs. Before each reporting season the saying usually goes that expectations are low and even the smallets earnings beat vs consesus will move the market higher (no matter the actual market performance). I guess that goes for the current earnings season as well.

“On a four-week average basis, net sales by the Institutional clients group are the largest in our data history (since 2008). Private clients have been net buyers of US stocks on a four-week average basis since early June. Private clients’ net buying streak is currently their longest since late 2011.” (BAML)

The overall feeling is that this is really bad timing by retail investors. Future will tell.

Equity Inflow vs S&P 500

Bond Market Bubble

“Mr. Bernanke believes you can expand the central bank balance sheet infinitely, and suffer no ill effects. Anything you do to diminish demand for the thing will cause the price to drop. Same thing here. Bond prices will drop, which causes interest rates to rise. We are in a global bond bubble. When it pops is anyone’s guess. I have tried to short bonds a few times. The French tried money printing in the 50’s, the Italians in the ‘60s. At some point, the market won’t take it, and bond prices will go down and rates will rise. We have more money than Bernanke and the central banks do. So at some point this will happen.” (Jim Rogers)

The general view is that Fed will trim its asset purchase program to $65B/month from the current $85B pace beginning in September, according to economists polled by Bloomberg. Question is if the market really has adjusted for this. If so the market seems to believe that it won’t be a negative thing. Neither to the market, nor to the economy.

Strongest Bull Market and Largest Monthly Inflows

The current market rally is record breaking. Strongest Bull market on record in 65 years.

Strongest Bull Market

When you look at earlier times when the flow was at extremes there is a tendency to coincide with market tops, periods of overshooting. Of course it feels crazy that we are seeing huge inflows while the stock market is printing new all time highs. The best strategy in recent years has been to buy when no one else is buying and sell when everyone else is buying. Part of the massive inflow is probably coming from the recent selling in the bond market (the Great Rotation).

Largest Monthly Inflows

Who is buying?

“BofAML notes, institutional investors have never (that’s a long time) sold as much stock as they have in the last 4 weeks – as retail has been piling in.”(Zerohedge)

Technically, the market is getting stretched again and we’re approaching overbought conditions (again). Perhaps that will bring even more people to start buying. Note that the record breaking inflows in Januari was also done be retail Investors (and they got it right then).

Institutional & Private Clients