Read not to contradict and confute, nor to believe and take for granted, nor to find talk and disclosure, but to weigh and consider. -Francis Bacon
Francis Bacon was known for many things including being the father of empiricism. Empiricism is the philosophy of science that emphasizes evidence, especially discovered in experiments. It is a fundamental part of scientific method that all hypotheses and theories must be tested against observations of the natural world rather than resting solely on a priori reasoning, intuition or revelation.
I bring up Bacon and the notion of contradictions and empiricism because this market has entered into a very confusing zone that challenges sensibilities and reasoning. While I've been bullish and continue to see opportunities, there are obstacles including grappling with the fact the market has covered a lot of ground in a short period of time. Sure, I get that price to earnings ratios are still cheap in historic context, yet I'm not convinced 2% GDP growth creates a wave big enough to lift all boats. Moreover, because of all the hype over all the great economic news, we are now set up with higher expectations. I like it when investors are hesitant instead of taking main stream media bait.
I know the current economic path embarked by the administration doesn't work, yet let's take Bacon's approach to find a conclusion. That said, I'm not going to entertain the thought twenty bucks a week is the cure-all for the largest economy in the world. Perhaps if we are talking Chad or Somalia it would be a big deal, but the fact is while too many families welcome any financial relief, it's not the answer.
(At one of my lowest points in life, I got ten bucks from Arbitron to participate in a survey, and I actually budgeted the cash. There are people in that position but a temporary break in social security tax that adds $10.0 billion a month to our national debt isn't the answer.)
The stimulus package turned three last week, and there was hardly a peep out of the media that continues to cheer about all the great economic data and about the White House, which continues to usurp Congressional authority in the name of an economic agenda that promotes the idea of people moving up to the "middle class."
But, the fact that America is still standing is taken as proof for many that redistribution works. On that note, New Jersey Governor Chris Christie is teeing up a 10% across-the-board income tax cut that I think will ignite the two year recovery that's already begun under his watch. The only criticism of the plan is the usual:
> It's not paid for
> The rich benefit
Considering the state has raised taxes and fees 115 times and still ran up a $13.0 billion deficit proves it's not about higher taxes but about the drunken spending that comes when there is no sweat involved in getting the cash or in this case it's better to call it loot. Naysayers say the plan will cost $150.0 million the first year and $1.0 billion over three. I despise the idea that money we earn somehow belongs to the governments, and when we get to keep more of it then somehow it costs the government. Moreover, people are going to put that extra money to work in a way that doesn't cost taxpayers anything. Of course it's really odd that the same people that cheer $20 going to folks that might not pay any income tax think it's a bad idea for folks to get $200 or even $20,000.
This experiment has already been done under Ronald Reagan, but I welcome a chance to see it repeated in New Jersey since I might actually get a chance to keep more of the money I earn.
There are worries about this rally, too. Earning season wasn't great, and higher fuel costs mean tighter margins even for those that pass on some costs. I think we could be in a tense market between now and the next jobs report, and if news from Gallup proves correct, there could be a serious shock to the market. Yesterday Gallup reported a massive swoon in unemployment midway through last month that lifted the unemployment rate to 9.0% from 8.3%.
If that proves to be true, I'm sure the main stream media will glom onto the impact of more people joining the job market. Of course there is no rule that the market can't go higher even if there is no justification.
On that note, I think there is still individual value, but it's getting harder to find "cheap" stocks. Plus, two thousand points in a few months is not unlike the two thousand points we lost last summer. Each day fewer names lift the market higher, and that's also a yellow flag. While I don't want to get too bogged down in guessing this is a near term top, we must be extra vigilant about the hype getting too far ahead of the facts. Yes, Francis Bacon would say ignore intuition and reasoning and often that's good advice in the market (imagine how many people missed the 100% rebound in the market) but these items should never be abandoned in life.
There have been times in the last couple of weeks when I felt I got too cute but prudence is important, and the last time I forgot the rules back in 2000 I paid a heavy price. We aren't in such a period of hype and hysteria, but we have to make sure the dots connect or make sure we know when we're riding the wave and not mistake it for anything else.