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Is there a growing danger facing the markets and investors – despite the fact that statistics suggest a mild recovery?

Robert Wiedemer
May 6, 2014
Video Transcript

When you just look at a stock market going up, nobody really asks why or cares. In fact in 2013, the bulls all said that this market will probably go up 7%, 8%, 9% on increasing earnings growth. Well in fact, they were dead wrong. It went up 30% on decreasing earnings growth, but nobody really cared because what are they interested in? The market went up. Why and how, we couldn't care less, but the underlying factors are important for a longer-term investor they're very important.

There's underlying issues that are causing problems in the market. One is that an awful lot of the stock is being bought in corporate stock buy backs. Number two, I think a lot more people are interested in this market as a momentum play, as... well this is the only place to make money play, and the Feds got my back play. That's scary. That's not a good fundamental.

What's a good fundamental? Real earnings growth and that's not what we're getting. You're not seeing real earnings growth anything like 30% last year and yeah we may get some of a pullback this year that makes it a little less, obvious, but even if it was 15% increase in the stock market on what was only 3% earnings growth, it's not much. You know, revenue growth in the S&P 500, it's been near zero for two years in a row. This is not the basis for a booming stock market. This is why people, I think, are a little worried about it and I think those fundamentals are important. Just like in real estate, I've also mentioned that... and people have talked about it, they just don't talk about it much... that as much as half the homes are bought by cash. Is that really a good basis for a real estate market to be moving up. Are those really new, young homeowners going out and buying their first home with cash? I doubt it. Or even people selling their first home and upgrading to a second home, cash? Hardly. Obviously, it's investment driven. It's a certain amount of foreign investment, that's good, but this could also change relatively rapidly.

There was a great article I saw that said, "What happens when the investors leave?" and they will. Ultimately, prices are not going up that fast. A lot of investment money will leave and this is all fake to think this is how our housing market should be. Our housing market fundamentally should be driven by young families buying their first home or buying their upgrade home and we're not seeing much at all of that. In fact, mortgage originations for new home mortgages are down 14% from last year, bad sign. So this isn't about real estate entirely, but it's about looking at the underlying fundamental driving forces behind what's pushing prices up. Something nobody likes to do and I understand all we really care about is the bottom line -- Are stocks up? Is real estate up? and that's all I care about -- but you really need to look a little more at those underlying forces. You'll understand better -- why people are a little more jittery than they look like on these markets and they can change much more rapidly than you think when the reality hits.

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