The U.S. Economy Has Grown by $1.3 Trillion, While The U.S. Stock Market Has Grown by $12 Trillion

Main Street and Wall Street could be on a collision course

August 1, 2013, 10:27 AM

As stock markets climb and climb, the voices of worry are out there, hanging on.

In a new note, Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, points out this disturbing bit of data: From the 2009 lows, the U.S. economy has grown by $1.3 trillion, while the U.S. stock market has grown by $12 trillion.


Among some of Hartnett’s current recommendations:

  • U.S. stocks: A bullish longer-term view on the S&P 500 index  SPX +1.05%, but a sell signal for the next three to six weeks. Their year-end S&P 500 target is 1,750.
  • Europe stocks: Bullish on lagging European banks for the next three to six months, as they have room to catch up with their U.S. and Japan peers. But neutral on the next three to six weeks.
  • Bonds: Bearish, with the 10-year Treasury yield 10_YEAR +3.49% ending the year at 3%
  • Commodities: Neutral
  • Cash: Bearish

Pragmatic Capitalism made note of some Merrill Lynch comments on Thursday that pointed out that institutional clients and hedge funds have been selling equities in the last five weeks, while retail investors are buying. But that’s entirely due to ETF buying, says Merrill, meaning retail buyers have largely shunned single stocks over the last four years. The last time this happened was during the market correction after the U.S. credit rating downgrade in August 2011.

Need a reason to hate the bear market? Here are five.

Stock market bubble

A stock market bubble is a type of economic bubble taking place in stock markets when market participants drive stock prices above their value in relation to some system of stock valuation.

Behavioral finance theory attributes stock market bubbles to cognitive biases that lead to groupthink and herd behavior. Bubbles occur not only in real-world markets, with their inherent uncertainty and noise, but also in highly predictable experimental markets.[1] In the laboratory, uncertainty is eliminated and calculating the expected returns should be a simple mathematical exercise, because participants are endowed with assets that are defined to have a finite lifespan and a known probability distribution of dividends. Other theoretical explanations of stock market bubbles have suggested that they are rational,[2] intrinsic,[3] and contagious.[4]

Stock Market Bubbles Cannot Be Timed

What do tulips, Pet Rocks, Beanie Babies, Barbie Dolls, real estate, stock markets, and gold, have in common? They’ve all seen speculative bubbles in their prices that burst with devastating results for investors who believed there would be no end to their rising prices.

Should we believe claims that the stock market is now in another bubble? Some are making that claim.

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It is true there are several characteristics in the current market that were characteristics in previous bubbles.

In prior bubbles prices were rising, as they seem to be now, based more on the excitement of the price action itself (the continuing rising prices) and the surrounding hype, with little thought given to the fundamentals. That is a worry.

Then there is the evidence that even as public investors are pouring money into the market at a near record pace, institutional investors have been pulling money out at a near record pace. That has also been evident near prior bubble tops.

A convincing argument can also be made from the surge in investor confidence that has margin debt (buying stocks with 50% discounts) at record levels last seen at the 2000 and 2007 tops.

The Bond Market Is Breaking Down

Today is turning into a repeat of yesterday in the bond market.

We had a few better-than-expected economic data releases this morning, and Treasuries are taking a hit.

Initial jobless claims fell to their lowest level January 2008, with only 326,000 filed this week. Economists expected initial claims to rise to 345,000. The release at 8:30 sent bonds lower, but analysts caution that the numbers look better due to irregular summer schedules at auto plants.

Read more:

Construction Spending Misses Expectations, Falls 0.6%

Construction spending fell 0.6% month-over-month in June. This missed expectations for a 0.4% rise.


But construction spending was up 3.3% on the year.

Meanwhile, May’s construction spending was revised up to show a 1.3% rise, form an initial reading of 0.3%.

Private residential construction was flat on the month, and up 18.1% on the year.

Read more:


UPDATE: ISM’s monthly report on manufacturing is out.


The headline index rose to 55.4 in July from June’s 50.9 reading.

The advance beat economists’ estimates for a smaller increase to 52.0.

The increase in the index suggests that the pace of expansion in the American manufacturing sector accelerated significantly in July.

The production sub-index led the gains, rising 11.6 points to 65.0 from the previous month’s 53.4 reading.

Read more:

Scramble To Exit Housing Market Peaks With “American Homes 4 Rent” IPO Pricing At 44% Discount

Two months ago we first observed the scramble by various hedge funds, in this case Blue Mountain, to take advantage of the peak sentiment in housing, and specifically rental housing (which just hit an all time high as reported previously) by rushing to capitalize on recent investments and dump exposure to the witless public.

Specifically, we envisioned the then just announced IPO of the aptly named American Homes 4 Rent (yes, with a “4” not “for“), also known as AMH, which however came at precisely the wrong time for the market: just as mortgage rates were soaring and Colony American Homes postponed its own parallel IPO. Two months later, with the market about to pass 1700 and fears about the housing market put back in the shelf despite a glaringly obvious collapse in mortgage demand, these IPOs are back and with a vengeance, although now reflecting a far more subdued, tapered if you will, view about the house leasing sector. Not surprisingly, AMH priced overnight, selling 44.1 million shares at a price at the bottom of the $16-18 range to raise a total of $706 million: a 44% discount to the $1.25 billion suggested in the prospectus filed back in June.

So much for the housing bubble.


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