I hear a lot of talk in the media and from bears like Nouriel Roubini about how the disconnect between the stock market and Main Street is why the bull market is wrong. But it is precisely because the Main Street economy is suffering that listed stocks are doing so well. These are my reasons:
- Governments in most countries continue to spend lavishly on social welfare benefits of all kinds.
- Governments give massive subsidies and credits to big companies to stay, hire more or relocate.
- Governments keep making up new laws and regulations, like the Internet tax or Obamacare, that require massive accounting, legal and other experts to implement that hurt small business and force many medium businesses to sell out to the big boys.
- Due the oversupply of labor, big companies can pick and choose whom they hire at lower pay.
- Due to free trade, big companies can take advantage of the lowest cost structures.
- Big companies have refinanced their debt many times already since 2007 while small to medium companies have a hard time doing this, which is why medium-sized companies are coming public, so that they can get cheaper capital.
- Big multinational companies generally pay lower taxes than the small guys.
- Big guys can lobby all kinds of special deals in almost any countries.
- The slackness in the overall world economy is keeping costs in check for the big boys, who have access to much better supply chains than Main Street.
- In the U.S. especially, the big boys can just fire people almost at will and have been steadily reducing the cost of employee benefits.
- The Cyprus bank failure sent big money into equities.
- Profits of listed companies have held up exceedingly well, even with sales not growing much or even declining because of the reasons listed above. The bulls are anticipating how great profits will be when the European Union finally starts growing again, and before the listed companies have to increase hiring to meet greater demand. There should be several quarters of astonishing profits before costs start to rise if sales increase because the EU stops sinking, not to mention growing.
- More central banks have thrown in the towel in the past few days and have lowered rates. The Federal Reserve is in there pushing down rates.
- Things are so good for the big companies that tons of interns are working for free. How could things be better while people harp about how bad off Main Street is. I do not think that most plutocrats, like Roubini, have a good fix on to how much welfare a family of four can get here in the U.S., England, Ireland or France. This is one reason why the Market Vectors Retail ETF (RTH) keeps hitting new highs.
- People forget that while Main Street may be doing badly, 80% of the population is not doing that badly.
- The negativity of the press is tiring. I am sure that because we got a Dow Theory bull signal Wednesday, someone decided that today had to be a bear day to make up for it with the same gasbags saying the same stuff over and over again. It take too much effort to see how much money the listed companies are making on lower interest costs, plus they sold a lot of secondary stock to pay off debt in many cases and made their balance sheets even stronger.
