The cheerleading, the promotion, and the self-serving pronouncements by the business news analysts is nonsense and irrelevant. Their pleading that the fundamentals are in place for a recovery, that the recession is over, and that they cannot understand why the market is not roaring ahead are senseless. They overstate every nugget of positive news, and in an unbalanced style, understate every piece of negative news. Their bias is irrational and transparent.

However the most depressing issues is that they just do not get it. The stock market will not lead this economy to better times regardless of how much the analysts shout that it is going to happen. This time the stock market will follow the recovery in the economy.  This economy will not recover until companies start making some money and employees become secure in their jobs.

It is often said that the stock market anticipates a recovery in the economy. That the stock market picks up 6 months prior to a general economic recovery. Maybe this has occurred in the past but not this time. The market already carries a valuation for many stocks that support a price lower than currently exists. Stock prices are too high for the current level of profitability at most companies.  Hence a great deal of profitable growth is required for many companies just to fill out the current stock price.

The stock market does not create value but should reflect value. If the stock market tripled overnight it would not make the economy any stronger. This economy will grow, as all others have done in the past, when companies become profitable and start to make money. It is profit that permits companies to expand, to hire additional employees, to consume materials, and to invest in new technology and equipment. This is what causes an economy to grow. If the analysts do not get this it is their problem.

It is true that an analyst may identify a company that is growing and becoming profitable, ahead of its competitors and consequently the price of the shares of this company may rise. This will occur not because of anything that the stock market does but because this company is becoming profitable. In becoming profitable the worth, the value, of this company has increased which causes the value and the price its shares to correspondingly increase.

Recently there have been two many examples of companies creating “artificial value” by using a wide variety of accounting misrepresentations. Most frequently this has been accomplished by not recognizing the true debt levels at companies. Off balance sheet parking of some debt instruments and the use of “pro forma” balance sheets have shamefully become common. The stock value of these companies rose to reflect perceived value. It cannot be surprising that once such manipulations have been discovered, and the true value of the company becomes known, that the price of the stock adjusts to reflect the true value.

This economy is going to meander along as it is doing now for some time. The operating costs at many companies, the largest component of this is the debt servicing costs, is currently too high to allow for companies to make any profit at current revenue and gross margin levels. The current debt load carried by consumers is going to diminish consumption and increase bankruptcies. This economy is not going to recover this time but rather it is going to restructure and this is going to take some time.

The stock market will not improve, on average, until the economy improves. Be patient as this is going to take some time.

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