9/12/2012
By Carlos Guillen, Research Analyst

More Articles by Carlos Guillen

Quite remarkably, equity markets are continuing to inch higher on no fundamental basis, and at the moment the Dow Jones Industrial Average is holding above the 13,300 resistance level that it surpassed on Tuesday. Clearly, investors are not letting go the hope of further quantitative easing, and Thursday all eyes will be on the Fed, expecting to see a green light for some form of quantitative easing.

The bulk of economic data is suggesting that our economy will grow slower and slower, and the odds are increasing that in this third quarter the U.S. economy may actually experience no growth at all. Europe and Japan are already experiencing a decline in gross domestic product, and China is growing at a decreasing rate, so with major economies experiencing a worsening economic backdrop, it is not too farfetched to see our own economy experiencing a similar situation.

In the latest piece of economic data today, we saw that inventories at U.S. wholesalers rose in July by the most in five months. It is apparent that declining sales are causing a buildup in inventories, and we can surely expect companies to reduce production in order to counter the buildup in stock rooms. According to the U.S. Census Bureau, inventories from wholesalers were up 0.7 percent month-to-month after decreasing 0.2 percent in the prior month, landing above the Street's estimate of 0.3 percent. While a buildup in inventory would be a positive if companies were expecting an increase in demand, this is not the case. In fact, at the moment, companies are concerned with the global slowdown and with the looming U.S. tax and government spending changes, and this may actually compel companies to sharply reduce production in order to anticipate declining demand and to prevent further inventory buildup.

So, there is still no indication of an improving economic backdrop, yet stocks are higher. In Germany, the green light has been given for the European Stability Mechanism to come to life, and here at home more and more economists expect the Fed to give the green light to QE3 tomorrow, and the markets are reaching levels not seen since December 2007. Without true support from fundamentals, this is starting to look like a bubble is growing.

Carlos Guillen
Wall Street Strategies