The Market's Upside Potential Is Capped

This blog post originally appeared on RealMoney Silver on June 2 at 8:11 a.m. EDT.

I have to ask the question: when will our authorities (read: SEC) wake up to the damage inflicted to investors' confidence and to our equity markets by high-frequency trading strategies? And the sad answer: when the damage to investors' confidence and to the markets is complete! Beyond my concerns regarding the troubling market manipulations, I continue to have a number of secular and intermediate-term fundamental concerns. There are numerous nontraditional headwinds to growth: rising taxes; fiscal imbalances in federal, state and local governments; the absence of drivers to replace the prior cycle's strength in residential and nonresidential construction; inept and partisan politics; and the long tail of the last credit cycle (Greece, Portugal, Spain, etc.). These factors (among others) don't necessarily prevent a bull phase, but they will most certainly put a cap on the market's upside potential. That said, my single greatest short-term concern is that credit is growing dearer as banks further pull in their lending horns -- in part, a result of the aftershock of the last credit crisis, which is now being felt in Europe. I recognize my observation of more limited credit availability runs somewhat counter to the Fed bank officers' lending survey. Perhaps, to quote Warren Buffett, those lending officers are lying "like ministers of finance on the eve of devaluation." (I have argued that restricted credit is growth-deflating and could jeopardize the bulls' self-sustaining economic growth thesis.) In conversations last week with the managements of two serial acquirers (industrial/manufacturing) and with the management of a large M&A investment boutique, all are singing the same song. Deal backlogs are strong but not for the reasons one would expect (i.e., as an attempt to buoy tepid top-line growth prospects). Instead, numerous growing companies along many different industries simply can't get financing to support growth, and some are forced to consider being acquired as an alternative to slowing their own organic growth. I believe that many of the uber-bullish strategists (who are often paraded in the business media) are too preoccupied with the prospects of large, S&P 500 corporations (awash in cash and materially self-funding with record free cash flows) and are missing the picture underneath -- that of a vulnerable consumer and of a less-than-confident small business community, both of which simply don't have an easy path to credit. After all, credit is the lifeblood of our economy, and without it, confidence sinks, capital commitments are postponed, and job growth is lackluster. In the fullness of time, restricted credit will ultimately affect even those larger corporations.   Loading Comments...   1 2 3 Last » Next ›

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