Business

Investors: Keep an eye on the market bubble

NEWSPAPERS are busy this week commemorating the one-year anniversary of the collapse of Lehman Brothers as if that was the World Series and we are all sports reporters going over our scorecard.

But if you are an investor in the stock market — or planning to be anytime soon — it’s what happened six months ago that should really have your attention.

That’s when the latest stock market bubble began to form.

True, you can only identify a bubble after it has popped. But with stock prices up nearly 50 percent since March because . . . (Here’s where you fill in the blank with any number of conjectures because there is really no explanation for the market’s gain.)

To be sure, stock prices are still down 32 percent from their highs in October, 2007. As I’ve told readers early in the year, the economy would start to look better in the spring, primarily because of seasonal adjustments done by Washington to government statistics, on top of unwarranted assumptions about improvements in the job market when the weather thawed.

And I said back then that the stock market would probably respond favorably to the improved, although deceptive, numbers. And that has happened — in spades.

Skeptics believe the market’s six-month run has little to do with any improvement in the economy and a lot to do with liquidity.

As you’ve probably heard, Washington has pumped a lot of dough into the economy since the beginning of the year.

Despite assertions by the Obama administration, there isn’t a whole lot of evidence that this stimulus is flowing into the real economy.

President Obama crowed yesterday during a Wall Street speech that this stimulus has “saved” tens of thousands of jobs, a fact that not only can’t be proven but which also flies in the face of hundreds of thousands of “lost” jobs still being reported each month.

Where is all this liquidity going?

The skeptics of the recent market rally (and even though I saw it coming, I now fall into this group) think the money is going into speculation — pumping up stocks; keeping oil and other commodities at unnaturally high prices even while demand is down sharply, and allowing US government bonds to remain attractive despite miniscule yields.

Stock market bubbles can be exciting. And I encourage anyone with the adequate nerve and a substantial-enough portfolio to take advantage of this one.

Just make sure that this time you get out of the market before the bubble springs a leak.

So what could possibly go wrong?

There isn’t enough space in this column to go over everything, but here are a half-dozen choices.

1. The trade war that started this week with the Chinese could lead to substantial disruptions in the financial markets.

As you already know, the Chinese own about $1 trillion in US government assets. If Beijing stops buying our bonds, interest rates rise and all predictions of an economic recovery get tossed.

2. Washington’s economic stats could start looking more dismal.

As I said above, seasonal adjustments made the economy look better earlier this year. But these adjustments — like the seasons they represent — have to come full circle.

So, if the adjustments made the economy look stronger early in the year the payback could come in the fall when the economy could look weaker than it is.

3. Because of tensions with foreign investors, the Federal Reserve and the Treasury may have to talk tough about inflation — including references to ending stimulus programs — before these operations have really had a chance to work.

This is what I mean when I say that the economy isn’t just in a recession, it is broken.

4. Economists and Wall Street are still expecting consumers to bounce back and start spending money. But what if they don’t?

Both the Bush and Obama administrations have done a good job explaining to people that they went through an historically- dangerous event.

The Lehman anniversary allowed everyone to repeat that theme this week.

Maybe consumers, who represent 70 percent of the US economy, won’t be willing to ramp up their spending.

5. A lot of tricky maneuvers — including some perhaps illegal trading condoned by Washington — helped banks report better than expected profits earlier this year.

But banks are still overloaded with bad loans — commercial and residential real estate, as well as bad credit card debt, delinquent student loans and everything else under the sun.

New requirements for bank capital might also burden banks more than Wall Street will like.

6. Lastly, but probably not the only other problem, is that fact that the investment community is expecting a very substantial recovery in corporate earnings that might not come.

And if companies don’t start earning gobs of money they won’t be inclined to hire back workers — which will, in turn, hurt con sumer spending and cause more trouble at banks.

The cycle, in other words, is vicious.

While corporate profits in the soon-to-be-re leased third quarter are anticipated to be down 22 percent compared with the same quarter last year, earnings in the last three months of the year are expected to jump 293 percent, according to Thomson Reuters First Call.

That would be a mighty big improvement. It would also be a minor miracle since homebuilders and automakers are being counted on for much of that improvement.

Lehman is old news. If you want to be hip, start talking about the bubble. john.crudele@nypost.com