Profit warnings should bring Wall Street tumbling down

It amazes me how high the Dow Jones and S&P 500 stand today given everything that has happened in the US economy over the past year: sub-prime crisis, financial crisis and the credit crunch. I know that is because the pain so far has been felt in the financial and property sectors and not elsewhere.

But how much longer can this false sense of security persist? What happens as housing transactions slump? There is a whole series of lost sales for other sectors and what about the lawyers who do the transactions, let alone the wealth effect of lower prices?

The truth is that the announcements on profit falls are time delayed. Nobody loves to rush out and tell shareholders things are not so good and our profits are going to fall. But eventually they have to – the truth has to come out sooner or later.

It is just beyond belief that the tribes of Wall Street retail investors continue to behave like lemmings heading towards the edge of the cliff, and fail to face up to this obvious reality. How can the rest of the economy be doing well if the banks and builders are in recession?

Another wake-up call ought to be the rising cost of energy and food. OK even if you think that corporate America can side-step the biggest financial crisis for a decade, how about the impact of rising costs on profit margins? Surely even the dimmest stock investor ought to think about that.

In the 1970s the US stock market was pummeled by the effect of inflation on profit margins. Let us not forget, companies that make less profit are worth less. I just wonder when the facts of economic life are going to catch up with Wall Street.

Normally high oil prices would do the trick but they are seen as just a reason to drive up energy company stocks. Indeed, the Washington and Wall Street PR machines are in high election year overdrive and keen to keep the mood of the public optimistic, against all the evidence to the contrary.

Sooner or late this bubble has to burst. It could be the markets will take fright when they really think President Obama is going to be elected, or afterwards when they sober up. But I would short US markets going forward.