Russell 2000 Small Cap index soars 100% in one year, but what does the Small Businesses says?

A few days ago, I posted about the IWM Russell 2000 ETF soaring, and today, it almost reached the +100% in one year milestone.

Please take some time to think about this simple fact. 100%, 1 year. In normal growth conditions, it takes an investment genius like Warren Buffet about 10 years to double his investment. In normal growth conditions, it take 20 years for the stock market to double.

Are we in normal growth condition?
What do small business owners say about their earnings and expectations?

Coincidently, NFIB published their March 2010 Small Business Economic Trends today. This is a survey of small business owners. Not of financial analysts about what they think of small caps.

What does the survey tell us? Here are some quotes. The charts have really not changed since last month, they are pretty grim. You can see them in my Feb post.

On Labor Markets: a seasonally adjusted net negative one percent of owners planning to create new jobs, unchanged and still more firms planning to cut jobs than planning to add.

On Capital Spending: capital outlays over the past six months was unchanged at 47 percent of all firms, barely ahead of December’s record low reading.  Capital spending is on the sidelines as is the demand for loans to finance these activities. Four percent characterized the current period as a good time to expand facilities, [...] a very pessimistic reading. 

On Inventories and Sales: Widespread price cutting continued to contribute to reports of lower nominal sales. The net percent of owners expecting real sales gains lost three points, falling to a net zero
percent of all owners (seasonally adjusted). [...] stocks are considered to be roughly in balance relative to expected real sales volumes (which are weak).

On Inflation: The weak economy continued to put downward pressure on prices. [...] Widespread price cutting contributed to the reports of lower nominal sales. Seasonally adjusted, the net percent of owners raising prices was a negative 21 percent [...] three percent of owners cited inflation as their number one problem and only three percent cited the cost of labor.  Neither labor costs nor materials costs are pressuring owners.

On Profits and Wages: Poor real sales and price cuts are responsible for much of the weakness in profits.

On Credit Markets: Weak plans to make capital expenditures, to add to inventory and expand operations also make it clear that many potentially good borrowers are simply on the sidelines. [...] 91 percent of all owners either obtained the credit they wanted or were not interested in borrowing.  Only three percent of the owners reported “finance” as their #1 business problem.  Pre-1983, as many as 37 percent cited financing and interest rates as their top problem.

General commentary by the NFIB:

The news about the economy and financial markets has been positive for some time, so the source of this pessimism must be found elsewhere such as Washington D.C., the source of most business uncertainty, but also facts on the ground: 34 percent said weak sales are their top business problem and that is what business is all about.   Credit access is not a major factor holding up economic growth, at least the kind of growth we want.  Many firms are desperate for survival cash, but many will not survive even with a free government loan. Creating growth with bad loans was just shown to be a bad idea. Comparing credit availability to that which prevailed in the 2003-07 period is misleading.  Underwriting standards were very weak, producing massive overextensions relative to cash flow and assets, a macro mistake we do not want to repeat. The notion that thousands of commercial banks are refusing to make profitable loans that would expand business activity is mistaken and not supported by statistics for community banks. Aggregate bank loans are down and should be. [...]

Capital spending and inventory investment plans remained historically low as did plans to create new jobs. [...]

The private sector is struggling to get back on its feet, but receiving little encouragement from Washington which is preoccupied with health care and higher taxes to finance unimaginable deficits.

Stock markets are not driven by fundamentals but by social mood, greed and fear. Nonetheless, there is a major disconnect between the fundamentals of the economics of the small caps, and their valuations on the stock markets. This is going to be rebalanced, sooner or later, and it will be very painful, potentially worse than the October 2008 stock market collapse.

We are in the Greater Depression and all the economic indicators confirms this.