We Had a Nice Run There, But Is the Bounce Over?

I am not going to say the bounce is over. We had an incredibly sharp drop in January and February and by early March we were due for a bounce. Question remains, dead cat bounce or have we reached bottom?

Some day I will say the latter, i.e. we reached a bottom, but I simply do not believe we are there yet. The 2 + 2 math does not add up. I think most of the action this month is in response to the U.S. government throwing another trillion in the fire. I say fire as it will be burned with minimal benefit, in my opinion. I have detailed here why and will not repeat my thoughts. Nonetheless the bounce is extremely impressive. March - not over yet - has been the best month for the market in three decades. And you are questioning why I have been buying put options this week, including some today. Go figure.

But let's focus a bit on the 2 + 2 for a moment. Why does the bounce not add up - aside from my view that the Geithner plan will have a relatively modest benefit in the short to mid term and perhaps a negative effect in the long term? Well, simply put, we are not close to out of the woods yet.

Let me count the ways:

The first "2" in the equation is employment or, more precisely, unemployment. People without jobs cannot spend, they cannot pay their mortgages, they cannot buy homes and they cannot deleverage. These are all in my mind key problems in the current recession and they are getting worse, not better. As Market Watch puts it:

Nearly 15% of the workforce is unemployed, underemployed, or just plain discouraged.

We are in serious downturn in employment and everything I am seeing says this will continue to get worse into 2010. Mind you, unemployment typically continues to get worse well after a recession has bottomed as employers get burned with a recession and are slow to respond in a positive fashion when it has bottomed. In any event, employment issues continue to complicate things and unemployment is still climbing with a vengence.

As Calculated Risk aptly reports (have I mentioned Calculated Risk is a great site):

Rex Nutting writes at MarketWatch: Unemployment still rising
The raw numbers, not seasonally adjusted, [show] 6.4 million collecting state unemployment benefits, and an additional 1.4 million who were collecting the federal benefits that go to people who've been fruitlessly looking for a job for more than six months. The claims numbers don't show the whole story. About 4 million more people are officially unemployed but not eligible for jobless benefits. In addition, 8.6 million can find only part-time work and another 2 million have given up looking for work. Nearly 15% of the workforce is unemployed, underemployed, or just plain discouraged.The employment situation is grim, and even if GDP turns slightly positive later this year, the unemployment rate will probably rise all this year and into 2010.

New home sales, though better than expected, were the -seasonally adjusted - second worst on record. Second to January this year. The chart at Calculated Risk is one of the most impressive cliff dives I have seen.

And, commercial real estate is in for a world of hurt too. You think vacancy rates are high now with all the bankruptcies, wait until 78 million more feet of space comes onto the market.

There are more "2"s to add to this equation, and I will add them as time allows, but y0u get the picture - I hope. We have simply not reached a bottom based on the stats. I could (and hope I am) wrong on this, but those who have followed me for a while will hopefully pipe in on my general track record.

Disclosures: I have put options on GE, MSFT, AA and AXP. They total less than $5000.

Comments

[expat in China:]

its not just unemplyement that will dampen the recovery!

Our consumer has changed, they no longer desire items because of the age change or style change. The group over 50 have 50% less money and retirement is forced on them. The middle age working people are either not working or are scared of the jobs going to LCC low cost countries (IBM news is one of many) The college group have been taught that our finnacial system is weak and not to be trusted so there sentiment and spending power is lean.

The auto companies will get their bail out but everone of them will spend the money on joint ventures in China and India. This leaves the American supply chain drifting in the wind as the automotive companies will buy parts and VAA Value Added Assemblies from lower labour markets.

I have no need to buy anything for years (I am 44) ok maybe some wine but if my glasses break i will drink it from the bottle now.

Mar 27 04:49 AM

[ksmithdc:]

Interesting read. Thanks.

Mar 27 08:38 AM

[y3115y:]

During last depression, the market bounced back 8 times, all more than 20%, and once was 39%. This is the third bouncing back for this bear market, it is unlikely the last one as the unemployment rate is going up, co earning is going down, and inflation is coming. These are the essentials for bear market.

Mar 27 08:43 AM

[mrresponsible:]

Bottoming is not an event, but a process! One can not recognize it in current time.

Mar 27 10:41 AM

[Allan Frain:]

When equities rise on falling oil that is improving fundamentals.

When oil and equities rise in mutual euphoria something else is at play.

Given Quantitative Easing a flight from cash is logical and explains a simultaneous rise in oil and equities. This is more like trading than investing and more short-term than long.

Mar 27 10:45 AM

[Allan Frain:]

Graph this bounce in Euros and it is not very impressive. Much is merely dollar depriciation.

Mar 27 11:29 AM

[Mad Hedge F...:]

It always in the the individuals come in. Once thought an extinct species, the retail stock investor is back with a vengeance. It only took a 23% rally, the best since 1938, to do it. Trading volumes are up 15%-20%. It’s time to take a look at the online brokerage stocks, which have been on a tear. These are pure brokerage firms, not de facto mega hedge funds like the big boys. So there are no hidden trading losses, mark to market issues, compensation scandals, or TARP money. These boys are poised to pick up the pieces left behind by the implosion of Lehman Brothers, Bear Stearns, and Merrill Lynch. Look at Charles Schwab (SCHW) with a mutual fund family that makes it a more sensitive to a rising market, or TD Ameritrade (AMTD) which is a better volume play.

Mar 27 01:40 PM

[Pecos Jack:]

I have been waiting for signs of weakness during this run-up, and when we opened down this morning, I pulled the trigger and bought DXD which double-shorts the Dow 30. So far so good...

Mar 27 02:16 PM

[Chezfrederick:]

Good Article, thanks.

I think that by the end of April, the March rally will have become but a faded memory.

Mar 27 05:56 PM

[Al-USA:]

Actually, my market projection model does identify the March lows as the BOTTOM. However, it must be said that the "financial crisis" did make it fail up until recently so...

Even I don't buy it, yet.

Mar 27 09:49 PM

[ValueInvestor:]

Are you one of them?


On Mar 27 11:43 PM MADE IN SOMALIA wrote:

> don't show your child on s.a. men, this site is full of pedophiles.

Apr 09 04:45 PM