Sucker's Rally Approaching an End

Whatever the technical reason for the 25 percent rise in the S&P over the past five weeks, or a more modest eight percent bounce in GCC regional stock prices, the absurdness of this sucker’s rally ought to be obvious to all.

Unemployment is still rising, house prices are still falling, and the fundamentals of bank balance sheets are still deteriorating with total bad debts unknown except that we know they must be getting worse.

Global trade fell off a cliff in the first quarter of the year. Even Mercedes car sales to the oil rich of the GCC fell 23 per cent. The collapse of the world’s second largest economy, Japan, has been unprecedented.

Bad news coming

Nor do you have to look hard to see what the bad news to come might be: US banks will have to reveal all in government stress tests to be published at the end of this month; the bankruptcy of Chrysler and General Motors (GM) loom, two companies of vast importance to Main Street USA with a million jobs in jeopardy and huge borrowings to be written off by the banks.

The stock market pattern in 2008-9 has so far been a mirror image of the crash of 1929-30 with a halving of prices from the autumn followed by a 25 per cent rally from March lows. In April 1930 stocks moved sideways and then they crashed another 50 per cent into the summer.

What possible reason is there for optimism to believe that history will not repeat itself? Government stimulus packages have more than likely been too small and too late to prevent another down leg in stocks, and will take time to revive the real economy, if indeed they can do so.

They might just stop the worst possible scenario but are they going to prevent the plunge downwards? Governments have not managed it so far.

Consumers and unemployment

At the commonsense level you have to ask why should an economy show signs of recovery as it lays off hundreds of thousands of people: the unemployed are not big consumers, and it frightens the hell out of people left in work who stop spending and save.

Consumer demand is the most important fundamental in modern economies and the confidence of consumers is being blown to pieces. It will take more than weasel words from US bankers and ‘green shoots’ in the waffle of President Obama to put things right.

Eventually global stock markets will reach a bottom but they are not close to having visited it just yet. Wall Street and its friends are playing investors as suckers but they are in danger of overdoing it. For once these guys are impoverished where will the next bunch of fools come from?

Goldman Sachs' (GS) results this week might well mark the top of the rally, beyond that the only way is down.

Comments

[coastalpirate]

Rick and to the Author, What would settle the 1930's comparison for me would be some facts comparing leverage levels, Loan to Value %, avg home price to avg salary comparisons etc, I know the un-employment rate was much higher then, but was the population and the banks levered and over-extended at differing degrees? Seemed like people saved more back then. People did walk out of their houses leaving the furniture and everything they couldn't carry, but that seems the same as the foreclosures going on in CA, NV, FL etc. Did the Banks keep more than 1.5 to 3% actual assets to cover their loans like today? Need some more data !!!

2009 Apr 13 07:15 AM

[wes mantooth]

I agree with this article. No way we've seen the bottom. This was the biggest credit boom in history. It will be it's greatest bust.

2009 Apr 13 07:19 AM

[MJJP]

When figuring the unemployement data REAL unemployement is comparable to the 1930's. We don't see it because of the many safety nets that exist and the just the way unemployement is calculated is different now than then.


On Apr 13 07:15 AM coastalpirate wrote:

> Rick and to the Author, What would settle the 1930's comparison for
> me would be some facts comparing leverage levels, Loan to Value %,
> avg home price to avg salary comparisons etc, I know the un-employment
> rate was much higher then, but was the population and the banks levered
> and over-extended at differing degrees? Seemed like people saved
> more back then. People did walk out of their houses leaving the furniture
> and everything they couldn't carry, but that seems the same as the
> foreclosures going on in CA, NV, FL etc. Did the Banks keep more
> than 1.5 to 3% actual assets to cover their loans like today? Need
> some more data !!!

2009 Apr 13 07:32 AM

[MJJP]

What is really concerning me is that the very behaviors that got us into this mess is being used to get us out. Spend ,spend spend. You cannot spend if workers don't have money. Real wages have stagnated over the past 20 years and unless industry turns a new leaf on attitude and outlook by opening their purses this downturn is likely to be with us for some time. Unionization gets a bad rap from conservatives and the right wing media but unions are the only alternative to getting this accomplished.


On Apr 13 07:19 AM wes mantooth wrote:

> I agree with this article. No way we've seen the bottom. This was
> the biggest credit boom in history. It will be it's greatest bust.

2009 Apr 13 07:37 AM

[djk!]

are the people who saw the opportunity in buying a month or so ago and did so and then took some reasonable profits since then suckers? I think not. The suckers will be the ones who did not understand what was happening and as a result may lose because of it, but those are probably a small percentage of all who took part in the rally. Even when there is a full blown bull market and a rally comes about there are folks who miss out on the gains for various reasons. There will always be "suckers" at the end of any rally in any market. *Sucker rallys" is just another misnomer, an overused term that implies that folks who participate in market action at certain given times are uneducated fools. Nothing could be further from the truth of the situation. The last month or so has been a good time in this current market for many people. Just because it will no doubt turn out that some folks will yet again take losses does not mean the rally itself was for suckers, just that some suckers took part in the rally, and I think every rally has it's own share of suckers.

2009 Apr 13 07:59 AM

[BeachRider]

The markets could certainly fall some more, but both sides of this argument have valid signposts that their trend will hold. One has to look at the position of the USA in the global economy and find it to be one of the most-organized while being the most intellectually fractured of the leading economies.

It has to be that the thought-processes of the USA need to be looked at for the intellectual fractures. We can disagree on what needs to be done, but we need to get into doing it quickly.

Economic leadership from the 90s and early 2000s must step back and measure our next step. We are clearly committed to some kind of deficit spending, so get over that (as a concept, the degree can still be discussed). It sounds too much like there are people rallying their choirs and not motivating the nation.

2009 Apr 13 08:03 AM

[donzoab]

Unemployement always increases the most at or near the END of a recession.
This type of deficit spending will eventually drive some consumer driven market increases, but in the longer run, it is extremely bad for our economy.
Future generations are going to foot the bill for our bad behaviors.
Some will still profit in this mayhem. Trading around your core positions will at least yield some free cash flow to your portfolio. Options can also limit your downside exposure.
Everyone so busy trying to call the bottom in the markets that they are missing the bigger pictures. Don't be distracted. More bad news lurking. Time will be needed to fix this as well as some fiscally responsible local/state and national budgets.

2009 Apr 13 08:29 AM

[somecatchyphrase]

The author offers an excellent summation of the recent rally. Thank you.

Nothing has changed in the past five weeks to justify a 25% rally. Despite all of the media coverage, it seems like many people don't yet appreciate the depth or gravity of the world economic situation.

This could create a wonderful shorting opportunity. I'll keep my power dry and finger on trigger. The next month could prove to be very interesting.

2009 Apr 13 08:30 AM

[R. Ennis]

Sucker's rally? It was a 25% trading opportunity. I'll take that kind of action every 5 weeks.

I think the only sucker is you!

2009 Apr 13 08:31 AM

[Bondace]

You were the "sucker" if you didn't participate in the rally.

2009 Apr 13 08:32 AM

[Paul Price]

Sounds like sour grapes from someone who was hsort and got hosed.

2009 Apr 13 08:34 AM

[Obi-Wan]

I agree, the only suckers here were the ones either shorting or sitting on the sidelines missing out on the opportunity to get 25% of their money back. If you were trying to time the market, you lost as usual.
Don't wish gloom and doom on the markets just to chase your shorting gains that you enjoyed last year. Enjoy the ride and be happy for some light at the end of the still long tunnel....

2009 Apr 13 08:58 AM

[Robert DiAlberto]

That was some rally. You are quite the Bear. But it seems we saw the bottom, though I agree there are some bumps ahead. We need to get through the GM problems. Once General Motors finalizes their plan and get past the B word. But no one knows if they will avoid the B word. I hope they can. I do not hold any GM stock but I do hold some of the Banks. Holding long term hoping to ride out the storm.

2009 Apr 13 09:05 AM

[capital pains]

Let's not try to get too deep into the market's moves. The stock market turned into nothing more than a casino with the rise of the evil hedge funds. Consequently, not fighting the tape has become more appplicable than ever. Buy and hold is long dead. In and out, grab a few bucks and run, is the only way to play the market. I agree with the author; the rally was amazing and seemingly absurdly overblown.No matter actually ... As the incomparable B.Baruch once said, "You take the first 20% and the last 20%, I'll take the 60% in between" !! Hence, just go with the flow on a daily basis and try to make a buck. It's gambling, pure and simple ! Any so called market maven who advises otherwise, is living in the past.

2009 Apr 13 09:16 AM

[hatarakiman]

According to the history, after the great depression there will be two world wars. So be prepared for it.
If you use unemployment data for trading, good luck to you. I take the nonfarm payroll data for some back testing on S&P500, I am kind of dissappointed. If you buy when the nonfarm payroll increases and sell when it decreases, the result is awesome, it's far worse than buy-and-hold.

2009 Apr 13 09:17 AM

[kelm]

In the US and Europe this is a sentiment driven rally which will need the fundamentals to catch up at some point in order to continue. Exactly when the market makes its decision that the fundamentals are or are not here remains an open question. In certain other areas of the world though there is more reason to believe that something is happening. China is posting steadily improving numbers with domestic consumption coming on strong. With their stimulus they will grow by over 6% this year, possibly as much as 8%. While down from some recent years that is a lot of consumption for 1.3 billion people. Companies doing business there could still do very well.

2009 Apr 13 09:18 AM

[prudentinvestor]

Good comment, but perhaps would be complemented by adding that those who enter in the early stages, then exit in the late stages, of a so-called "sucker's rally" are smart, and the exact opposite of suckers. For them, a better description is a "tradeable rally".

Those who coined the expression "sucker's rally" probably meant it to apply only to those who enter in the late stages of such a rally, then watch their positions drop, then, perhaps, compound their error by panic selling near the subsequent trough.



On Apr 13 08:03 AM BeachRider wrote:

> The markets could certainly fall some more, but both sides of this
> argument have valid signposts that their trend will hold. One has
> to look at the position of the USA in the global economy and find
> it to be one of the most-organized while being the most intellectually
> fractured of the leading economies.
>
> It has to be that the thought-processes of the USA need to be looked
> at for the intellectual fractures. We can disagree on what needs
> to be done, but we need to get into doing it quickly.
>
> Economic leadership from the 90s and early 2000s must step back and
> measure our next step. We are clearly committed to some kind of deficit
> spending, so get over that (as a concept, the degree can still be
> discussed). It sounds too much like there are people rallying their
> choirs and not motivating the nation.

2009 Apr 13 09:32 AM

[The Simple Accountant]

Short term market moves are better analyzed on technical indicators, and they pointed to a rally. Yes, the underlying economic fundamentals are still weak, and that should cause investors to be cautious over the longer term, but significant interim moves present profitable opportunities for nimble traders. As so many have noted, it's not a market that favors the buy and hold approach.

2009 Apr 13 09:48 AM

[ACCOUNTANT]

This was not like 1929-1930. THe crash of 2000-2001 from the 1999 bubble was similiar to 1929-1930. This was a continuation of that crash - much like the the markets continued decline in 1937 was a continuation of the 1929-1930 crash.

Adjusted for size of the GDP and the difference in the risk free interest rates, the S & P 500's recent low of 676 represented a 94.3% overall 10-year decline in the S & P since 1999. To imply that we haven't reached bottom simply doesn't reflect the facts.

I'm not saying we are going to bounce back real quick. the 1999 peak was a massive bubble that we probably will not see again in our lifetimes. But, I also believe that that lows recently witnessed are, as Doug Kass as has called them, "generational lows" that will not be seen again.

2009 Apr 13 09:56 AM

[The Geoffster]

Good comments. Debt levels are much higher today than in the depression. Then, we were a nation of savers and a creditor nation. Now....
Both crashes were caused by excessive leverage. It took WW2 to get us out of the depression. Pump priming didn't work. We paid for the war by selling bonds and then inflating them away. We'll get out of this fix by hook or by crook but I'm betting the dollar will be worth a lot less then than it is now.

2009 Apr 13 10:00 AM