Don't Be Fooled, We've Been Here Before

The market, after the gut wrenching sell-off earlier, is now officially positive for the year. Things are rosy and we can embrace the new bull market, right? Not so fast.

Let's not forget we are still over 40% off from the market highs of 2008, the national deficit and debt has officially exploded past even the worst assumptions of a year ago, unemployment is racing to 10%, housing has been decimated, 2 million more homes are estimated to be foreclosed on this year, the government is the largest investor in U.S. financial institutions & has decided to arbitrarily re-write bankruptcy law and despite all this, we cannot get oil (USO) to go below $50 a barrel which means any growth or geo-political event causes a massive surge in prices (exhale).

But, you say, we are positive for the year. Problem: see, we have done this before. Look at the following data from the 1929-1934 market (hat tip reader Mike for emailing it).


There were plenty of times during that market it rallied for prolonged periods but one thing remained the same, the underlying fundamentals of the economy were lousy, just like they are today. The FDR government underwent a massive spending plan designed to "boost growth", just like today (it did not work, just like today). Markets will rise on the hope "things will be better soon" as folks want to be in on the bottom. As it rises others come rushing in, not wanting to be late for the party, and the market bursts higher.

Then, things do not get better and a market that looked cheap just a few months ago based on the hope people had now looks grossly overvalued based on today's reality. Then comes the slow selloff as reality sinks in. If you look at the time frames in the above chart you see the trend. Violent rallies up followed by slow painful selloffs.

Remember, this market decline started in October 2007 after it peaked. It gained speed in September 2008 and then again in February 2009. The recent near 30% rally has taken less than a month.

We cannot sustain the rally and turn the corner until the economy does, period. "Green shoots" are meaningless....meaningless. All government officials, despite trying to talk up the economy as best they can, admit we are not even at the worst of this yet. All agree unemployment will significantly worsen and the commercial real estate issue are only now beginning to make themselves obvious.

Rumors are 10 out 19 banks failed the ill-devised "stress tests" and when results are actually released (any day?) it will only serve to diminish confidence further. The banks, who by these tests seem to be on already shaky ground, are all saying they expect consumer credit to "significantly worsen".

At the end of the day we need the economy to stabilize before we grow. We have not even begun to do that yet. If that is true, how can we take the 30% rally serious? Ought we not take it with a grain of salt? I am...

Comments

[MGA_1:]

Excellent post ! With the amount of bad debt out there I don't see any reason why we wouldn't see a 1930's style decline in the stock market (with associated bear market rallies) - the only wild card is govt spending which was big under FDR but also carried out under balanced budgets.

May 05 01:29 PM

[North Pole ...:]

Good post. The thing I find interesting is the lengh of the previous bear market rallies quoted above, excluding the first and last, they were relatively short, 4 to 5 weeks. The longer the bull goes on, the more sustainable it becomes.

May 05 03:36 PM

[buoy:]

When people make comparisons of recessions from the past to the present, they should realize that events happen much faster today.

May 05 04:30 PM

[toobad41:]

I am having a difficult time determing if this is a good post or not. The break-down of the Great Depression in the table above is interesting but does it really have any relevancy to today? Most of the industrials of the Great Depression don't exist today. GE and GMC are still on the list today but that may change. The rest are gone. Also in 1929 there were a total NYSE market of 846 companies whereas today there are over 4000 companies. Less than 1% of the population in the US in 1929 held or traded stock. Today almost 70% of population owns a part of the NYSE. The total NYSE volume in 1929 was just 3 to 4 million shares per day. Today the Dow itself trades over 300 million shares per day. What I am getting at is that it takes a lot more energy to move a super tanker than it does a small boat. The Dow of yesteryear was a small boat. I even question the validity of todays Dow. Does it really represent the true nature of the market? I feel the Wilshire 5000 comes closer to the truth in my opinion.

May 05 04:34 PM

[doubleguns:]

Liked the artical, some facts are questionable making it appear careless but I believe your point is very obvious to most of us.

This bear rally could last longer but we have no TRUE earnings to speak of. Yes there are some companies making money but the majority are simply loseing less and that makes a rally?

Come on! Get real. Without earnings from spending of all the unemployed, scared, broke, savers, bankrupt and every other sad situation out there we can not get this turned.

When fools rush in!

May 05 04:38 PM

[BadCompany:]

Considering that I've have yet to see a single acurate forecast for 2008, made beforehand, I have no reason to believe that anyone can forecast where the market is going.

May 05 04:45 PM

[buoy:]

When comparing past recessions to current, one must realize that events happen much faster in todays world.

May 05 04:54 PM

[I am not a ...:]

I Agree,the Australian Big four banks are in the worlds top ten of profitable companies. Yesterday the CEO of ANZ bank quite openly stated that no matter what the government says, they will charge what ever interest rate they like and damn the mortgagees of Australia,"we are here to make money.."


On May 05 12:16 PM Steven Vincent wrote:

> seekingalpha.com/insta...
>
>
> The Panic is Over and the Panic has Begun
>
> I think that the Panic of 2008 like the Panic of 1907 was rigged
> to achieve some aims by the banking cartel. The financial industry
> was consolidated, political power was extended, globalization was
> forwarded and losses were transferred to the public sector. In addition,
> asset prices were discounted allowing insiders to buy on the cheap.
> Having achieved these ends, the cartel will now blow another bubble.
> And so on. The "crisis" is what they want it to be and lasted as
> long as they needed to accomplish their intermediate term goals.
> I don't see another major financial/economic upheaval for several
> years...next will be public sector debt/Treasuries/USD crisis. Not
> till the 2011-2012 time frame.
>
> With regards to markets, the only "fundamental" that matters is the
> supply/demand configuration.
>
> Supply: Sold Out in a massive, engineered panic.
>
> Demand: trillions in scared money sitting on the sidelines, trillions
> more of new money injected by the Fed and Treasury and then the short
> interest of Bears continually trying to pick a top.
>
> Don't look for anything even remotely resembling a top until we see
> the 200 DMA on SPX. Around 970.
>
> I am expecting a "buy the news" reaction to the "Stress Test" event.
> Really, the news is already out. If the financials were going to
> sell off, they had their chance. All we have seen is a breakout
> of a reverse head and shoulders bottom, a retest and a consolidation.
>
>
> Every dip, however insignificant, is being bought. Insiders are
> accumulating for a big bull run while the stunned public sits on
> the sidelines nursing their wounds. The media is busy building the
> Wall of Worry...swine flu, stress tests, credit card defaults, commercial
> real estate...the list of Worry items is endless. Bull markets climb
> a wall of worry and this is exactly the behavior we are seeing now.
>
>
> This week's close above SPX 875 represents a breakout after a consolidation
> lasting several weeks. Some strong upside should be in the offing.
>
>
> 5/4/09 Addendum: And today's breakout above SPX 880 and 900 in a
> single session further validates that the market is SOLD OUT and
> the only sellers who remain are SHORTS who are now being forced to
> cover. A decline below 875 and weekly close below 860 (lower rail
> of uptrend channel) is required to turn the market bearish. Stops
> at 860 are recommended.

May 05 05:30 PM

[Northstar10000:]

DOW 10000 in the bag. After that fake out, it's Katie bar the door.

May 05 07:49 PM

[mlonz:]

This post is so on the money I cant believe it. The powers that be will prop up markets for several years to ensure BO gets re-elected, and just like every other time, the public will pile in at the top. All of you who are negative on the market are using sound principals, but your timing is way off.

May 05 08:32 PM

[mlonz:]

This post

"The Panic is Over and the Panic has Begun

I think that the Panic of 2008 like the Panic of 1907 was rigged to achieve some aims by the banking cartel. The financial industry was consolidated, political power was extended, globalization was forwarded and losses were transferred to the public sector. In addition, asset prices were discounted allowing insiders to buy on the cheap. Having achieved these ends, the cartel will now blow another bubble. And so on. The "crisis" is what they want it to be and lasted as long as they needed to accomplish their intermediate term goals. I don't see another major financial/economic upheaval for several years...next will be public sector debt/Treasuries/USD crisis. Not till the 2011-2012 time frame.

With regards to markets, the only "fundamental" that matters is the supply/demand configuration.

Supply: Sold Out in a massive, engineered panic.

Demand: trillions in scared money sitting on the sidelines, trillions more of new money injected by the Fed and Treasury and then the short interest of Bears continually trying to pick a top.

Don't look for anything even remotely resembling a top until we see the 200 DMA on SPX. Around 970.

I am expecting a "buy the news" reaction to the "Stress Test" event. Really, the news is already out. If the financials were going to sell off, they had their chance. All we have seen is a breakout of a reverse head and shoulders bottom, a retest and a consolidation.

Every dip, however insignificant, is being bought. Insiders are accumulating for a big bull run while the stunned public sits on the sidelines nursing their wounds. The media is busy building the Wall of Worry...swine flu, stress tests, credit card defaults, commercial real estate...the list of Worry items is endless. Bull markets climb a wall of worry and this is exactly the behavior we are seeing now.

This week's close above SPX 875 represents a breakout after a consolidation lasting several weeks. Some strong upside should be in the offing.

5/4/09 Addendum: And today's breakout above SPX 880 and 900 in a single session further validates that the market is SOLD OUT and the only sellers who remain are SHORTS who are now being forced to cover. A decline below 875 and weekly close below 860 (lower rail of uptrend channel) is required to turn the market bearish. Stops at 860 are recommended.

May 05 08:32 PM

[Donkey Kong:]

You are just like the market...."we can't stop you, we can only hope to contain you!" Release, rotation...SPLASH!!!


On May 05 02:48 PM Cetin Hakimoglu wrote:

> This bull market can't be stopped. There is compelling evidence the
> financial crisis and recession off the past 16 months is over. Just
> like the good times can't last forever, neither can the bad times.

May 05 09:14 PM

[Sober Realist:]

LOL. Cetin's got the top negative rating, but you have to give him credit for not wavering in his convictions. He's got a pair of cajones.


On May 05 09:14 PM Donkey Kong wrote:

> You are just like the market...."we can't stop you, we can only hope
> to contain you!" Release, rotation...SPLASH!!!

May 05 09:41 PM

[Donkey Kong:]

More like s--t for brains!!


On May 05 09:41 PM Sober Realist wrote:

> LOL. Cetin's got the top negative rating, but you have to give him
> credit for not wavering in his convictions. He's got a pair of cajones.
>

May 05 09:42 PM

[yellowhoard:]

This may or may not be an engineered crises.

However, I think that, whatever it is, it is out of anyone's control.

May 05 10:01 PM

[raising4dau...:]

Great article, especially if you've never read a history book. I suppose Joe "When the stock market crashed, FDR got on TV" Biden co-authored this thing. Hoover was President, there was no TV, and Biden is a fool.

Author's opinion? Maybe right, maybe wrong. Who knows?

But, a re-write of history was used to support the author's claims. I hope most reader's realize that FDR didn't take office until early 1933, a period off the author's chart ends.

The article would've been more interesting if the chart used 1933 as the first period in the chart.

May 06 12:16 AM

[Finance Fan...:]

I agree. Our current position is almost a identical inverse of the downward trace we saw in February and March. Just as many thought the market would never go up in March, it is the same with us going down at this point in time.

May 06 02:02 AM

[Hot Richard:]

Todd,
Usually this next phase includes an increase in calls for patriotism (and blind faith).

Sucker rallies are just regripping to squeeze even more lemony juice of wealth obliteration (and transfer).

May 06 07:54 AM

[Liebold:]

Rise of the machines (algorithms). When the mega-funds rewrite them with the uptick rule, there will be balance.

May 06 08:31 AM

[carey_jim:]

This thread is cold but I need to make an observation.

I'm not an economic historian and I only report on the books I've read, and the lectures I've watched and listened to.

But, unless I've lost my ability to hear and listen, these facts come from economic historians.

One important controversy comes from the monetarist school (including Bernanke) who are convinced that tight monetary policy was the major cause of the Great Depression. They don't ignore the facts that I cite (and have cited before) but they think monetary policy is the most important cause.

Voting for or against these facts doesn't change them. It would be to make a comment on a fact or chart that you think is wrong and provide whatever source you can find.

I understand that rhetoric, propaganda and advertising trump the facts for most people but this site is not for 'most people', but is dedicated to the discussion of economic and financial facts so that informed people can make uncommon profits.

Let 'most people' chase bubbles and let us stick to economic reality.


On May 05 12:48 PM carey_jim wrote:

> If you look very closely at the data from 1929 to 1942 you will see
> that the United States pulled out of the Great Depression by 1937
> and the GDP and the stock market increased from about 1936 to 1942,
> with one short recession in 1937.
>
> (Don't forget that World War II didn't start for the United States
> until December, 1941)
>
> There is no consensus for what exactly brought the economy out of
> the Great Depression but it isn't clear that government spending
> programs were NOT a factor and many economists think they were a
> major factor.
>
> One persistent problem that didn't completely go away until World
> War II was unemployment. Government work programs were seen as a
> political necessity when unemployment reached 25% in 1931-2.
>
> We have a very similar unemployment problem today when you calculate
> unemployment the way it was calculated back then (they included the
> homeless in the unemployment figures, for example.)
>
> Sometimes politics, class warfare and even war itself trump economics.
>
>
> And of course, almost everything trumps simple observation and intelligent
> interpretation of road signs. But that's another story.

May 19 01:19 PM