Dead Cats Are Bouncing

In economics, as in many other “soft sciences,” facts are often overshadowed by theories. The dominant economic theory currently in vogue is that the massive government stimuli orchestrated by the Bush and Obama administrations would produce an economic recovery by the end of this year.

Thus, it is no surprise that media cheerleaders have seized on the recent steep, but thinly traded, rally to find the facts that appear to fit the theory. From where do these talking heads draw this conclusion?

In recent months, we have allowed for the probability that a bear market rally, driven by seemingly low price-earnings multiples, would take hold for the first half of 2009. Months ago, I had stated that the rally would reasonably last into the summer and that the Dow could reach 10,000 before the next major downturn begins.

In the depths of the stock market crash of 2008/9, buying opportunities certainly arose. By March 2009, stock markets appeared to have been oversold. Certainly price-earnings multiples on many stocks had been compressed to generational lows. Ignoring the fact that these low multiples were underpinned by pre-recession earnings data, investors declared a bottom.

However, as is the tendency with sudden declines, bargain hunters entered the market too aggressively. On relatively thin trading levels, this led to a steep rise in stock prices which, in turn, drew in investors who feared being left behind. A steep bear market rally was in place. This mirrored the pattern of the Great Depression, when the initial crash was followed by a 68 percent rally in 1930. But after that rally had fizzled, stocks then declined by an astounding 86 percent over the two subsequent years.

While we urged caution in this rally by highlighting, among other indicators, a 38 percent decline in corporate earnings, speculative traders made enormous profits as stock markets rose by over 40 percent. But as dismal economic statistics continue to rain on everyone's parade, the cheers are beginning to subside. Last week, the unemployment figures were released and the Dow slid by some 223 points.

Now, even speculative traders are preparing for a drop. The new-found concern is due to three basic indicators:

First, the U.S. dollar, linchpin of all American (and most global) transactions, is appearing increasingly weak. 10-year Treasury yields, as low as 2.1 percent post-crash, and continuing to stay below 4 percent, indicate a persistent bubble in “safe” U.S. bonds and cash.

Certainly, the fiscal situation of the United States government doesn't warrant the confidence placed in its debt. The U.S. will soon have to choose between outright default and hyperinflation. The BRIC countries are already preparing themselves for the latter eventuality by seeking alternatives to the dollar.

Second, there has been a realization that the low multiples of March 2009 were largely illusory. With corporate earnings falling faster than share prices, price-earnings ratios are still high and historically expensive for an economy in an official recession.

Third, employment figures have been so bleak that the financial spin-doctors have been suggesting a “jobless recovery”! Reading between the lines, that means even the most deluded forecasters cannot find an argument for hiring to resume.

Despite the enormous stimulus packages, there are now roughly 15 million Americans unemployed, the highest total for some 26 years. Worse still, the official figures do not include the long-term unemployed or those who have been forced to accept part-time employment. If these “unofficial” unemployed figures were included, the total would be nearer to 20 percent than the official 9.6 percent. Furthermore, annualized figures show Americans earning less for each hour worked.

There can be little wonder that consumers are hoarding cash, increasing their savings and not buying on Main Street. American consumers are in a state of financial shock. The U.S. economy is heading deeper into severe recession, even depression.

The facts are universally bearish for the American stock markets. As for the pundits' sentiments, you can measure their value by how much you personally pay for CNBC (very little) versus your cost if they're wrong (very much). Now, there's a statistic!

Comments

[Davewmart:]

I don't see a way out of another leg down, to continue to mirror the 30's crash.
It is easy to draw scenarios where things get a lot worse - sovereign defaults in Eastern Europe, for instance - and very difficult to see where a recovery is to come from.
The eternal optimists are clutching at any straw, but serous analysts are divided between those who think we may have some sort of weak stabilisation and those expecting another plunge.

Jul 09 04:49 AM

[User 353732:]

THe Govt. and media induced "confidence" bubble of the first half of 2009 is now deflating as truth collides with delusion. As the false confidence, built on the vapor of economic something for value added nothing evaporates, it is being replaced by the reality of disappearing jobs, declining profits, vanishing net worth and rising investment risks, regulatory costs and class warfare.
The grim and continuing reality that in ,July 2009our Govt, itself, is the greatest source of national economic decline and financial debasement is engendering fear and deep anxiety among consumers, businesses and investors alike, except of course among those groups and few companies that are politically favored and coddled.
In turn, fear shortens time horizons, increases mistrust, if not deep didlike of dominant institutions in our society and forces the besieged middle class to seek a haven in cash hoarding, savings and very short term, liquid to quasi-liquid investments.
In fact, the American middle class is discovering what fearful middle classes across the world already know: Big Govt is the captive of the upper class, the patron and master of the parasitic class and the enemy of the middle class. In response to this discovery, Americans are reacting as middle classes do in many parts of the world: they are turning inward , shrinking from conspicuous and deferrable consumption and accumulating savings the best they can.
No surprise then that the investment environment is bearish: the hard times of the past 9 months are not receeding history but a prelude of harder times yet to come.

Jul 09 05:42 AM

[Moon Kil Woong:]

Although rising commodities have tied the government's hands, now on a weaker economy, the lack of any additional buyers for bonds will still keep the government constrained. That is a good thing long term, because if politicians could make your dollar 50% weaker and their friends 20% richer they'd do it in a heartbeat.

Even so, that may still not constrain a Fed who doesn't need to issue bonds in order to blow up its balance sheet, monetize, and engage in unfettered QE strategies that make monopoly money look secure (after all, monopoly money has a limited supply).

This market must reach a bottom. The sooner the government lets it reach there and stops their paternal hand holding of failed businesses and financial institutions the better. then, and only then can money flow to the truly efficient market participants and savers, not spenders will be rewarded.

Jul 09 05:49 AM

[jhartz:]

You'll recognize when the real turnaround comes. The spokesmen for all the various government agencies will start making statements about the economy that coincide with what you, yourself, have been observing.

Won't it seem strange to once again believe what our elected servants are telling us?

Jul 09 08:34 AM

[John Galt:]

Government: " We have a crisis of confidence"

So what's the cure for a crisis of confidence? The cure for a crisis of confidence is to flood the market with positive ( fabricated as it may be) data that turns pessimists into optimists. In other words " Green shoots". The great national spin job, perception ( in the market) is reality right? In the short term the market is a voting machine but in the long run a weighing machine right? Let's make people happy, let's try and steer them to ignore the cold hard reality. Maybe if we pretend the economy is better it will get better... Let's hope...

What's going to happen when people finally wake up and realize they have been deceived? The possibility of a big 1987 type event is there, I can't believe more people aren't worried/predicting that.

Jul 09 08:58 AM

[enigmaman:]

One stat that has not been discussed enough is the effect of the declining hours worked per week, while lets say weekly jobless numbers may show little or no movement and viewed as a green shoots by media and wall street pundits, in reality a loss of only 1/2 hr worked per week per employee is equivolent to the loss of 100K jobs, when you add this shadow stat to jobless claims you have an ugly result, so its not widely reported. Another reason why the information we are receiving is suspect, everybody reporting these stats are doing so working their own angle but nobody is working to disclose the unfiltered truth to the public, that is why the public always gets caught in the meat grinder time and again, sacrificial pawns of the system

Jul 09 09:53 AM

[lynnybee:]

I always enjoy Mr. Browne's articles. There is always one profound sentence that just grabs me.....the last sentence regarding CNBC is spot on. I remember when RON INSANA sat there on t.v. calling the bottom in 2002. RON INSANA said, "we'll never see that number again" (refering to when the DOW hit around 7,200). Really, Ron ? We'll never see that number again ? I remember when CNBC was a consumer advice show !!! The insanity of the past 20 years turned CNBC into the stock market show. My bet is that 10 years from now CNBC will either be off the air or revert back to a consumer advice show. Thank you, Mr. Browne, for your wonderful articles. Sincerely................

Jul 09 09:59 AM

[Carl Spackler:]

To know when this recession is over will be easy. When you see month to month increases in retail sales, we are at the bottom. Go to any mall and you will see shoppers, but very few bags. Without consumer sales, our economy cannot grow. Forget all the other stats, because this is the driver of everything. Right now, retail sales are dismal and the market's outlook mirrors that of retail sales.

Jul 09 10:52 AM

[Manifestor:]

Depends on what you are rooting for. If it is the economy yes it stinks and yes you have to wait and there will come a time when you, me and everyone including the politicians will know that the economy is robust. But if it is the market and if you want to buy low and sell high, you have to get in when the economy is in the dumps, like where it is now. Of course there are risks, but the risk of getting in when the economy is good is even greater because that is when Fed would raise rates and companies will have difficulty beating expectations. Now if you are a short trader as many here are, you have to work very hard constantly feeding these blogwaves with your negativism to influence reader opinion.

Jul 09 12:17 PM

[Old Trader:]

"Now if you are a short trader as many here are, you have to work very hard constantly feeding these blogwaves with your negativism to influence reader opinion."

Manifestor,

I consider myself a "realist". If the "reality" is such that the market is headed for a tumble, you'll find me heavily hedged (note: I've never been "net short"). If the "reality" indicates better times ahead, I've no problem with "backing up the truck".

Jul 09 07:36 PM

[Carl Spackler:]

I seriously doubt any short traders can move the market with their "negativisms" on any posting on Seeking Alpha. Perhaps you need to join forces with all the Goldbugs who believe that the Fed is conspiring to keep gold prices low. You could start a X-Files type organization which believes that aliens and short sellers are trying to take over the world!


On Jul 09 12:17 PM Manifestor wrote:

> Depends on what you are rooting for. If it is the economy yes it
> stinks and yes you have to wait and there will come a time when you,
> me and everyone including the politicians will know that the economy
> is robust. But if it is the market and if you want to buy low and
> sell high, you have to get in when the economy is in the dumps, like
> where it is now. Of course there are risks, but the risk of getting
> in when the economy is good is even greater because that is when
> Fed would raise rates and companies will have difficulty beating
> expectations. Now if you are a short trader as many here are, you
> have to work very hard constantly feeding these blogwaves with your
> negativism to influence reader opinion.

Jul 09 11:18 PM