This Rally Is Sustainable: Halftime Report, Part 2

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Green Shoots

The term “green shoots” has become much reviled, but it is green shoots we look to for signs that the recession may be slowing or reversing. If bull markets start a few months before recessions end, the question becomes, are we nearing the end of the recession? As in May, there is evidence pointing in both directions. But almost everybody now accepts that the economy has pulled back from the precipice, and that there is some evidence that the economy may be heading towards growth again. If anything, those arguments have strengthened since May. Here is my updated list of “Top Twelve Green Shoots.”

• The most recent (June 24) Federal Open Market Committee statement said that the pace of economic contraction is slowing. Conditions in financial markets have generally improved; household spending has shown further signs of stabilizing; and businesses, while cutting back on fixed investment and staffing, appear to be making progress in bringing inventory stocks into better alignment with sales. “In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability.”
• After seven months of decline, the Conference Board's Index of Leading Economic Indicators rose in April for the first time in seven months. It rose again in May and June. In a report issued yesterday (July 20), the Conference Board stated that the six-month change in the index has risen at a 4.1% annual rate, up substantially from a negative 6.2% annual rate for the previous six months. At the time of their preceding report, a spokesman for the Conference Board stated, “The coincident economic index is still declining, but the declines are less intense. The recession is losing steam. Confidence is rebuilding and financial market volatility is abating. Even the housing market appears to be stabilizing.”
• Similar indexes designed to be predictive of the economy are also showing positive movement. ECRI (the Economic Cycle Research Institute) reported in June that “[T]he cyclical improvement in the economy is proceeding in a textbook sequence, from [improving] long leading indicators to short leading indicators to coincident indicators…In fact, there are now pronounced, pervasive and persistent upturns in a succession of leading indexes of economic revival.” The BullandBearWise.com Index of Economic and Market Indicators (available here), which “…weights economic and market indicators from 0 (bearish) to 100 (bullish),” stands at 58.2 as of yesterday (July 20), and it has been on a jagged but pretty clear uptrend since January.
• In late June, the Commerce Department reported that gross domestic product (GDP, a measure of all goods and services produced in the economy) fell at a 5.5% annual rate in Q1 2009. That marked a modest but meaningful improvement from the Q4 2008 drop of 6.3%, which most are now seeing as the probable low of the recession. Most economists believe the economy did still better in the second quarter, with estimates for GDP decline in the 1% to 3% annual range.
• Consumer spending rose 2.2% in Q1 2009, following sharp drops of 3.8% and 4.3% in the Q3 and Q4 2008 (seasonally adjusted annual rates). The Q1 increase was not enough to offset bad investment spending numbers, hence the overall GDP decline. That said, in seven of the last nine recessions, consumer spending led investment spending by one quarter.
• In June, it was reported that U.S. construction spending made an unexpected jump in April, with a rare climb in residential outlays and an increase in commercial construction. Total spending rose by 0.8% compared to the prior month, the Commerce Department said. Spending had also increased 0.4% in March (the prior month).
• Claims for initial unemployment benefits paint a picture of slowing job losses. According to the Labor Department, the number of first-time applications for benefits has been slowly falling since peaking at 674,000 the week of March 28. The number of initial claims in the week ending July 11 fell (after seasonal adjustment) 47,000 to 522,000, the lowest level since early January. And continuing claims fell from a record 6.9 million to less than 6.3 million, which is the lowest since April.
• Consumer confidence is rebounding. In June, the Reuters/University of Michigan Consumer Sentiment Index rose to its best level since September, 2008. The Index, which bottomed in November 2008, has now been up six of the last seven months.
• There are some signs of encouragement in housing. Reuters reported last Thursday that U.S. mortgage rates dropped for a third consecutive week, reaching their lowest level since late May, 5.1% on a 30-year fixed-rate mortgage. That is the lowest since the week ending May 28, but still higher than the record low of 4.8% set the week ending April 2. The statistics on mortgage applications tend to mirror rates: lower rates = more applications. The Reuters report stated that the U.S. housing market has been showing some signs of stabilization, with sales rising and home price declines moderating in many regions of the country. Other factors encouraging people to return to the housing market are near-record housing affordability (the ratio of median house payments to median income) and the upcoming year-end deadline for the $8000 first-time-buyer tax credits. Reports from the National Association of Realtors (NAR) in early July indicated that pending sales of existing homes rose for the fourth consecutive month in May. The last time that happened was in 2004. The group’s pending home sales index is 6.7% above May 2008. "Strong activity by entry level buyers is helping to absorb inventory and allow some existing owners to make a trade," said Lawrence Yun, NAR's chief economist. New construction of homes and apartments picked up to the fastest pace in seven months in June. Housing starts rose 3.6% to a seasonally adjusted annual rate of 582,000, the highest figure since November. Building permits also increased, rising 8.7% to 563,000, the strongest reading since December. The National Association of Home Builders reported a survey of builder sentiment rose to 17 in June, the highest level since September.
• Elsewhere on the housing front, according to the widely followed Case-Shiller national home price index report released at the end of June, overall housing price declines are slowing. On a month-to-month basis, prices in 20 selected cities fell 0.6% in April after a decline of 2.2% in March. According to David Blitzer, chairman of the index committee for S&P, which compiles the Case-Shiller index, "[E]very metro area, except for Charlotte, recorded an improvement in monthly returns over March….While one month's data cannot determine if a turnaround has begun, it seems that some stabilization may be appearing in some of the regions."
• In mid-June, it was reported by the Investment Company Institute that long-term mutual funds saw net inflows for the 13th week in a row, and that the pace of money flowing into stock funds increased from the previous three weeks. This flow suggests increasing investor confidence and growing willingness to invest in riskier assets such as stocks. Bloomberg reported on July 8 that there is more cash available to buy shares than at any time in almost two decades. The $8.85 trillion held in cash, bank deposits and money-market funds is equal to 74 percent of the market value of U.S. companies, the highest ratio since 1990. In related news, the State Street Investor Confidence Index of institutional investors rose over 6% in June, the third increase in as many months.
• The widely watched Institute for Supply Management monthly survey of new orders bottomed in December at 40.1, with a clearly improving trend since then. The ISM survey of manufacturers is still below 50 (which indicates contraction instead of expansion), but its turn upward is consistent with what has historically happened at the end of recessions. Recent readings are May's 44.0 and June’s 47.0.

Interpretation: Coming out of past recessions, consumers drove growth. When it was at full tilt, 70% of the USA’s GDP was made up of consumer spending. But since that coincided with massive mortgage and consumer debt levels, plus the housing bubble, it was unsustainable. Currently, the housing bubble is deflating, consumers are paying off debt and saving more, and banks and credit markets have tightened up lending criteria.

In the long run, saving more and reducing debt is a good thing—it will lead to a stronger economic foundation for the country. In the short term, though, this “deleveraging” retards GDP growth. We are now in a period of “less worse,” that is, slowing shrinkage. That is a necessary precursor to actual growth. The transition from recession to growth is not like turning on a light switch. It is a process. The data tend to be quite mixed in the early months of a recovery, and with a recession this severe, the data will probably take an extended time to turn predominantly positive. Historically, economic data are not uniformly positive even during economic expansion.

But there is little doubt that we are moving in the right direction. Since my earlier article, the data have improved. I expect the data will be quite mixed for several more months, but to continue turning more positive overall, with occasional hiccups and short-term noise.

But as I said earlier, this article is about the stock market, not the economy. I think the market is sentiment-driven, and so long as the “net news flow” is positive and supports growing optimism about the economy, the stock market rally will have enough fuel to continue.

Room to Run

Besides the bottoming and reversal of economic contraction, there are other signs that support a continuation of the rally. One is stock valuation. There are many ways to measure valuation, and a lot of attention has been paid to the soaring trailing P/E ratio of the S&P 500, as measured by S&P itself. Putting aside arguments about whether their calculation is valid, a full picture of valuation comes from looking at more than a single trailing metric. In the case of stocks, we can measure valuations and risk premiums by looking at forward P/E, Price/Sales, Price/Book, and PEG ratios, among others. By these measures, the valuation of the S&P 500 has not soared out of sight.

Another way to value stocks is by computing “fair” or “intrinsic” value through a net-present-value discounting model. In my first article, I referred to Morningstar’s Market Valuation Graph (available here) that compares actual current stock prices to what they compute are the current “fair values” of the same stocks. For all the stocks they cover (about 2000), that current ratio is 95%, meaning that they believe that the market as a whole is about 5% undervalued. For stocks they consider to have “low uncertainty” in fair value, the ratio is 84%, meaning that they consider those stocks to be 16% undervalued. And for stocks they think have “wide moats” (i.e., strong companies with sustainable competitive advantages), the ratio is 82%, or 18% undervalued. While all of these ratios have increased since my article in May—meaning the stocks are more fully valued now than then—the numbers still suggest that the rally has more room to run.

Market Technicals

It has been fun to watch technical analysts, who as recently as 10 days ago confidently predicted that the market had to fall because it “broke the right neck of a classic head-and-shoulders pattern,” try to back away from those predictions and explain last week’s 7% rally in the S&P 500. One widely-read technical analyst said that the head-and-shoulders formation is one of the most reliable signals in the technician's book of tricks—more than 80% accurate--and the recently negated one was picture-perfect, conforming to almost every point in "the manual.” But, alas, it was negated.

Be that as it may, a very simple reading of market technicals does not negate the possibility of the rally continuing. A straightforward drawing of trend lines shows the market rallying since March 10, with a slowdown and then some backtracking in June and early July. Call it a small correction if you like. The fact is that the general trend line since March 10 has been rising.

The S&P 500 now stands above its 20-day, 50-day, and 200-day simple moving averages (SMA). When I wrote the article in May, the index was still below its 200-day SMA, which was seen as a barrier (“resistance") by the “unsustainable" camp to further upward movement of the index. That resistance has now been broken.

Summation

This summary is not much different from the first. While the bearish point of view certainly has strong adherents and supporting evidence, the view that the rally is sustainable has good evidence too, and it seems to be growing. The summary is simple: The strongest argument that this rally is sustainable is the historical pattern that bull markets start about 6-7 months before the ends of recessions, combined with evidence that the recession is entering its final stages. That argument is supplemented not only by figures suggesting that the rally has more room to run on a valuation basis, but also that favorable technical arguments can be made as well.

I will conclude by repeating a statement from the first article: Anybody who claims to know whether this is a bear-market rally that will end soon is simply stating his or her opinion as if it were fact. Nobody knows at the time it is happening. The best anyone can do is make reasoned judgments based on facts and logical theories. What I’ve tried to do here is make the best case I can for the sustainability of the rally despite a continuing bad economy. My timeframe and magnitude remain the same: that this rally is sustainable to S&P 1050 by early October.

Disclosure: Long SPY, QQQQ, and IBM based on the case made here. I am also long about 15 dividend-paying stocks based on a separate investing strategy that has nothing to do with this discussion.

Comments

[Speedspirit:]

Bear Market - Bull Market= Maniupulated Market

Just like the trap set on the "Classic" head and shoulders pattern that failed this new paradigm of another 15% will set another trap.

Jul 22 07:00 PM

[JohnBinTN:]

C-Dubya, :)

Try to not pay too much attention to the man behind the curtain. I usually look forward to your posts, and agree with many of them, so please don't consider this a 'bash'. David expressed a 'bullish' outlook, which you must admit is a minority here, there and everywhere. He articulated well. Enjoy it, brother. This IS a rally. Trade into it. Don't look behind the curtain! Who cares what's back there, anyways? Just be savvy enough to know when it's time to hunker down. GS and JPM will never go out of business. They will ALWAYS make money. Stop worrying about stuff so much, and you can, too! ;)

There has never been a better day to be alive than today.... And I'll say the same thing tomorrow. ;)

Luck to all....

-JB


On Jul 22 06:32 PM conceptwizard wrote:

> Its great news to see that you have done well, and certainly optimism
> is much better than bearish innuendo. In normal times I would feel
> the same, and have. I just cant make out the plain facts when everything
> indicates that their are forces behind he market that are by no means
> normal market activity.This causes me great concern and I feel obligated
> to shed light on the issue. If in fact you are ahead or even, I would
> reccomend you take steps to stay that way.

Jul 22 07:05 PM

[David Van K...:]

Thanks to all or your comments. I have a few responses:
User 143167: Assuming you are correct, thanks for correcting my 70% number to 72% consumer spending in the GDP. I don't believe that changes my basic point, which is that a number that high is unsustainable if it is aided and abetted by a housing bubble and unprecedented debt.
Markfl: How can you confidently declare deleveraging as a long-term trend, and how do you define long-term? It's certainly happening right now, but there is a strong streak in American culture to buy stuff and to leverage to do it. I'm not convinced that in a few years, Americans won't be doing it again.
Larry House: I made it clear from the beginning of the article that I was making a case, and if you read my first article, that's what I did there too. Of course I don't KNOW, and neither does anybody else. My point is that some intelligent arguments can be made for a continuation of the rally, and I've tried to make them.
Alex Filinov: Right, improving economics doesn't automatically = market uptrend. But it helps the positive news flow, and I think this market is predominantly sentiment-driven. Thus, positive news leads to improving sentiment, which may lead to more demand for stocks.
Bruce Pile: Excellent point about what made the 2001 recession and stock market recovery different from the previous eight (excessive debt). Except: This stock market recovery may already have started with the rally that began on March 10. I don't think there was a comparable head fake in 2001; correct me if I'm wrong.
Boxed Merlot: I love your pseudonym, but I have no idea what you are saying.
Swashbuckler: There's no doubt about government stimulus and bailouts helping the rally, but to say "The rally was engineered, bought and paid for by the government and will not continue indefinitely" is pretty extreme. Of course the rally will not extend indefinitely, they never do. I realize that in distrusting and mocking the government's involvement, you represent the thinking of many SA commenters. I happen to think there are other factors, which I attempted to describe.
conceptwizard: Where'd you get the $40-45 number for the S&P? And if you answer that, tell me the difference between that number on the S&P spreadsheet's P/E page and the total number (about twice that) if you add up all the earnings on the preceding page of that spreadsheet, labeled "Issue Level Data." I haven't found an explanation for why the number drops so much from page 1 to page 2. Thanks.
Yoda: Who totally debunked the Green Shoots theory? Is that fact or opinion? As to what to look for for recovery, read the National Bureau of Economic Research (NBER) paper at www.nber.org/cycles/de... for how they determine the starting dates of recessions and recoveries. Their numbers are generally accepted as "official."
Owen B: I did not mean to imply that the leading economic indicators from different organizations all turned upward at the same time. It seems that is irrelevant, as all of them are positive now, which was my point.
Alternative: Get your damn "iamned" shilling off of SA, will you? And tell all the other shills too. I hope before long, SA intercepts these and banishes them. If that's you, Cetin, posting this garbage under a series of different screen names, you should be ashamed of yourself. Everyone: Give those things thumbs-down whenever you see them, they are an insult to this community.

Jul 22 07:27 PM

[User 422955:]

I appreciate van Knapp's preference for defining the terms he uses. That's pretty rare here on SA.

Jul 22 08:39 PM

[Boxed Merlot:]

On Jul 22 07:27 PM David Van Knapp wrote:

> Thanks to all or your comments. I have a few responses:

> Boxed Merlot: I love your pseudonym, but I have no idea what you
> are saying.

I apologize. It was a poor attempt at trying to appear more intelligent than I really am. All I meant was that the cited phrase could be interpreted as evidence that the overwhelming media’s coverage of our nation’s condition is committed to influence the economy / market by touting “positive” and squelching “negative” information in an attempt to overcome fundamental policy weaknesses they have vested interests in. I hope that helps.

Jul 23 12:08 AM

[phewtures:]

You tell 'em, JB.

Thinking on good things will absolutely destroy an otherwise perfectly bad day.

~~~

On the S&P Futures front:
The Daily golden cross happened early last month.
Now, the Weekly golden cross is setting up for early August.
Daily and Weekly momentum's are steadily up.
The Monthly pivot point got popped hard last week, like it wasn't even there.

Some say it's a trading range, now. But momentum is not contracting and there are not enough cycles, yet, to qualify for a trading range. Plus, the daily 50sma has not stalled out. It just keeps pushing higher.

So, who's gonna stand in front of this train?

Oh, and by the way, for those who are saying an H&S neckline supposedly broke the week of July 6, and are therefore claiming the market is somehow being manipulated, you may need to study up a little more on that one. First of all, H&S patterns are notoriously unreliable. Secondly, the neckline never broke. You need at least one close below, and preferably an opening and a close below. Thirdly, Pro's use this exact scenario to run other people's stops -- just below the "neckline" -- so they can get in at a great position just before the market turns higher, ... which is precisely what happened. Live and learn and grow.

~~~

We're most likely headed much higher, very soon.

Tight trailing stops going forward, now. Resetting on pullbacks until proven otherwise.

All of which are good things.

Jul 23 12:16 AM

[Owen B:]

> Owen B: I did not mean to imply that the leading economic indicators
> from different organizations all turned upward at the same time.
> It seems that is irrelevant, as all of them are positive now, which
> was my point.

Understood, but my point, which I should have made clearer, is that your conclusion -- that the rally is sustainable -- may have been evident earlier than now. People do have different risk profiles, but as I watch the ECRI data on turning points, their argument for a summer recovery is essentially the same as it was three months ago. Now, I'll readily admit, trading on that view since April has not been straight forward. Perhaps that is because many have been waiting for more evidence that the recession is ending.

Jul 23 08:21 AM

[David Van K...:]

JohnBinTN: You should post more. Your positive attitude is refreshing, and SA needs more of it for balance. I read your profile...funny stuff and a good philosophy on life.
Boxed Merlot: Thanks for the clarification. I need to ask, though, why do you and so many others believe that there is a vast cross-media conspiracy to mis-report and falsify facts, and to mislead the public about the state of the American economy? With all the so-called "mainstream" media, cable channels with different political agendas, talk radio shows with different agendas, etc., I don't see how such a conspiracy is even possible. They all act as checks and balances on each other. I don't feel that I have any trouble getting the facts I need. If I read an article (or get an email) that sounds false, it is so easy to check it out for myself. The bias (if it exists) in most sources is easy to spot from a mile away. Isn't that the free-speech system working as it should?
Owen: Thanks for the clarification. I wrote my first article in May, and I began investing into the rally on April 2. You're right, many are waiting for still more evidence that the economy is turning. But judging from the preponderance of comments (not only on my articles but throughout SA), most seem to feel that the economy is not turning at all, and any evidence to the contrary is considered to be the product of deliberate media and government manipulation and fraud.
All: On the "iamned" shills, I've noticed that if you click "Report abuse," SA seems to remove the offending post. Two have been removed from this thread after I clicked it. So now I urge you to "Report abuse" whenever you see a naked "iamned"
shill. It's a little something we can do to improve the quality of this community.

Jul 23 09:35 AM

[constab:]

The stock market is governed by psychology. If many people believe the stock market will go up. It will go up. Reality (unemployment, etc) is lagging behind. If the investors Faces Reality the next downfall will start. I hope there comes a time when the stock market is governed by Realists. If this happens the recession will be over. According to the Kondratiev Cycle the next stage starting around 2012 will be the state of Spring. New Ideas will start to appear about what has to happen in the future. One of these ideas could be to stop with the Stock Market Gambling Machine and create an alternative that is more Sustainable.

Jul 23 10:37 AM

[Dialectical...:]

"The strongest argument that this rally is sustainable is the historical pattern that bull markets start about 6-7 months before the ends of recessions, combined with evidence that the recession is entering its final stages."

If this bull market started in April, as you suggest, 6-7 months out puts us in October. If this is the strongest argument and it suggests the recession is ending in October, I don't think it is a very good case.

I love basketball, but I rarely cheer when my team, which was down by 26 points closes the gap to "only" 18. The problem with trends is that they can look positive ("We've out scored them 2-1 in the last three minutes") when the real picture is negative ("The score is 100 to 82"). Eventually trends will improve, but we are a long way off from ever catching up to where want to be, in both the market and the economy. End of recession? Maybe soon. Recovery? Don't hold your breath.

Jul 23 10:55 AM

[max12345:]

Whether you are right or wrong about your conclusions (and I happen to think you are right) you have flagged the (crying) need to better define terms that are typically just banded about.

For instance, "sustainable" and "unsustainable", "bull markets" and "bear markets" "secular or less than secular", "dead cat bounces" (or for that matter, live cat bounces), primary, secondary, tertiary and even to the nth power trends, "sucker's rallies" and clever guys' rallies.

Unless one puts some quantitative parameters and boundaries on some of these terms they can end up being worse than meaningless.

Another important aspect which you flagged is that people often simply do not know, (mainly because they also CANNOT know) yet they nevertheless like to indulge themselves in all sorts of assertions which are nothing more than that.

We don't need to be able to measure everything quantitatively (qualitative language also has its place) but if one doesn't at least say what is one's own understanding of a particular term....(if an "official" definition cannot be found anywhere) then it's a linguistic free for all where nothing but nonsense ends up being "communicated"

Jul 23 10:56 AM

[Arthur Hau:]

It really depends on how we define "sustainable"!

If the author is talking about 1 year. Sure, the little bull can sustain for at least 1 year given the large amount of liquidity available in the economy. Thanks to the Fed. Can the stock market not go up, when there is so much cash around and its rate of return is so low?

From its bottom of 6xx to today's 9xx, the S&P has been moving up not only because it has hit a bottom, but also because of the super low interest rate and the billions of dollars of cash pumped in by the Fed.

Oftentimes, it is believed that stock indices are leading indicators of the economy. However, this time these indicators may be lying to us because they are not driven by any sign of a true recovery of the economy. In fact, all signs show that the recession will continue for at least another quarter or another half a year. AT LEAST!

Can the recession worsen? Yes, if we are currently in a liquidity trap, flushing the economy with even more liquidity will not boost real investment. The only effect is an even more speculative stock market.

Is the Fed building up another bubble in the real estate and the stock market? Possibly!

I suspect the S&P will go back up to 1000 or even 1200 in a couple of months. However, if the Fed ever raises interest rate again (possibly some time towards the end of next year), it will go back down again.

Has the economy benefited from the low interest rate and high level of liquidity? NOT sure yet. We may well be at the onset of another financial bubble.

So is this rally sustainable? Yes, if we are talking about 1 year. Not sure, if we are talking about a longer horizon.

Large trade deficits, high unemployment rate, low interest rate for retirees, high rental costs, high oil price, lack of major innovations ... are all unfavorable to a true recovery.

Jul 23 11:54 AM

[friar tuck:]

nice to read some positve comments for a change. unemployment at 10% actually means employment at 90%. simple math is un debateable. don't worry, be happy with what's there and make the most of it. america has always, without fail, in our history, been resilient and most of all, resourseful. one must use extreme caution when trying to lasso a moving train.

Jul 23 01:22 PM

[Boxed Merlot:]

On Jul 23 09:35 AM David Van Knapp wrote:

> Boxed Merlot: Thanks for the clarification. I need to ask, though,
> why do you and so many others believe that there is a vast cross-media
> conspiracy to mis-report and falsify facts, and to mislead the public
> about the state of the American economy?


I won’t be able to speak for others, but my reservations to believe certain sources has as much to do with the omission of facts as with the sheer volume / amount of coverage given to favored interests. This tactic is understandable when a source either blatantly states or pays directly to present a point of view. However, when a PBS or other “objective” news cast using government controlled RF exercises the same omission / editorial prerogative it leaves lingering doubt in my mind as to the veracity of everything else being presented. I agree that misreporting and outright falsification should be easily identifiable, but the omission of pertinent lines of questioning and facts is troubling.

By the way, I appreciate your follow ups. Thanks.

Jul 23 01:41 PM

[CLH:]

Right on David. What most investors who comment dont understand is that there is only one thing thats important for an investor. That is to make money. Whether its a bull, or bear is of no importance.

If you havent made any money since Mar. 2009, you are not an investor and should put your money in a hole in the backyard. Certainly dont waste our time by writing comments on Seeking Alpha.

Jul 23 02:00 PM

[markfl:]

I argue that over the period 2010 to 2011 the personal savings rate will be around 5% or more, representing 5% less consumption. I thus expect about 1.5% GDP growth next year. This is toward the lower end of forecasts because I don't expect a V. As stimulus wears off I consider that job creation will be too weak to lower the unemployment rate much, that it remains around 8% in 2011, and reduced employment and higher savings mutes growth to again around 1-2% in 2011.

Employment may lag GDP, but labor utilization should not. Weekly hours should minimally become stable at 33.0 in July (if the economy is growing).

The S&P rally will require top line revenue growth that may not be forthcoming. We need to see retailing this Christmas that suggests consumers are able to spend as you suggest. Not what they want to do but what they are able to afford.

On Jul 22 07:27 PM David Van Knapp wrote:

> Thanks to all or your comments. I have a few responses:
> User 143167: Assuming you are correct, thanks for correcting my 70%
> number to 72% consumer spending in the GDP. I don't believe that
> changes my basic point, which is that a number that high is unsustainable
> if it is aided and abetted by a housing bubble and unprecedented
> debt.
> Markfl: How can you confidently declare deleveraging as a long-term
> trend, and how do you define long-term? It's certainly happening
> right now, but there is a strong streak in American culture to buy
> stuff and to leverage to do it. I'm not convinced that in a few years,
> Americans won't be doing it again.

Jul 23 04:00 PM

[Dialectical...:]

I agree on both counts. I enjoy reading both positive and negative opinions and think there is usually some truth in both sides. I have a problem with some people who are gloom and doom and seem to be hoping for collapse. I am in the other negative camp. I would LIKE to see reason to cheer, but have a hard time finding positive measurements that resonate with my sense of what is happening. I think we are deeply damaged by the impact of the credit bubble and its aftermath. Sometimes the Bulls remind me of the Black Knight form Python's Holy Grail. As he is disassembled by King Arthur's sword, he keeps insisting it's only a flesh wound and "I've had worse." There is a place for (and a power to) positive thinking. But sometimes it seems divorced from what is actually happening. In 2011 this post will be long gone and I will either have changed my mind about the economy or I will feel vindicated. But I think it will take at least that long before we start seeing healthy activity, recession or no.

On Jul 23 09:35 AM David Van Knapp wrote:

> JohnBinTN: You should post more. Your positive attitude is refreshing,
> and SA needs more of it for balance.

Jul 23 10:09 PM

[David Van K...:]

Again, thanks to all for your insights. This has been a good discussion, much better than the one that followed my first article in May.

Dialectical: The 6-7 months is an average length of time between market trough and end of recession. The range of times has been 3 to 10 months. With a recession this severe, it might clock in at the longer end of the range, or even more. Ten months would take us out to January or February. By the way, "end of recession" and "recovering" are basically synonymous according to the National Bureau of Economic Research (NBER), whose dates for the beginnings and ends of recessions are generally accepted. To them, the economy is either always expanding or contracting (never flat). If it's contracting, that's a recession; when it stops contracting, the recession is over. Check out their website, NBER.org . The important point is that recessions are defined by lack of growth, not absolute level. When this recession ends, we will be well below the GDP when it started. If by "recovery" you mean regaining former levels of economic activity, I agree that it will be way more than 6 or 7 (or 10) months to get there.

Max, thanks for your support on the definitional issue. The loose use of language on SA drives me crazy. I'm not a symantics nut, but I hate to see two people talk right past each other because they are using the same terms but with fundamentally different definitions, which they don't reveal.

Arthur, it ALL depends on how we define "sustainable." That's why I went to such lengths in both articles to give my definition: S&P 1050 by early October. It's interesting that some now dismiss that as just a short time (or by calling it a "little bull"). When I wrote the first article, it was 5 months away, and many commenters acted as if I'd lost my mind. Their advice was to short everything, the rally wouldn't last a day. (By the way, I generally agree with everything else you say.)

Boxed Merlot, thanks for your clear explanation. I guess my point is that free speech provides a marketplace for ideas. I don't much care for the bashing of "mainstream media" for their shortcomings by other media outlets that simply have a different political leaning. There are some news shows that attempt to be objective, and they hit the mark pretty often. Others have a clear political bias (left or right), and they hit their marks too...their job is simpler, it's easier to be biased than objective. Also, it makes me laugh when I hear some of the latter bash the mainstream media for bias, then crow about how high their own ratings are. Sorry,if you are the highest-rated radio talk show in America, or the highest-rated cable news channel, you are by definition mainstream yourself.

Markfl, I don't see much disagreement between us. When I say I suspect that Americans might return "in a few years" to their former free-spending, debt-fueled ways, I'm thinking 3-4 years out or more. Your timeframe goes to 2011, or two years. (See how it helps to clarify timeframes?) Within your two year timeframe, I don't disagree with any of your points, although I don't necessarily follow the chain of logic that leads from one point to the next. But forget that, we can agree that it's quite possible that GDP growth in 2011 may be low at 1-2%. (Note that's way beyond my timeframe for the case I made that the stock market rally is sustainable, which ends this October.) I think you make a hugely important point that holiday spending will provide a big clue as to how much (or whether) the American consumer is recovering from the recession, and that sooner or later revenue growth will be required to sustain the rally even further out. It wouldn't surprise me at all to see the rally stall out at any time. I simply made a logical, fact-based case that it could be sustainable until October. When I first made the case, it struck most commenters as outlandish. Now many more people clearly see the possibility, but it could still be wrong. That's why I'm using 8% sell stops.

Jul 24 11:06 AM

[Adam855:]

I think it's important to note that the author is not arguing fundamentals for the most part. He is simply stating his opinion that based upon momentum factors, "that this rally is sustainable to S&P 1050 by early October." The fact that he defined an exact price target for the broad market so specifically is laudable.

From that momentum standpoint, I think he makes a decent argument. From a fundamentals standpoint, things are much dicier (I would argue they are still horrible), but those show up only over multiple years or even decades.

So this is a variation of the whole "value" vs. "growth" investor type of discussion. Both can be effective strategies, though I lean towards fundamentals since they are easier to fathom than the near randomness of market psychology.

If you correctly analyze fundamentals, get on the right side of them, and practice patience, I'd argue that this gives the highest probability of long-term success. Momentum/growth/technical trading is much more dependent upon either great trading skills or just pure luck to figure out when the current trend has turned.

Jul 24 01:47 PM

[markfl:]

I disagree on this account: We could be seeing impacts from lower back to school spending far sooner than October.

" 'There’s been a question mark in regards to how permanent is this new behavior by the consumer, and I think a lot of people question whether this recession could have the same effect on the psyche on consumers as the Great Depression,' Stacy Janiak, Deloitte vice chairman and U.S. retail leader, said in a telephone interview. What we see is the changes in behavior are still there in large part. For some contingent, these will truly become their paradigm.

Concern over the economy was the top reason for spending cuts with 55 percent of respondents, followed by higher gas, food and home energy prices.

The back-to-school season generally starts around mid-July and runs through mid-September, according to the International Council of Shopping Centers, a New York-based trade group."
www.bloomberg.com/apps...

Some consumers will resume spending, such as those unscathed by the Great Recession. Those who've had foreclosure, for example, will never forget. Their credit score won't forget. Their kids won't forget. Ever.

On Jul 24 11:06 AM David Van Knapp wrote:

> Markfl, I don't see much disagreement between us. When I say I suspect
> that Americans might return "in a few years" to their former free-spending,
> debt-fueled ways, I'm thinking 3-4 years out or more. Your timeframe
> goes to 2011, or two years. (See how it helps to clarify timeframes?)
> Within your two year timeframe, I don't disagree with any of your
> points, although I don't necessarily follow the chain of logic that
> leads from one point to the next. But forget that, we can agree that
> it's quite possible that GDP growth in 2011 may be low at 1-2%. (Note
> that's way beyond my timeframe for the case I made that the stock
> market rally is sustainable, which ends this October.) I think you
> make a hugely important point that holiday spending will provide
> a big clue as to how much (or whether) the American consumer is recovering
> from the recession, and that sooner or later revenue growth will
> be required to sustain the rally even further out. It wouldn't surprise
> me at all to see the rally stall out at any time. I simply made a
> logical, fact-based case that it could be sustainable until October.
> When I first made the case, it struck most commenters as outlandish.
> Now many more people clearly see the possibility, but it could still
> be wrong. That's why I'm using 8% sell stops.

Jul 25 06:31 PM