In Spite of Five Month Rally, Top Permabears Don't Waver in Their Assessment

As a permabear, my natural inclination is to be bearish on US equities. However, even hardcore permabears like myself are forced to acknowledge an uptrend, and clearly an uptrend exists on the S&P. Below is a weekly chart of SPY, an ETF that tracks the S&P 500. Since March of 2009, we've been in a clear uptrend.

However, let's look at some arguments why it may not last:

1. You will hear many arguments about recovery will be W-shaped, U-shaped, V-shaped, etc. Personally, I agree with fellow permabear Eric Janzsen, who noted that we need to look to the Cyrillic alphabet to find a letter whose shape corresponds to the current economic cycle in the US. Janzsen argues for a Cheh-shaped progression. Basically, that while we may have some seemingly strong bull trends, as we did during the Great Depression, the ultimate trend is still bearish.
2. Stefan Karlsson notes that stocks are still overvalued from a fundamental perspective, noting that earnings of broad baskets of stocks are down 30% while prices are down just 20%.
3. Strict adherents to Austrian economics will note that a recovery cannot really happen so long as malinvestments are not liquidated. Bailouts prevent the liquidation of malinvestments and the return of asset prices to appropriate levels; so long as this situation maintains, a recovery seems unlikely. I agree with this notion from a philosophical perspective, although from a financial perspective, it does not seem to be particularly meaningful. We can have a rally in the stock market and a plagued economy; the two are not mutually exclusive.

Personally I focus on trading the US dollar, though my bias is to short the S&P as it approaches strong resistance levels.

Disclosure: No position

Comments

[conceptwizard:]

The Fed has supported this market by infusing money through HFT from the beginning. It is all smoke and mirrors and highly unethical what is truly going on. They are stuffing mattresses full of money, insider trading is at all time highs and the crucial ecomonic data, ie, housing, unemployment, average weekly income, consumer credit, home equity, and weekly hours worked, savings rate, retail sales etc are still heading downward. The dollar ison shaky ground and the generational debt has no way to be repaid. Tax receipts are down 28% and we are still implementing new expenditures. Its like living in a world where everything is upside down.
With all this going on we are ending the recession...please...we are just starting the greatest decline in the history of mankind.
The "DEBT BUBBLE" implosion.

Aug 11 01:54 PM

[TeresaE:]

Go back and read some headlines from 1930 in the late summer of that year.

What you read should scare the hell out of you and lead you to realize that (once again) the robber barons are cashing in the last of their chips while they can. The real devaluation is coming, and it will make March's lows look like good times for all.

This time the robber barons ARE the government, or they just outright own the politician.

Aug 11 02:28 PM

[Mark Bern:]

Fundamentals will eventually drive the market, it always does in the long-term. What really matters is expectation of future returns because that is what ultimately determines price. Let's look at a few of the green shoots that have help fuel the current uptrend.

Earnings: There are two primary factor that I consider to require caution: 1) While earnings have been beating estimates, earnings are still well below the levels from the same period a year ago. Does it make sense that prices should go up if the year-over-year (YoY) trend in earnings is down? Earnings are peating forecasts because forecasts are being lowered by Wall Street to levels that can be beaten. 2) Much of the earnings have come from cost cutting. Revenue is down YoY. Until we begin seeing top line improvements I am leary of forecasting sustainable earnings growth. Profits from cost cutting cannot sustain earnings growth. They do, however, form a better foundation from which to grow once the economy begins to recover for real.

Consumption: In order for the economy to recover and grow the consumer must dig out of his/her bunker and begin to spend freely again. This would require an expansion of consumer credit. Consumer credit is contracting and has a long way to go before the ratio of debt to assets for individuals reaches a comfortable level again. I don't see this trend changing for a few years. Many consumers, especially the all-important baby boomer generation, are increasing savings and deleveraging. Why? Because we say our retirement nest eggs explode recently and have lost 50% or more of our wealth that was intended to carry us through our golden years. Stock portfolios are still down more than 25-30% from the highs and home equity has, in many instances, completely evaporated (recent reports claim 30% of mortgages are under water now and the number keeps rising). The consumer account for nearly 70% of GDP. Consumption is not likely to grow briskly for years. This does not portend well for revenue and earnings growth in the US, nor for stocks dependent upon that growth.

Capital Investment: Businesses have a whole lot of excess capacity right now and will probably not add much more until that ratio changes dramatically. Without robust economic growth in demand (read: consumption) this could take several years before we see new capacity added. There will always be some replacement and updating to keep ahead of competitors in the technology and medical devices sectors. But as a percentage of total GDP this will not account for much in terms of growth prospects.

Construction: Well, if I have to explain this one you haven't been paying attention. But just to be inclusive in my comment, here goes. We've experienced "only" about 1.5 million foreclosures at last count since the beginning of the recession 20 months ago. Expectations are for that many more by year-end 2009 and 3 million more in 2010. This spells a lot of competition for builders of residential real estate. There is demand building, but there is also a lot of foreclosure inventory being held off the market that will overwhelm any significant increases in demand for the next two or three years. Banks are selling homes at fire sale prices in order to get them off their books. They have too. The holding costs are expensive and, in many areas, there is a high risk of having houses vandalized causing many thousands of $ in damage requiring repairs (additional investment). Vandals remove siding, fixtures, all electic wiring and copper pipes. While they are at it, they often destroy anything else of value just for kicks. I know, I own over 90 investment properties and have experienced a sharp increase in vandalism over the past three years. My point is that as long as the banks are dumping homes on the market at really cheap prices, the housing market will not improve and prices will, at best, remain flat. This will require at least three years to ompletely stablize before we can start to see some opportunities for builders.

Let's see now. What could become the next major driver of economic activity and growth in the US? Well, having eliminated everything that could actually make a difference above, I am having a real problem finding a case for a vibrant, sustainable recovery happening within less than three years. IMHO, I can't help but see a double dip recession.

I have a sizable vested interest in wanting a recover to come sooner rather than later, so I am not "hoping" for things to stay bad. I just call them as I see them. To find the truth we need to look at the facts as they are and not as we would like them to be.

Aug 11 02:32 PM

[markfl:]

Bullseye Conceptwizard, and why you've deservedly rocketed to the Top Ten. It's not about being a permabear, as I am not. Its about the reality of what happens when the Potomac stimulus debt machine is unplugged. Check GDP then and let me know what it looks like in 12 mos. Maybe a lot like a "W" or an "L."

Mr. consumer's not going to dig a pot of gold from his back yard to spend. We know unemployment will probably top 10 percent next year. There's something to be said for better financial markets' contribution to improved personal wealth, but I'm most concerned about earned income. With unemployment so high, where does consumer income, spending, and top-line corporate revenue come from other than government transfer payments?

On Aug 11 01:54 PM conceptwizard wrote:

> The Fed has supported this market by infusing money through HFT from
> the beginning. It is all smoke and mirrors and highly unethical what
> is truly going on. They are stuffing mattresses full of money, insider
> trading is at all time highs and the crucial ecomonic data, ie, housing,
> unemployment, average weekly income, consumer credit, home equity,
> and weekly hours worked, savings rate, retail sales etc are still
> heading downward. The dollar ison shaky ground and the generational
> debt has no way to be repaid. Tax receipts are down 28% and we are
> still implementing new expenditures. Its like living in a world where
> everything is upside down.
> With all this going on we are ending the recession...please...we
> are just starting the greatest decline in the history of mankind.
>
> The "DEBT BUBBLE" implosion.

Aug 11 03:44 PM

[Swashbuckler:]

My thoughts are much in sync with the article and the first four comments. Anything I would add would be redundant.

Aug 11 05:09 PM