Where Is This Market Going?

Obviously I have been wrong on the market direction for some time. Daily I scratch my head and elsewhere and wonder how in the world can people buy stocks and believe we are in a rebound. I will admit we may be at or near the bottom of the recession, but there is a stark difference between bottom and recovery and the markets of late are apparently predicting a fairly significant recovery back to our spending ways of yesteryear. I view that as an impossibility, literally. The math simply does not add up and won't for some time. And so I will stay on the sidelines kicking myself and waiting.

So why am I saying impossibility, let me count the ways:

1. While U.S. consumers have in fact been paying down debt, it is still near record levels and I suspect much of the debt reduction has either been from government stimulus or defaulting on the debt (which results in it being eliminated).
2. We had the destruction of over $13 trillion in wealth in this country during this recession and outside of government stimulus little of this has returned.
3. Median incomes are down over 3% this month YOY so we do not have more money to spend absent government stimulus, which is the government borrowing money for us to repay later.
4. Housing is nearing a bottom generally but still sluggish.
5. Commercial real estate is just starting to get to its lowest point and will not likely get there until 2010 or well beyond.
6. Mortgage foreclosure issues will continue to be an issue as Alt-A mortgages, especially Option ARMs, and prime mortgage defaults continue to rise and will not likely peak until 2010 or 2011.
7. We have major shadow inventory on the real estate market, which is homes that are not officially for sale but belong to people wanting to sell. Reportedly, a lot of banks have held off on foreclosures as they do not want to deal with the costs of foreclosure (shadow inventory) and 24% of homeowners would like to put their homes up for sale if the market were better (shadow inventory). That is enough shadow inventory to keep home prices depressed for years to come.
8. The retail space in the U.S. is roughly 50% overbuilt compared to any other country in the world.
9. Unemployment may have stabilized a bit but there is not likely to be a big bounce off the bottom.

I have more, but this can get depressing, so let's take this a few steps at a time. Do you see my point? And one last point here, I do not like at all the Administration response to this crisis. I voted for the guy but he has surrounded himself with idiots and he listens to them way too much. Actually, I am not sure they are idiots. I just think they are answering to the big banks and not the people they are sworn to serve - the taxpayers. I would like to hang them high, very high. They are bending over backwards to please the jerks that got us into this mess. And that keeps me up at night wishing I had voted for the other guy.

Here is an important piece on what the Administration is doing about banks too big to fail. It starts by noting many very prominent economists who think they should be dismantled, which is what I favor and have touted for months, but then it notes what Geithner, Summers and the like are still kissing butt with the big banks, who have treated them well in the past. Makes me a bit ill to read it.

Disclosures: None.

Comments

[CautiousInv...:]

In the services I subscribe to I started getting index sell signals as early as last July and another service provided a sell signal last Thursday.

I believe we have failed to undertake the necessary steps through which structural imbalances can be resolved; these are inherently long term in nature and not of appeal to politicians and their policy making pawns.

David Rosenberg recently cited five reasons to be circumspect of today's market:

1. This remains a hope-based rally in the equity markets (with strong technicals). What we are seeing transpire is without precedent - the magnitude of the employment slide versus the magnitude of the market advance.

2. Companies have not really been beating their earnings estimates - only the very final estimates heading into the reporting quarter.

3. Valuation is a poor timing device but even on “normalized” trailing 10-year earnings, the S&P 500 is trading near 18x, which is now above the historical average of 16x.

4. All the growth we are seeing globally this year is due to fiscal stimulus.

5. While Mr. Market may be pricing in a fine future for the U.S., but when the 3-month Treasury-bill yield is 13bps north of zero, you know that there are still substantial fundamental imbalances that need to be worked through.

Sep 13 06:58 AM

[Michael Clark:]

My readings say the indexes are overbought but not ready yet to form a top. We require an overbought and declining momentum indicator and negative trend and negative trend pattern. The Nikkei is undecided about where to go next; the Housing Index (HGX) also seems to be struggling a bit.

Charts and texts below:

seekingalpha.com/insta...

Sep 13 09:31 AM

[knight:]

Great article and I couldn't agree with you more. The markets can stay irrational longer than you can stay solvent. Just keep your cash ready for the pull back whenever it comes. There are few things one must also take into consideration the volume of this rally has been extremely low and 40% of it has been done by machines. I would not be chasing here or even close to here. Capital preservation with solid opportunities will present itself. As far as Obama is concerned I am not an American so I did not vote but there is no question I would have voted for him. It is truly disappointing he made Timothy G his head guy when he was directly involved with the mess running the New York Fed. How do you keep Berneke at the helm when he basically accelerated this whole mess by dropping interest rates in 2005. The sad part is Obama is spending way to much money and I don't think it matters anymore if you vote for Democrat or Republican their main purpose is to get as much money for themselves as possible. Damn morals ethics and responsibility. I don't even want to get started on George W. If Americans wanted REAL change Ron Paul would have been the way to go. Sadly it will be to late to ever see him in office.

Sep 13 02:46 PM

[logicalman:]

we may not agree on all the rules of a game..we may think some of the rules are ridiculous....we may hope for some changes in the rules..but as long as we play the game,, we deal with the rules and play to winn....this may sound simplistic, but to many,it says it all!!!

Sep 13 03:10 PM

[samretlew:]

Ah, yes, the pullback will come, but not yet. Maybe next year, or the year after. In the meantime, let's just count the money that's pouring in, keep an eye on the good old exit strategy, and get ready to short the broad indexes when the time is ripe. To make money, be patient, avoid second guessing the market, and be nimble, but sit tight when the momentum is in your favor. Mr. Market has fooled many people in the so-called bear rally, and will fool a whole bunch more before finally changing direction. When? I don't know. I just follow the money. Happy trading, investing, gambling--it doesn't matter what you call it as long as the money is pouring in.

Sep 13 03:29 PM

[mkttrdr:]

Good work and you can add
10) a never ending war against......

Sep 14 11:48 AM