Friday Roundup: Reality Bites Bulls

Economic reality is meeting bullish enthusiasm and the results are disappointing and upsetting. Bulls were expecting the economic recovery to continue and gain more steam. However, the reality is an economic recovery is going to take some time. Another negative we take away is stock prices are much too high. It would be interesting someday if the mainstream financial media would represent PE ratios on the basis of GAAP (Generally Accepted Accounting Principles) or reported earnings versus operating earnings. In the latter case operating earnings deflate PE ratios making stocks sound cheaper than they are.

Volume today was higher again on selling than previously when buying. Breadth again was negative.














































My apologies for the limited posting: however, we’re returning late from many errands. Anyway that’s just the way of it.

The markets are deeply oversold short-term and could rally sharply early next week based on nothing other than this condition. Bears are advised to be very cautious until this condition is somewhat relieved. Clearly however, the long anticipated correction has begun.

Next week features more earnings news than economic data.

Have a great weekend and you can follow us on twitter.

Disclaimer: Among other issues the ETF Digest maintains positions in: UDN, DBC, GLD and EFA.

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Comments

[TradingHelp...:]

Jobless data was bad but an equity retreat was inevitable.

For the first time since 1983 the S&P 500, the large capitalisation US equity index, has risen to 20% above its 200 day moving average. This event indicates that equities, irrelevant of underlying fundamentals are technically overbought in the short-term.

Oct 03 02:31 AM

[David Van K...:]

Interpretation depends on your time frame. 1983 was the second year of what turned out to be an 18-year bull market (1982-2000).

Oct 03 07:06 AM

[MarvinMBA:]

Tough market calls for the day traders. Best to take long positions in companies lie GE, INTC and hold some silver SLV is my best advice. Now forget about the market and have a drink..Marvin adv

Oct 03 10:29 AM

[jerrydd:]

While it may have been a bull market in technical terms, until 93 it was way overrun by inflation as has it been since 2001 which in real terms, what stuff costs, has been over 100% in the 7 yrs of Bush. The only real bull that increased real wealth was 93-2000 when Clinton ruled. We even balanced the budget then which is what curbed real inflation and increased real wealth.

The Fortune 400 lost 30% of it's wealth with lower taxes by 4%. Which is better, slightly more taxes and a good economy or a bad economy and slightly lower taxes?


On Oct 03 07:06 AM David Van Knapp wrote:

> Interpretation depends on your time frame. 1983 was the second year
> of what turned out to be an 18-year bull market (1982-2000).

Oct 03 10:36 AM

[fjd10595:]

"Bulls were expecting the economic recovery to continue and gain more steam. However, the reality is an economic recovery is going to take some time. "

"Take some time?" Yeah, as in a few years, not months. Stock buyers are delusional. One thing that would concern me from a bear point of view is the VIX- if it rises too fast or too far, then I would tend to think that the market will stabilize.

Oct 03 11:26 AM

[Mad Hedge F...:]

mhy For the last six months there has been a great big whopping contradiction in the markets. The stock market has been discounting a return to the “Roaring Twenties,” while the bond market has been anticipating the return of the “Great Depression.” After yesterday’s publication of the Labor Dept.’s September nonfarm payroll number showing the loss of another 263,000 jobs, it looks like the bond market now has the upper hand. The really disturbing aspect of this number is that 57,000 teachers were fired, as states chop budgets to the bone. This is really eating our seed corn by the handfull. Stocks have dropped 5% from last week’s peak, as the bond market soared, the ten year yield reaching nosebleed territory of 3.05%. My call to buy the TBT, a leveraged bet that US Treasury bonds would fall, is starting to look a little green about the gills. The dollar still maintains its flight to safety status, which to me, is one of the great ironies of all time. It’s like that reprobate, alcoholic uncle with the bad teeth, who, when your car breaks down in the middle of a downpour in a bad neighborhood, will always let you crash on his sofa. Let’s call him your Uncle Sam. You have to hand it to PIMCO’s inveterate card counter, Bill Gross, who says this is all about transitioning to a “new” normal of 1%-2% real GDP growth. That’s why he was loading the boat with bond yields at 4%, a ballsey move at the time, which now smells like roses. I guess that’s why they call him the “Bond King.” As for me, I’m never wrong, just early. Sometimes way early.

Oct 03 12:44 PM

[ryanclarke:]

If the cheerleaders at CNBC focused on GAAP earnings instead of operating earnings the S&P 500 would currently be under 500. The same misinformation kept the market from tanking in 2002-2003 ... as well as Bush starting a war in the Middle East. If Bernake gets his way and BAC and JPM don't report losses like they are obliged to do this quarter then look for the S&P to rally to 1200. But if either bank does post negative earnings, then we will get that S&P 600 target in 2009 everyone was predicting back in February --- with an October 1987 like crash. Either way, by the end of 2010 the S&P will be below 500.

Oct 03 02:32 PM

[Donald Ingram:]

The Dow appears to have topped on the 23rd of September. Volatility readings have risen sharply past 1000. We may assume that the 23rd was a key reversal day and that this correction will most likely be the strongest down turn since March 09 and that it will take out that low. Insider selling continues unabated with buying almost non-existent. The smart money is leaving the table as fast as possible. I'm out and long GLD and SLV in the physical.

Oct 03 02:38 PM

[prudentinve...:]

The market surged under Clinton because of the dot.com bubble, not because of higher taxes! The dot.com bubble was the first wave in the mess we now have, thanks to Greenspan's ultra easy money.

The market fell under Reagan because Volcker held rates high to stamp out inflation, encourage savings, and thus set the stage for a long period of prosperity.

Economies have high inertia, and long response times. Regan's and Volcker's actions caused long-term prosperity, long after they were gone, and Clinton's and Greenspan's actions caused an immediate feel-good bubble that undermined basic fundamentals, and we are seeing its aftermath now.


On Oct 03 10:36 AM jerrydd wrote:

>
> While it may have been a bull market in technical terms, until 93
> it was way overrun by inflation as has it been since 2001 which in
> real terms, what stuff costs, has been over 100% in the 7 yrs of
> Bush. The only real bull that increased real wealth was 93-2000 when
> Clinton ruled. We even balanced the budget then which is what curbed
> real inflation and increased real wealth.
>
> The Fortune 400 lost 30% of it's wealth with lower taxes by 4%. Which
> is better, slightly more taxes and a good economy or a bad economy
> and slightly lower taxes?

Oct 03 05:20 PM

[gordo39:]

Higher tax RATES are absolutely never better for the economy.


On Oct 03 05:20 PM prudentinvestor wrote:

> The market surged under Clinton because of the dot.com bubble, not
> because of higher taxes! The dot.com bubble was the first wave in
> the mess we now have, thanks to Greenspan's ultra easy money. <br/>
>
> The market fell under Reagan because Volcker held rates high to stamp
> out inflation, encourage savings, and thus set the stage for a long
> period of prosperity.
>
> Economies have high inertia, and long response times. Regan's and
> Volcker's actions caused long-term prosperity, long after they were
> gone, and Clinton's and Greenspan's actions caused an immediate feel-good
> bubble that undermined basic fundamentals, and we are seeing its
> aftermath now.

Oct 03 07:18 PM

[topshelf:]

This is the longest period of time ever that the actual [REAL] PE of the S&P 500 has not been mentioned. Amazing when you consider this Historically. The S&P 500 is the undisputed Benchmark for the US Stock Market. It wasn't that long ago when there was a standard way to quote and state that PE Ratio. Like several other Market, Economic, and Financial items, we have seen changes made in various ways, anywhere from just totally eliminating, M3 an example, or changing the formula for the Calculation.

Bottom Line re: the S&P 500, I don't believe its Allowed for anyone to mention the Real PE, certainly not on TV, like CNBC, and very rarely in an article, though not in any widely read MSMedia in Print. Mentioning a PE of over 100 would be career suicide, and I believe any TV broadcast would be assured that any guest, talking head, would only talk about such things that are within a near match to the "Script" that gets fed to the Average Joes & Janes.

And lets not forget, this PE of over 100 was only made possible with the assistance of the changes in Accounting & Reporting that a quick Law change was given to the Financials for the reporting of Q1/09.

One thing I find noteworthy is the Standard, Historically used Yardstick hasn't been lost. I noticed this when the PE for China, and some other countries, equivalent Benchmark is quoted, the usual, Standard, historic Yardstick is used. Its just set aside, hidden in a corner, when it comes to our S&P 500 and equities in general. I won't even begin on the topic of why using Operating Earnings should at least be included, since the use of Stock Options for Pay & Compensation is such a large part of total Pay & Compensation in this country compared to the rest of the world.

There should be one Measure, one Yardstick, and it should be the one we always used.

Oct 05 09:27 AM