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Sometimes I wonder if I’ve lost my mind.

I turn on the TV or open Yahoo! Finance and see commentator after commentator proclaiming that the recession is over, that Ben Bernanke saved the world, and that the Dow is soon going to some outrageous number.

The people proclaiming this look intelligent enough. They obviously know how to dress well. And they can usually spout off a few data points or correlations to back up their claims, e.g. GDP is growing again, housing data is not quite as bad as before, jobless claims are down.

It’s really quite frightening because when you look at the data, there is virtually nothing positive to talk about. Let’s start with the basics:

Individual income tax receipts are down 29% year over year for the month of October.

Unlike incomes, jobless claims, or most other consumer-based economic data, tax receipts cannot be fudged: either the money comes in… or it doesn’t. So it’s a bit difficult to stomach any claims that the economy is improving when tax receipts are down nearly 30% from last year (a year that the economy was already falling off a cliff).

Speaking of jobless claims… the market went berserk when November’s unemployment data came in at 10%, down from 10.2% (never mind the fact real unemployment is at 17% or more). Of course, the bulls don’t bother to consider issues like emergency unemployment numbers: these are people who have fallen off the ordinary unemployment insurance bandwagon and are filing for emergency unemployment insurance.

For the week ending November 28 (the most recent data we’ve got) 4.2 million people were filing for emergency unemployment. This marks a 325% increase over the number of people filing for emergency unemployment for the same time period in 2008.

I would also like to point out that, at 4.2 million, emergency unemployment claims are closing in on continuing unemployment claims (5.5 million). In other words, more and more people are sliding down the unemployment scale from initial claims to continuing claims to emergency claims. And once they fall off emergency unemployment claims… they simply cease to exist (at least according to government statistics).

According to a report cited in the New York Times, a total of 1.5 million people will have fallen into this category by year-end. Other estimates put the number closer to seven million.

Again, I don’t see the good news here. Instead, all I see is an economic nightmare.

The implications of this aren’t very difficult to understand: lower employment means less money for people to spend. Less money for people to spend means lower corporate profits. Lower corporate profits means more layoffs… which brings us back to lower employment.

Speaking of corporate profits, I continue to hear that earnings potential is going to send the Dow into the stratosphere. Well, let’s take a look at the numbers from some key economic bell-weathers:


Data is for first nine months of 2009 vs. first nine months of 2008.

With the exception of drugs, cars, and phones, every industry is down big-time year over year. Cars are something of a fluke too since we had the now infamous “cash for clunkers” program; a program that is not likely to be repeated in 2010.

OK, so let’s be blunt here… during the first nine months of 2008, we were already in a severe recession… and revenues and profits are sharply down from those levels.

Again, I do not see recovery or improvements here. All I see is an economic nightmare. And yet, roughly 370 stocks on the NYSE have hit new highs in the last two weeks. Only three stocks have hit new lows.

To say that stocks are disconnected from reality would be a gross understatement. Whenever they come back to earth, it’s not going to be pretty. But if the above data is worth anything, it tells us that telecom and drugs might be potential safe havens; they’re the only industries seeing significant growth.

Source: The Coming Economic Nightmare: Part 1