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Dr. Stephen Leeb
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Dr. Stephen Leeb is a recognized authority on the stock market, macroeconomic trends and commodities, especially oil and precious metals. Dr. Leeb is founder of the Leeb Group, which publishes a line of financial newsletters including The Complete Investor, Leeb Income Performance Letter, Leeb... More
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Game Over: How You Can Prosper in a Shattered Economy
  • No Surprise: Economy Not Ready for Lift-Off Yet… 1 comment
    May 15, 2009 2:12 PM

     

    Retail sales fell in April for the second straight month, signaling that the economic recovery hasn't arrived yet. This shouldn't be a surprise, given rising unemployment and continued high anxiety about financial security. While the rate of job loss may be declining, job growth appears far away.

    Consumer caution is also showing up in tepid loan demand. The focus has been on unavailability of credit because of financial institutions' weak balance sheets and tightened lending standards. But Americans, at long last, also are waking up to the ongoing need to boost savings and trim debt.

    The economic recovery—when it comes—is likely to be subdued. One reason is that job growth probably will lag, just as it did in the recovery after the 2000-2001 economic downturn. The priority of employers will be profitability first, with job creation to follow only as they're more confident the economy is getting better.

    Another risk to recovery is rising long-term interest rates. The yield on the benchmark 10-year U.S. Treasury bond is 60 percent above its December low, which admittedly was extremely, excessively depressed because of the financial crisis and a global flight to safety.

    Rising long-term interest rates go hand in hand with an expanding economy as demand for credit typically pushes yields higher. But this time interest rates have jumped even though the economy is still showing signs of merely stabilizing, not actually growing. Continued low long-term rates, which directly affect the cost of mortgages and other loans, are essential.

    What's more, the massive government efforts to support the financial system and stimulate the economy cannot continue indefinitely. At this point, the economy and investors are too dependent on government largess.

    …But Financial Markets Look Ahead to Better Times

    The overdue financial-markets correction arrived this week. Now the question is how deep it will be.

    The Standard & Poor's 500 ended last week at its highest mark in four months, following a big two-month rally. This week, investors supposedly have tempered excessive optimism about the economy and sold accordingly. In our view, it's basically old-fashioned profit-taking after a valid run-up that got ahead of the fundamentals.

    But a measure of improvement has been the ease with which companies have been able to raise money in the financial markets.

    In 2008, even the largest companies found it difficult or impossible to raise cash. Now they're issuing equity and debt at the fastest pace in many years. Amazingly, May already is the busiest month ever for secondary stock sales from publicly traded companies. Sales of both higher-quality and junk bonds are also impressively brisk.

    Some of the activity is from banks that have to boost capital in the wake of the government stress test and/or that want to repay government money. But companies outside the financial sector are selling stock or debt too. And it's not just the weak companies. Even AAA-rated Microsoft has raised some cash.

    A key reason that this is possible is that there's a huge amount of investor money on the sidelines searching for a decent return at a time when cash-equivalents pay very little. That dynamic led to a rush into riskier assets over the last two months.

    Skeptics say this has happened because of a deliberate, ultimately unsustainable government rate-slashing policy to get investors back into the markets, among other goals. Well, nothing lasts forever. We'll take it.

    We think there's ample fuel for the advance to continue. First, though, it's only natural we'll first see some softness in the near term. So we reiterate our core advice: Buy quality on market weakness.

     

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  • manya05
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    I do not think money came back to the market because the government is keeping interest rates low and people are seeking higher return. At the same time the government added opacity to the accounting standards and was not entirely up-front with the stress tests, all moves that will discourage investors to return to the markets. I do not think the government has a good plan when it comes to dealing with the markets (as Obama said it, he does not care about the market just as he does not care about the tracking polls). I further do not think that the pool of money on the sidelines will return to the market any time soon, at least not under the old assumptions, it is too risky. This money is at retirement or very near retirement...this money is searching for a safe place to be at reasonable return, this money wants to behave as savings...it will all end up in CDs once the interest rates become reasonable, or, it may end up in foreign currency denominated bonds to be protected against a dollar collapse. The go-go days of Wall Street are over for good.
    18 May 2009, 02:37 AM Reply Like
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