Posted on 06/15/2009 8:48:16 AM PDT by SeekAndFind
The Recession is over.
This means that when the National Bureau of Economic Research gets around to dating this recession, I predict they will pick June 2009 as the bottom. I know it doesn't feel that way now. After all, if July is just a bit better than June, it will still be terrible and the year-over-year comparisons will be awful. That's how it always is at the bottom of a recession.
Furthermore, there is lots of bad data coming. How can I say the recession is over when it is obvious that unemployment is going to continue to climb for months, possibly the entire rest of the year? New jobless claims improved a bit in the June 11 announcement, but were still over 600,000 for the week. The average duration of unemployment – the number of weeks people are out of work – has been steadily climbing and I agree will certainly get worse. Consumers are sitting on their hands and saving money, so the ratio of installment credit to personal income is sinking. The weakness in consumer spending even is showing up in the consumer price index for services, which is increasing each month at very low rates, if at all.
What about business capital spending, currently in the toilet and doomed to remain there, according to most surveys? (The main exception is enterprise software spending, where surveys of future spending are showing the first signs of life.) And don't forget labor costs per unit of output, which remain stubbornly high because companies are not cutting costs fast enough to keep ahead of declining output.
Add in unwanted increases in inventories as consumers continue to sit on their hands, and intense pressures remain on corporate bottom lines. That also shows up in the inventory-to-sales ratio, which may have further to climb (bad) or be topping now, but is likely to stay high for a while. You can bet you'll hear some bearish economists on CNBC talk about that over the coming weeks and months.
And weak demand will show itself in a continued low Fed funds rate and prime rate, as the Fed frets about economic weakness and the threat of deflation. The weakness in commercial and industrial loans outstanding shows it is not just consumers sitting on their hands; corporations aren't borrowing money to spend and help out this economy either, even if prime interest rates are low.
So, what does this litany of future woe have in common? The average duration of unemployment, the ratio of consumer installment credit to personal income, the consumer price index for services, the inventories-to-sales ratio, changes in labor costs per unit of output, the average prime rate, and commercial and industrial loans outstanding?
These are the seven components of the LAGGING economic indicator, calculated by the Bureau of Labor Statistics. They will turn up AFTER the economy turns up. Anyone who is waiting to buy stocks until all these weak areas turn around will miss almost the entire bull market. In fact, anyone waiting for the CURRENT economic indicator to start getting better, which I think will happen in July, has already missed the first 40 percentage points of this bull market. That's because the stock market is a LEADING indicator of the economy – actually, the best one of the 10 leaders that they use – so if you wait for the surveys and sentiment indicators to get back into the water, you miss the big waves.
What specifically makes me think the economy is bottoming now? First, the stock market. In the March 5 weekly edition of the New World Investor Radar Report I wrote:
“Today's drop to 678 intraday and close at 682.55 will probably be followed by a touch of 664 tomorrow, after the awful labor numbers come out. That would be driven by lots of investors just giving up, which is exactly what the market needs to clear the decks for a sprint to 750 and, perhaps, just maybe, beyond. We'll know soon how this will play out.”
“Here is my short-term and, more important, long-term take. Near-term, the S&P 500 is way oversold. The gap between the current level of the Index and its 200-day moving average is at near-record levels, about 35% below the 200-day moving average. Last November 20 there was a one-day gap of 39.7%, just before the market entered a five-day, 19% rally. We saw similar gaps during the Great Depression, each of which also preceded powerful upside reversals. It certainly looks like the market is setting up for at least a corrective bounce.” “Beyond that, 12-year lows are very rare. Aside from Monday's retest of the 1997 low, it has only happened two other times, on April 8, 1932 and on December 6, 1974. The 12 year low in 1932 was about three months before the end of the bear market. In 1974, it was the exact low for that bear market. In both cases, the economy continued to contract, unemployment continued to climb and GDP stayed weak – all typical of recessions. That's why economic surveys lag the market turns. After the 1974 bear market low in December, the March 1975 quarter GDP fell 4.7%, the worst drop of the whole recession, yet the Dow shot up 24.7%. Today's fear levels after the nearly vertical drop of the last three months make a contrarian's heart warm.”
The next day did mark the intraday bottom for the S&P 500, so the extremely rare 12-year low on Monday, March 2 again proved its worth in identifying the bottom just four days in advance. But has this been just a bear market rally or a sucker's rally?
Unlike previous rallies in the last year, this one has an advance-decline line showing broad breadth, and relative strength numbers that have not been seen since 1932. With the exception of 2001, nine out of the last 10 recessions saw the stock market start up three to six months before the economic bottom. March 6 to June 6 was three months, and the strength of this market makes me believe we'll see another three month lead this time. Consumer confidence hit a 42-year low in February, but then April and May saw the strongest two-month improvement in 35 years. And while consumers are still leery about the current economy, they have gotten much more confident about the future. So the chart of the difference between future and current expectations is at the highest level in 16 years, and these sharp jumps have always marked the end of recessions.
More? The ISM survey of manufacturers that we get on the first of each month hit a 30 year low earlier this year, and it is still below 50, which indicates the economy is still shrinking. But it turned sharply upward a couple of months ago, as it always does at the end of a recession, and I believe it will go from May's 42.3 to well over 45 when the June number is announced on July 1, and be over 50 in a couple of months. The quarterly Conference Board survey of corporate CEOs was in the tank in the December survey, but showed a dramatic jump in the March period. I expect the June survey to show another sharp jump.
On June 8, Texas Instruments (TXN) raised its June quarter guidance for both revenues and earnings, based on stronger-than-expected orders and shipments. They also said that order visibility is improving. As I've been telling my subscribers, the Chinese stimulus spending has been helping electronics. If you bought the Ultra Semiconductor ProShares (USD) exchange-traded fund at the close on March 6, you were up 76% before TXN held their conference call. This broad-based strength in technology spending is another indication the recession is over.
Outside of tech, biotech and healthcare, the whole real estate sector is on the rise because a flood of new capital is available. Yes, there are many more home mortgages to blow up this year, and it is true that half of the loan modifications wind up back on the foreclosure list. It's also true that there is a huge commercial real estate problem, which means there's a coming problem for life insurance company portfolios. But when this much capital is available to soak up the huge secondary offerings we have seen from banks, REITs and others, problems get fixed.
I see great investors like John Paulson, the hedge fund manager who had a $3 billion personal payday in 2007 by shorting the subprime implosion, raising money for his new Paulson Real Estate Recovery Fund. He is looking past the current valley to a big mountain built by inflation, and repositioning himself for the inevitable economic recovery. To do anything else is to fight the Fed, and there is no point in getting into a financial war with the guys who have the power to print money.
As you can tell if you read the comments on Yahoo Finance, new bull markets have a way of keeping undisciplined investors on the sidelines. Near the bottom, the pain gets too great and they sell their stocks to go to cash. As the market starts up, they buy some Ultrashort exchange-traded funds to make back some money when the “little bear market rally” falls apart. After taking a 30% loss on those, they start posting angry messages about how this is a garbage stock rally, a bubble manipulated by the hedge funds or a sucker's rally doomed to fail. They're not going to get sucked in, no siree.
After the market has recaptured some key levels, they decide it looks like the economy is starting to recover, and they would be willing to buy some stocks except that everything has gone up too much from the lows. Their fear of a weakening economy is replaced by a fear of buying too late, and getting caught at the top of a bear market rally. So they wait, hoping each consolidation down is the start of something big that will let them get back in gracefully. They forget that the market's job is not to make us all look graceful, it is to make us all look stupid. By the time they decide this is a bull market, not a bear market rally, and start nibbling, make some money, and build up their courage to get fully invested – the market is ready to top. Happens every time.
Or almost every time. This time we are headed for a whopping inflation, not the stagflation of the '70s but a real barn-burner in both financial activity and the real economy. This will be unexplored territory for everyone in the U.S. except 90-year-old Germans and any recent immigrant from Zimbabwe. The U.S. went through an out-of-control inflation from 1776 to 1779, four years during which the Continental lost 80% of its value. Of course, then the British were printing counterfeit Continentals that had no gold backing; today, the Fed has taken on the British Army role. The result will be that no matter where someone finally buys stocks during the next couple of years, they will make money in dollar terms. The dollars may not be worth much, but at least there will be more of them.
I could be wrong (cf. the market making us all look stupid), but this has been a picture-perfect consolidation for a market headed sharply higher. I now think this rally will get to 1060 around July 10. The strongest part of the rally should be from June 19 through July 10. After that, 1060 is a big target that will be hard to break through the first time, and we should be able to take advantage of the run-up to sell some stocks, and then take advantage of a mid-July to mid-August or mid-September decline to buy stocks at lower prices for a big year-end rally up to 1160 or even 1250 – another 34% from current levels. Will you still be waiting for the lagging indicators to improve?
Yikes. Your just a bundle of cheer. lol.
Exactly. Its clear to me that we will get the brief sugar high caused by the “stimlus” followed by an inflationary crisis.
US Stocks In Sharp, Broad-Based Decline; DJIA Down 200 Points
(June 15, 2009): The Dow Jones Industrial Average came into Monday's action up almost 23 points for 2009 but recently gave back more than 200 points, trading down 2.3% at 8593.16. All 30 of its components fell. Among the big losers were Alcoa, down 6%; Boeing, down 4.4% and Wal-Mart Stores, down 2.5%. A rebound in the dollar sparked a nearly across-the-board decline in commodities, which are traded globally in dollar terms. The U.S. Dollar Index was recently up 1%, while the Dow Jones-UBS Commodity Index was down 2%. Crude-oil futures fell $1.56 to $70.48 a barrel in New York.
Nah. This is a temporary uptick because of summer.
It seems to me that if any major calamity strikes, there will be a flight to the dollar, pushing down commodities even further.
I’m betting on deflation, because we’re currently turning a blind eye to North Korea, Iran, Israel, etc., which just emboldens bad actors.
>> “I now think this rally will get to 1060 around July 10.” BS. Squared.
Maybe he meant DOW, not S&P. :-)
I bet this guy thinks that CO2 leads global warming too
I think we’re seeing decisive non-confirmation of the transports. You been watching the rail stocks at all? They’ve utterly invulnerable until today (UNP, BNI) = incomprehensible, traffic is mediocre and of course way down yr over yr.
Staying long here is hoping for that last 5% while you get clocked for 15%+. Not good.
Nice article, I think his metric of hours worked is a very good indicator.
No.
They never smile.
But when they vomit at you, they vomit a solid stream of running chainsaws, that when the chainsaw hits something, sends out showers of fire ants.
Heh. You ARE nervous!
>> Heh. You ARE nervous!
Darn tootin’ I’m nervous. So nervous about the market that I’m mostly in cash... and I’m nervous about even THAT! :-)
LOL... this is an impossibility :)
You should be.
The Greatest Depression The World Will Ever See is so bad that all cash will spontaneously burst into fire.
>> But when they vomit at you, they vomit a solid stream of running chainsaws, that when the chainsaw hits something, sends out showers of fire ants.
Did you take a lot of acid and then watch Saturday cartoons when you were a pup?
That'll get really bad, because they'll infringe on the territory of pirates riding flying sharks that are on fire. The ensuing cataclysm levels are likely to reach over 9000.
>> The Greatest Depression The World Will Ever See is so bad that all cash will spontaneously burst into fire.
That’s why I keep it in a safe at the bottom of the neighbor’s swimming pool.
I’m looking forward to your 108% unemployment though. Been working pretty hard lately... I could use a breather.
The result will be that no matter where someone finally buys stocks during the next couple of years, they will make money in dollar terms. The dollars may not be worth much, but at least there will be more of them.
This guy contradicts his entire rosy forecast at the end of the article. He says you'll indeed make money in the stock market, but the money won't be worth anything.
What's this guy's point?
Come into my parlor, said the spider to the fly.
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