Worst may be yet to come (Economy)

ECONOMY | Prognosticator with a remarkably good record says stock market gains won't last

Last week the stock market heaved a sigh of relief. The gains were widespread. The broad-based Wilshire 5000 is up 38.66 percent or $3.2 trillion from the market low of March 9.

There's a growing consensus that the worst of the economic news is behind us, and that a rebound in the economy can't be far behind the rebound in the stock market. File all of that under the heading "Everything is Relative."

The unemployment numbers were bad. But not as bad as expected. (Tell that to the 539,000 people who lost jobs in April.)

The banks need to raise "only" $75 billion in capital. (Tell that to the taxpayers who have already come up with billions in TARP money, and to the shareholders whose stake will be further diluted.)

Consumer confidence has rebounded from its all-time low at 37.7 in January, to 39.2 in April. (Tell that to those who confidently purchased homes or stocks back in June 2001, when the index stood at an all time high of 118.9.)

Home prices fell "only" 19.6 percent last month. (Tell that to a homeowner trying to refinance a mortgage that is larger than the value of the house.)

When it comes to the economy, everything is relative. We are relatively a lot worse off than we were a year ago. But some of the statistics are relatively better than they were a few months ago, when so many people feared another depression. Bull market? Bear market rally?

The stock market has chosen to focus on those relatively better numbers, because the stock market always looks ahead. But is this a new bull market -- or just a temporary rally, an opportunity to sell stocks before another collapse?

A well-known Wall Street money manager said on Friday: "This is a "once-in-a-generation opportunity to get in at prices that haven't been as good since 1982." One stock market sentiment indicator has gone from only 2 percent bulls to more than 80 percent bullish in just the past two months.

The bulls are running. But two legendary traders beg to differ. They each correctly timed this "bounce." But neither feels it will last much longer. Elliott Wave Theory: lows ahead

Bob Prechter is a stock market technician, meaning he charts historic stock prices and patterns using the "Elliott Wave Theory."

Lest you think this type of analysis is like reading tea leaves, Prechter gained fame predicting the stock market crash of 1987. In 2002 he wrote a book titled Conquer the Crash -- You can Survive and Prosper in a Deflationary Depression. In it he correctly forecast a huge credit contraction, brought on by all the mortgage and debt issues that we're now facing.

Reading this book today, it seems as if Prechter had a crystal ball. That's why his current view of the market is so compelling. After forecasting this current rally in February, Prechter suggests traders should be looking for an exit point soon, an opportunity to sell short. He laments: "On the major trend, there's such a long way down to go."

Pressed to put that into numbers, he said that a normal rally from the 667 low on the S&P 500 would take that index back up to the 1,000-1,100 range. (It's around 900 right now.) After that, he expects the next wave down to be larger than the initial drop of 58 percent. You do the math!

Prechter calls it a "C" wave in Elliott Theory -- and notes: "Declining C waves are usually devastating in their destruction." He says the "credit implosion" is not finished. Much like Japan, he predicts, we'll have to live through a long period of declining asset values, summed up in one word: deflation.

Traders can follow these volatile waves, but where do long-term investors hide during an extended deflation? Not in stocks, or real estate, or commodities -- even though today's prices seem like bargains. "Until the credit implosion is over, the only place to hide is cash -- safe equivalents such as Treasury bills. Holding on to your money will give you a chance to buy the real bargains when the bottom eventually arrives -- several years from now."

I had just finished digesting this forecast from Prechter when I received the latest issue of Bert Dohmen's Wellington Letter. (dohmencapital.com). Regular readers know that I value Bert's perspective highly, as he uses both technical analysis and an insightful view of both politics and the economy.

Noting that bear market retracements can be deceiving, Dohmen pointed out that the first rally after the historic 1929 crash extended into 1930 -- and produced a 52 percent gain. And then the market plunged another 64 percent!

As for the current rally, Dohmen says time is running out. He advises: "Bear market rallies are usually eye-catching and make the casual investor believe that it's a new bull market. Don't make that mistake and fall into that trap."

Sorry to spoil your day with these unpleasant forecasts. We'll only know in hindsight if the bulls or the bears are right. But it's always dangerous to get caught up in the euphoria of the bullish crowd. We learned that lesson already, didn't we? And that's the Savage Truth.

Whatever the cause of a person getting behind on their mortgage payments, the process from that point onwards is fairly set. Initially, the lender will file a public default notice. This initiates the foreclosure process, and at this point the property officially enters the pre-foreclosure stage.

So basically, pre-foreclosure is like a grace period. The homeowner is being warned that they’re in default and need to do something about it, but at this point, the lender is unable to claim back the property and sell it to recoup their costs. The length of the grace period varies, as it’s determined by state laws. Some states allow the grace period to last for as long as 6 months, but many states have shorter periods.

So, what does this map tell us? Bupkis.

I think Terry Savage has forgotten a new factor coming into play: the possibility of a tax revolt.

Americans are starting to discover that our current income tax system is a GIGANTIC root cause of much of the economic mess in the USA, especially since:

1) By definition income taxes in the long run discourage personal savings and capital investment.
2) It costs Americans US$350 billion per year (and climbing higher in subsequent years!) in compliance costs.
3) We have a GIGANTIC problem with tax evasion, what with the flourishing underground economy and the funneling of American-owned liquid assets to banks and financial institutions outside the USA to avoid taxes, the so-called offshoring of assets.

It was Alexander Hamilton (I believe) who wrote that the best way of taxation was by a consumption tax. Maybe it's time to very seriously look at getting FairTax into law and repeal the 16th Amendment at the same time.

Wall Street Journal

Was It a Sucker’s Rally?

You can have a jobless recovery but you can’t have a profitless one.

* Article
May 12, 2009

By ANDY KESSLER

The Dow Jones Industrial Average has bounced an astounding 30% from its March 9 low of 6547. Is this the dawn of a new era? Are we off to the races again?

I’m not so sure. Only a fool predicts the stock market, so here I go. This sure smells to me like a sucker’s rally. That’s because there aren’t sustainable, fundamental reasons for the market’s continued rise. Here are three explanations for the short-term upswing:

- Armageddon is off the table. It has been clear for some time that the funds available from the federal government’s Troubled Asset Relief Program (TARP) were not going to be enough to shore up bank balance sheets laced with toxic assets.

On Feb. 10, Treasury Secretary Timothy Geithner rolled out another, much hyped bank rescue plan. It was judged incomplete — and the market sold off 382 points in disgust.

Citigroup stock flirted with $1 on March 9. Nationalizations seemed inevitable as bears had their day.

Still, the Treasury bought time by announcing on the same day as Mr. Geithner’s underwhelming rescue plan that it would conduct “stress tests” of 19 large U.S. banks. It also implied, over time, that no bank would fail the test (which was more a negotiation than an audit). And when White House Chief of Staff Rahm Emanuel clearly stated on April 19 that nationalization was “not the goal” of the administration, it became safe to own financial stocks again.

It doesn’t matter if financial institution losses are $2 trillion or the pessimists’ $3.6 trillion. “No more failures” is policy. While the U.S. government may end up owning maybe a third of the equity of Citi and Bank of America and a few others, none will be nationalized. And even though future bank profits will be held back by constant write downs of “legacy” assets (we don’t call them toxic anymore), the bears have backed off and the market rallied — Citi is now $4.

- Zero yields. The Federal Reserve, by driving short-term rates to almost zero, has messed up asset allocation formulas. Money always seeks its highest risk-adjusted return. Thus in normal markets if bond yields rise they become more attractive than risky stocks, so money shifts. And vice versa. Well, have you looked at your bank statement lately?

Savings accounts pay a whopping 0.2% interest rate — 20 basis points. Even seven-day commercial paper money-market funds are paying under 50 basis points. So money has shifted to stocks, some of it automatically, as bond returns are puny compared to potential stock returns. Meanwhile, both mutual funds and hedge funds that missed the market pop are playing catch-up — rushing to buy stocks.

excerpt:

http://online.wsj.com/article/SB124208415028908497.html

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