When this current move began last month, we were overdue for a rally. Sentiment was clearly too negative. Now, Wall Street sentiment seems to be a bit more positive. The question is, do we really have reason to be more positive?
Earnings reports out thus far have generally beaten expectations. But, these expectations were based upon a scenario where the economy was going to fall off a cliff. It has not done that, and I don't expect it to. All of the stimulus going into the economy will lead to some sort of recovery. It is the long run I am most concerned about.
I think it is irresponsible as hell for Mark Haines on CNBC to be calling this a Bull Market. He bases this on the fact that the market has rallied 20%. He feels that if a Bear Market is defined by a 20% decline, then a Bull Market should be defined as a rally of at least 20%. We are now up nearly 30% since the March lows, and this has been a big move. However, 30% of 683 on the S&P is a heck of a lot less than 20% of 1550! And the market came down over 50%!
Look at any major, multi-year Bear Market and you often have more than one rally of this magnitude during the declines. After the S&P peaked over 1500 in late 2000, there were two rallies of 20% or more, and another that carried about 18%, until the market finally found its bottom in 2003.
I like the double bottom formation in the Nasdaq, but when you look at a weekly chart, you see just how devastating this Bear Market has been. A lot of wealth destruction. Throw that in with the destruction in wealth caused by the residential real estate market, and possibly more losses in commercial real estate, and the destruction of wealth is the greatest since the 1930's.
When the market was bottoming in 2003, we had low interest rates, an already strong real estate market, and tax cuts were in place. The federal budget deficit was large, but nowhere near the size of it now, and energy prices were significantly lower. Inflation was in check...the price of Gold was in the $400 to $500 range and Copper prices were way under $1.00. Furthermore, there were no huge job losses like what we've seen in the last 18 months.
Now, we have a government that is intent on spending even more money that it does not have. This will result in higher taxes down the road, and possibly higher inflation. It looks like the 1970's all over again. After the Dow Jones peaked at about 1,000 in 1966, it took the market 16 years before it reached the 1,100 level. In between there were FOUR Bear Markets resulting in losses of 20% or more...about 50% during the 1973-74 decline.
After such huge losses in income and assets, the psychology of consumers has changed. We will begin saving again, because we realize we no longer can depend upon the returns from our investments to provide for our retirement. In fact, a recent poll I saw on the news today indicated that 61% of Americans will save more, rather than go back to their old spending habits once the economy improves. That is just a poll, but I believe this will be the new American mindset.
This current rally may continue upward for awhile. It is forecasting a recovery by the 3rd Quarter, but it is also just an oversold rally. This may be a significant Bear Market bottom, but don't expect to see Dow 15,000 within a year. Some traders have been making good money during this rally...but they had their heads handed to them during the declines. Soon enough, the next dip they buy will result in losses. That will be the end of the Haines Bull Market.
Copyright (c) 2009 Scott Cole
Last Friday's trading sessions on the NYSE and the NASDAQ were attention getting amazing. CitiGroup reported a huge $13 billion write down for the first quarter and that it was cutting 9,000 jobs. That was taken as good news as it might be the last of the bad news and Citi's stock surges. What optimists the current largely untested in a bear market group of money managers are.
Google then reports that earnings for the first quarter were better than expected and the stock takes off and closes 20% higher,Google's best one day performance in over two years. Another 4650 job cuts are announced by AT&T and this is taken as more good news as it means that AT&T is taking action in the face of a recession. For the day the Dow is up over 200 points and is closing in on Dow 13,000.
What is happening here? An investor who is looking at the stock market performance of late may draw all of the wrong conclusions. He might think that the real estate market has suddenly recovered, that the subprime mortgage fiasco is over, that the 45 trillion dollars or so of weird unmarketable derivatives sitting on the books of the world's major financial institutions are solid AAA investments, and that the US recession will be over before we know it.
It would be easy to think all of these things based upon the stock market's performance since Helicopter Ben and Hammering Hank Paulson engineered the Bear Sterns rescue plan and opened up the Fed overnight window to brokerage firms. Countless billions of low cost money was suddenly made available to the brokerage firms.
And therein probably is our answer to the stock market's new life. With fresh multi billions injected into the banking and stock brokerage communities who can doubt that a significant part of it has fueled the recent stock advances? Bravo for Ben and Paul, both heroes of Wall Street.
However, at what cost? The billions of dollars that Bernanke is pouring into the financial system must come from somewhere and they do. The Fed's high speed printing presses must be smoking hot these days.
Money is being spent by the Fed and the US government like they really have it to spend. Sadly they do not. As the world's largest debtor nation the US is digging itself into such a deep hole with it's borrow and spend policies that it may never fully recover.
M3, which the government stopped reporting some time ago, has been growing about 15% until recently. Currently M3 is estimated to be expanding at a rate greater than 20%. This printing of fiat currency is going to cost the US dearly over the long run. Inflation is already climbing fast as prices for energy, food, healthcare, and hard commodities soar as monetary inflation gains ground.
Make no mistake about it. A perfect financial storm is brewing and the helicopter money for everybody who is a fat cat in America tactics of Bernanke and Paulson in dumping buckets full of money on Wall Street are going to contribute to the storm's intensity.
Once inflation really kicks in at double digit numbers, which will likely be all too soon, the Fed will have to start increasing interest rates. Raising rates in a weak economy will bring Wall Street back to earth. In the end the tricky Big Mean Bear will have his way.
Don't forget to sell the rally. It might be your last chance to move out of stocks at attractive prices for a long while. It seems to me that this is a last gasp bull market rally before the market heads lower in a horrifying manner.
Both Scott Cole & are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Scott Cole has sinced written about articles on various topics from Sell Home, Forex Guide and Bull Stock Market. Scott Cole is a stock market analyst and blogger. He writes for and owns the webs. Scott Cole's top article generates over 33100 views. to your Favourites.
has sinced written about articles on various topics from . . 's top article . to your Favourites.