Is the Recession Really Over?

So do you think that we are still in a recession? According to the agency that dates the starting and ending of recessions, it has been over for a long time. The National Bureau of Economic Research stated today that the recession that began in December 2007 actually ended June 2009. It has been referred to as the Great Recession because it is the longest recession (18 months) since the Great Depression (43 months).

So great! The NBER states we are out of the woods. Let me ask you a question – Is the recession over in your world? Do you feel better off than you did over a year ago? Keep this in mind when it comes to economic numbers – numbers can be manipulated and interpreted in many different ways. It is very easy to misrepresent with numbers – just remember what the government does with the unemployment report each month as a case in point.

Statistically you could say we are not in a recession. However, ask the people who have been laid off, facing or faced foreclosure, dealing with over-indebtedness, etc. if the recession is over in their lives. Statistics say one thing and reality says another. At the end of the day, I don’t think that the Great Recession of 2007 is going to get the press it deserves.

However, these favorable statistics do make for good political sound bites.

State of the Stock Market

I would state that this is an important week for the stock market. The market has bounced back nicely in September and is at a 4 month high. Further, it has also risen past some key levels. However, it also has done so on very light volume which is not the sign of a healthy market. If the market starts a significant decline from these levels, I would not automatically assume it is just a pullback. I would take it seriously.

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The Challenges of an Abnormal Economic Cycle

Why hasn’t the economy recovered? Why are there still issues? This week I want to give you an economics lesson. If you can get an understanding of economic cycles, you can get a sense of where we are today.

We can get some insight by taking a look at how a normal economic cycle works. A normal economic cycle goes through 5 stages. The economic cycle starts at the bottom with a recession. Then you start a recovery that leads to a period of prosperity. When the period of prosperity hits a peak, a period of contraction occurs. During contraction, the prosperity period (economic growth) starts to slow down. If the contraction is severe then the slow down becomes economic loss. Economic loss leads to the next stage – recession. The recession acts as a detoxification period. The Government intervenes and then the recovery starts again which leads to a period of prosperity. The economy has been doing it that way for decades.

During a normal economic cycle, the government is effective in providing solutions. The government can intervene, fix things, and shorten the time it takes to get back to economic growth. In order words, the problems that created the recession can be easily fixed.

If we are not in a normal cycle, the cycle has grown much larger, meaning that it takes longer to move from stage to stage. This type of economic cycle is full of structural problems. For instance, the debt feuled prosperity period for this economic cycle was much larger and because of that the downturn is much larger. If that circle gets pushed far enough out, then the economic cycle could result in a much worse scenario like a depression or hyper inflation. It is an economic cycle that has gotten out of balance.

When you get into an abnormal economic cycle, you find the economy has structural problems. Said another way, it is the structural problems that create the abnormal economic cycle. With our current scenario, an irony exists. The very thing that created the growth in our country is the very thing that is creating the problem – DEBT. We were fueled and are being destroyed by the same thing. That creates more and more structural problems. A debt fueled recession or worse is the toughest thing to fix because in an abnormal economic cycle the Government cannot just fix things. They are ineffective as we have witnessed over the past few years.

The problem is only fixed through the destruction of debt. Either the debt is paid back or someone takes a loss. Since the government refuses to allow this to happen, the circle gets bigger and bigger pushing real recovery off into the future.

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Potential Market Myths

A client of mine forwards me an e-mail from time to time that he receives from another financial advisor.  These e-mails are typically very positive on the state of the market.  I also find that they are filled with what I would refer to as market myths.  I thought I would share some of these with you.

(1)  Companies are showing strong profit reports – thus we are definitely in a strong recovery

Companies have slashed their expenses (and people) to the core.  It doesn’t take much to report strong earnings when you drastically cut your expenses.  Much of what is reported has nothing to do with actual profit growth and has more to do with the ability to cut expenses. 

(2)      Weekly jobless claims have been falling – that is a good sign

Every Thursday the government reports how many new people filed for unemployment benefits.  Over the course of the last few months those weekly numbers have marginally improved.   Does that mean that things are getting better in the job market?  I don’t think that the weekly number means much of anything at this point.  First, they should be decreasing just because companies have cut employment back just about as aggressively as they can afford to and still run a business.   Second, I would argue that the unemployment claims numbers still running this high is a negative.  As I pointed out, they should be on the decline.   Recovery in the jobs market comes as soon as companies start aggressively hiring.  This is something that we are not seeing.

(3)    The Price of Gold is signaling that we are heading for inflation

This is not necessarily true when there is nothing there to produce inflation.  Yes, we are printing money by the truckloads in this country.  However, that money is not being used to boost consumer purchases or being put together as new consumer loans.  All of that printed money is being used to absorb massive losses that would ordinarily not be there.  Remember that gold is a psychologically driven investment.  It does not have any value nor does it produce anything.  It is not a currency.  It goes up or down because people think that it should.  There is nothing to back up the price of gold.  The price of gold didn’t start going up until the dollar started having problems.  Ultimately, the government will do whatever it has to do to shore up the dollar.  However, longer-term, the dollar is in real trouble.

Economists declare that the recession is over – When the majority of economists thing one way, typically the minority is right.  Economists as a collective body rarely make the right forecast. 

This Week

It is all about earning, earnings, and more earnings.  It is very hard to predict how the market will react to earnings reports.  My guess is that companies will need flawless reports and near perfect outlooks for the near-term. Anything other than a show of strength might be tough for the market.  The stock market has very large expectations right now.   One thing for sure – this should make for an interesting week.

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Unprecedented Times Create Unprecedented Events

A recent article in the Dallas Morning News states that we just don’t have anything to worry about going forward regarding a “double dip” recession.  A double dip recession is one where you go through one recession, the recession concludes, and then it comes back again.  Of course, that would mean that the stock market would come tumbling down again as well.

September 14, 2009 edition

“I can now report that it’s time to lift up your melancholy spirits and go find something else to worry about.  Double-dip recessions are very rare events.”

“Since WWII, there are really no examples-except 1980-82….”

The writer also points out that, “you would think a 50% upside prance in the stock market would be met with some measure of confidence rather than such an undercurrent of distrust.”

The biggest mistake that the media is making in the reporting of this recession is comparing it to normal recessions and normal cycles.  The writer would need to go back further than 70 years to take a look at the full length of the Great Depression to get a better comparison. No, I don’t think that we are spiraling into a depression.  I do think that in the least a double dip recession is a high probability. 

People are distrustful regardless of the rise in the stock market.  There is rampant unemployment, a foreclosure crisis, and consumers faced with mountains of debt.  That is not even considering a Congress that is trying to ruin this country through socialistic policies. 

To get a good comparison, you can’t look at post WWII recessions.  It would be a lot like comparing apples to oranges.  This is what makes this situation so dangerous.  Yes, people are distrustful.  At the same time, people are also hopeful.  They are hopeful that the worst is behind us.  If that doesn’t turn out to be the case, confidence will be destroyed and that will be the biggest problem the markets and the economy face.  Today, at least confidence is on life support after a grueling 2008. 

Levels in the Market

I haven’t covered significant levels in the stock market in a long time.  (Click here for a description of what I mean by levels.) For the S&P 500, we are starting down a few key levels that are right in front of us.  It is a range of levels between 1042 and 1062.  The ability for the stock market to get above 1062 and stay there would be a very bullish event. 

Isn’t a rise of 55% in the stock market a bullish event in itself?  Only if the bear market is over.  Thus far, the levels necessary to declare the intermediate trend change from a bear to a bull have not occurred.  It would take the S&P 500 getting over and staying over the level of 1119 for that to occur.

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Unemployment Reports Better than Expected – Are we in the clear?

 

The recession is declared to be over or over soon states many media outlets on Friday.  Unemployment was not as bad as expected and it appears that we are starting to lose less jobs. All of that is good news and it took the media and Wall Street no time at all to react positively. 

 

I really do regret taking the opposing view on this one.  I would like for it to be true.  There are just a few problems.  We have 14.462 million people unemployed.  The number is likely higher. This is the estimate from the Department of Labor.  Where are these people going to get jobs?  Unless you are ready to pick up a shovel and get on the Obama job creation bus, you might just be out of luck.  Once again, the Obama administration does not have a plan in place to fix the job situation. 

 

Looking back to 1948 (as far back as records take us), there has never been as big of a spike in the number of those unemployed.  The closest spike that you can find was between 1979 and 1982.  In 43 months, the unemployment numbers jumped 106% to a high of 12.051 million people. Today, in just 33 months the unemployment numbers jumped 125% to 14.462 million.  The following is a chart from www.freelunch.com that illustrates this dramatic rise.

I think that the monthly unemployment numbers could continue to look better.  However, that doesn’t mean that companies are hiring. I think that it means that companies have cut as far as they can cut.  Those lay-offs might start to slow.  Until there is a solution to the problem that over 14 million people are facing, we will continue to have this crisis. 

 

Regarding the market…the 1929 comparison that I wrote about still tracks very closely.  I would still suggest that there is extreme risk on the table.  As long as we stay below 1020 on the S&P 500, that will remain the case.

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The Bear Market has to be over…Right?

Those of you who have been reading my analysis are probably wondering when I am going to throw in the towel and just admit that the bear market is over and start talking about buying stocks again.  Well, I hate to disappoint you.  It is not going to happen yet.  Let’s take a much bigger picture look at what is occurring.  First, we are in a financial crisis produced by the bear market and those don’t just go away without a strong fight. 

Second, how could a 40% plus rise in stocks not mean the bear market is over?  Well, let’s take a look at history for that answer.  In 1929, a bear market started as a result of a credit/debt crisis.  There are many similarities between that period and today.  The big difference is the type of debt crisis.  The bear market eventually bottomed in 1932 after an 86% decline.  The first “crisis” decline in 1929 saw the market drop -44%.  Following that -44% decline, the stock market went up 46% over the next 147 days.  If you compare that to today, we are going through a similar experience.  The crisis of last year resulted in a -48% decline.  Thus far we are a little over a 40% increase in the stock market over 137 days.   This is not in any way unprecedented.  The problem for stock market investors in 1929 was what followed the 46% increase.  Following that incredible stock market rally was an -82% loss over the next 3 years. 

Third, the market has been rising over the past two weeks as a result of earnings season reports.  Over 70% of the companies of the S&P 500 have reported better than expected profits.  However, a closer look would reveal that the vast majority of these “profits” were due to cost cutting and not real growth.  These are clearly not sustainable. 

Fourth, Wall Street is beating the drum that the recession is just about over.  The index of leading indicators came out last week “and is rising at a rate that has accurately indicated the end of every other recession since the index began being compiled in 1959” (Dallas Morning News).  Is that really valid when we are dealing with the worst recession since 1929 when no leading indicator index was even around? It is important to compare apples to apples.  Wall Street has a history of claiming the recession over prematurely many times before.

Finally, unemployment is a major crisis and there is nothing in the works to fix it.  Of course, you can always get a job working an Obama induced construction job. 

Let’s not get to ahead of ourselves.  I was premature to write that the stock market rally was nearing the end.  Obviously it still has more to go.  I don’t think that I am wrong to suggest the bear market is over.

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Markets on Shaky Ground

Wall Street (which drives me crazy) calls even the smallest bit of good news “green shoots.”  The analogy is that grass starts to grow in the form of a “green shoot.”  Well, I have many “green shoots” in my yard right now.  Unfortunately, these green shoots are weeds more than anything.  John Mauldin made a very good observation in his latest writing.  He said:

“My premise for uttering the heresy “This Time It’s Different*” is that the fundamental nature of the economic landscape has so changed that comparisons with post-WWII recoveries is at best problematical and at worst misleading.”

His point is that Wall Street is looking at this recession through the lens of past recessions since WWII.  It is like comparing apples to oranges when you think of what makes up the problems that we face today.  Last week, the S&P cut their investment ratings on 22 banks.  Banks depend on strong investment ratings so that they can attract investor money.  The Consumer Price Index saw its largest drop since 1950.  Once again, it looks a lot like deflation more than inflation.  The reality is that there is a higher probability that we are in the throws of a deflationary problem which is something that only time can solve.  The problem with the weeds in my yard is that I cannot do anything about them unless I want brown spots all over my yard.  I will have to wait until next year and make sure that they don’t come back.  This is unlike any recession since the 1930’s. 

This week will have some interesting events.  The Federal Reserve Board meeting, that always makes for an interesting day.  The Treasury is set to sell billions of dollars of Government Bonds on the open market.  It will be interesting to see how interest rates hold up.  Once again, a rising interest rate environment is the last thing that a debt laden economy can handle.

As I write, the S&P 500 is below a critical price level of 900.  If the market were to close below that level, we would want to watch the next couple of days very carefully.  Once again, we want to evaluate whether this stock market rally is the beginning of a new bull market or nothing more than a bear market rally.  It is my view that this is nothing more than a bear market rally.  Thus, you want to be monitoring your risk very closely right now.  I will update more frequently this week as it warrants.

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The Roller Coaster of Hope

Yesterday, the market struggled throughout the day until the Beige Report on economic activity was delivered early afternoon.  The news was that it looked like the economy might be stabilizing and the word out of Washington was that the recession might be over sooner than we think.

 

Well, that day of struggle for the stock market turned into a nice day with the market finishing with a strong return.  This is pretty typical for a bear market/recession.  If there is any glimmer of good news, the recession is declared to be ending. 

 

An economic decline does not fall in a straight line.  You will see really bad news, maybe some good news every once in a while, and then a period where the news might not be so bad.  It is tough to see the light at the end of the tunnel when analysts state that the economic news, although still very negative, is “not as bad” as months before.

 

So, we get on that roller coaster.  At the risk of being a “doom and gloomer”, I think that we need to take a look at the real estate markets and get a fresh dose of reality.  I don’t think that anything is going to recover until we take care of this foreclosure crisis. 

 

Even though the Obama Administration has rolled out an enormous homeowner bail-out program and banks such as JP Morgan, Morgan Stanley, Citigroup, and Bank of America have suspended foreclosure proceedings in some states, foreclosures were still up dramatically in February by 30%.  Approximately 291,000 homes were added to foreclosure ranks.  

 

The idea of the Government fixing the foreclosure problem remains nothing more than an illusion.   In addition, John Mauldin reported in his weekly newsletter that there are in the neighborhood of 600,000 properties that banks have repossessed but not even put on the market.  In other words, there are many foreclosures that are not even showing up in the numbers.

 

The foreclosure crisis is THE problem for the credit markets which is the problem for the banks which is the problem for the stock market which is the problem for the economy.  It all ties together.  This is a worldwide cancer that is still making the global economy sick. 

 

My concern is that because the market is up over the past 5 weeks and all of the economic cheerleaders are returning to the stage, that you will declare that you will not take risk seriously with your investments.  You need to know that risk is still very high in the markets.

 

 

 

 

 

 

 

 

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1929 or a Real Bad Recession?

I was debating current issues with a buddy of mine who manages a hedge fund.  Throughout all of last year, we had been in agreement on what ails this country and the problems that we face. Recently, my friend has taken a more bullish (positive) attitude. 

He pointed out that the latest economic news has been much more positive than expected. He went through some of the metrics he follows on individual companies stating that things aren’t as bad as they seem.  I could disagree with none of those statements.  Economic news will get better at times.  Bear markets or economic growth doesn’t fall in a straight line.  In other words, there are always periods of hope amongst the despair.

I summed up my feelings about it this way.  If we are in a real bad recession and that is the extent of it, then the worst might just be behind us.  We also might have seen the bottom of the bear market a few weeks ago.  However, if this is much worse than a recession and more along the lines of a depression, then gear up because the worst is ahead.

Depressions are highlighted by periods of very high unemployment and economic loss in excess of -10%.  No one can say for sure.  I just cannot see that any of the proposed solutions put in place do anything at all to really solve the unemployment problem as well as increase economic growth on a grand scale.  Then you still have these massive levels of debt to deal with.

So, if this is a real bad recession, then we should go forward without major setbacks.  Any major setbacks would suggest that the worst is still ahead of us.

Yesterday’s stock market saw a modest decline in price levels.  I was telling someone this morning that a few years ago a -2% daily loss in the stock market would have been bad.  Today, it is just another normal market day. 

A decline yesterday made complete sense following such an enormous positive day in the S&P 500 on Monday. Now we are back to watching those price levels again.  Anything above 825 is positive.  Anything below 800 is neutral (neither positive nor negative).  Anything below 741 is very bearish.

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Market at Very Critical Juncture

In earlier posts, I talked about the signficance of the S&P 500 staying above the price level of 741.  Incidentally, if you have not read Thursday’s post yet, please do so.  This will help you understand the meanings behind price levels.   The S&P 500 has been as low as 734 this morning which should be a stern warning to investors.

As I write, the S&P 500 has managed to rise back above 741.  Where the market finishes at the end of the day is critical for three reasons.  First, it would be a big negative if the market finished the day below 741.  Every professional money manager in the free world is watching that level.  So, that in itself could cause a great deal of future selling.  

Second, today is the last day of the month.  We would be closing at a month on a very negative note. 

Finally, investors will be receiving more bad news when they go to their mailboxes in March.  This should create more selling as the small investors starts to throw in the towel and yell surrender.

The market is reacting to a decline in growth (Gross Domestic Product or GDP) of -6.2% for the fourth quarter announced this morning.  That was much worse than expected.  It was the biggest decline in growth since 1982.  The report also showed the largest drop in consumer spending in 28 years.  The bigger problem is that although the fourth quarter was very negative, the first quarter of this year looks like it could be even worse.

The Government also announced that they were increasing their control (read:Nationalization) of Citigroup to 36%.  So, we should see some real fireworks today with the end result anyone’s guess.  If the stock market were to end on a positive note, that would be short-term bullish (postive) for the market. 

On an interesting note, the S&P 500 did close below 755 yesterday (see Thursday’s post).  I noted that was a critical price level.  That ended up being a warning that the stock market is about to fall apart again. 

Check back at the end of the day for another post.

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