Thursday, April 9, 2009

Good News Crushes Any Bad News

As I have been pointing out, this market is relishing the good news and brushing aside bad. It is the sentiment. And today with the WFC news of profitability and making it public as a company news release, this is certainly good news and the market is loving it.

So all is good in the economy, right? WRONG! Walmart same store sales slide. Not a good sign when the retail king shows a slow down. It could just be a one-off stat but keep a close eye.

Also, unemployment continues to rise at a staggering pace. Why isn't that a headline??? Because analysts predicted 660K lost jobs but since it was *only* 654K lost jobs, it was ... good news???? The s**t will hit the fan soon enough. Unemployment numbers at those levels are staggering and to brush that aside as meaningless is just beyond me. Maybe when unemployment hits 10% by July, when they have been predicting it maybe by December, and retail numbers go down by June, the recent optimism will be lost.

Make no mistake, this is a solid bull run in a bear market. But make no mistake, we will test the lows again. Retail numbers are up only because of great management of inventories. Now with the inventory numbers at skeletal levels, the retailers have to start showing growth in the bottom line and top line. No way that happens when unemployment is rising this much. The house of cards will fall.

The banks will benefit from the M2M changes for the short term. It is no telling what WFC would be announcing if the M2M changes were not put in place. We will never know. But just as retailers have managed inventories to have a good bottom line, banks are going to have to live up to the expectations that WFC has just set with their announcement. Any banks missing now would be a huge problem. Any banks needing significant Fed money now will be a big blow.

Market sentiment is now on the side that we are out of the worst of it. As those signs wain and the bad news starts coming in, it could get ugly. There are 4 key pillars to making the economy recover to anything close to what it was.

1. Unemployment slowing significantly
2. Real estate values bottom
3. Banks get back to more business as usual (not just short term profitability)
4. Confidence in the economy to get new small businesses growing again.

I really don't see any of these happening for 3-6 months. I will be digging into each of these in upcoming blogs.

One thing I do want to point out. I think we are headed for a short term deflationary period. With unemployment continuing to rise, people are looking for bargains and bargains only. This will drive down prices of many consumer goods. This will be good for the consumer in the short term but if and when unemployment stops rising and the economy recovers, we will move very quickly from deflation to inflation and will result in less spending and less borrowing by consumers. This is what will prevent the economy from growing much at all for the next 5-10 years. That's fine, to a degree. The problem is that with the gov't spending going on, they really will not be able to unwind the debt we are incurring right now without raising taxes at all levels. This in itself will cause a recession of sort in that the economy will not grow and will be stagnant for many years.

So, enjoy the trading while you can. By 2010, the stock market will be a very boring beast with little to no gains for many years.

1 comment:

  1. 3 day weekend means MM's push things up on light volume. Don't fight the tape. But beware on Monday. Reminds me a lot of Thanksgiving and Xmas holiday volume.