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I'm bullish when I see productivity driving wealth.



May 21, 2009 – Comments (4)

Leo Kolivakis has an excellent post that looks at the triple hit to the markets,  The asset decline is the housing market is about 1/3rd and comparable to the 1930s.  An interesting point is that some people still expect the market to recover to what they paid kind of thing and over time people will adjust spending to their beliefs of their level of wealth.

This latest stock market rally is timed perfect with how declines in GPD in recessions normally last.  However, with this kind of credit contraction declines typically last 2 years.  It takes 6 years for housing to bottom out, which suggests housing bottoms around 2011-2013.

It looks like about 3 times as many people have found themselves out of work compared to a normal recession.  This is simply a bigger shock.

Income drives spending and profits.  There is huge under employment, which means people have to make cuts to discretionary spending.

I took the title from this next piece:

The stock market still has big hurdles to clear. You can have a jobless recovery, but you can't have a profitless recovery. Consider: Earnings are subpar, Treasury's last auction was a bust because of weak demand, the dollar is suspect, the stimulus is pork, the latest budget projects a $1.84 trillion deficit, the administration is berating investment firms and hedge funds saying "I don't stand with them," California is dead broke, health care may be nationalized, cap and trade will bump electric bills by 30% . . . Shall I go on?

Until these issues are resolved, I don't see the stock market going much higher. I'm not disagreeing with the Fed's policies -- but I won't buy into a rising stock market based on them. I'm bullish when I see productivity driving wealth.



4 Comments – Post Your Own

#1) On May 21, 2009 at 1:45 AM, QualityPicks (54.81) wrote:

With banks returning TARP money, if they just return 80 billion in total, given the 12 to 1 leverage, we are talking about 1 trillion dollars out of the economy.

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#2) On May 21, 2009 at 2:08 AM, awallejr (82.72) wrote:

GDP is an important stat to follow for market direction.  Housing "bottom" will take years (despite Jim Cramer's silly calendar).  Unemployment, while a lagging stat, still can't be ignored since the rate of recovery could take years (and probably will).

With that said, I disagree with Kessler's characterisations.  People assume that S&P 666 was a true evaluation of the market.  Assuming that, then the rise to current levels could be viewed as an over shoot.  However there is also the argument that things move to equilibrium.  In that view, the midpoint between the S&P high (1576) and its low (666) is 1121.  Additionally other index's like Value Line have current valuations at last bear market bottom. Hence there isn't over valuation, but accurate valuation.

And while I do agree there are plenty of issues that need to be addressed (and I really do have concerns over the unemployment situation), they aren't insurmountable.  There is still room for a retracing of the collapse, which is what we REALLY are doing.  As for being a roaring bull market that will get us to new highs?  Nope, not happening for awhile.

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#3) On May 21, 2009 at 9:42 AM, dwot (97.03) wrote:

QualityPicks, I think that trillion out of the economy would have only gotten into the economy through bad loans.  So there would be part of the what the economy is adjusting to, an economy without so much money that will never be repaid being spent.

awallerjr, I think this bear has way more problems then the last bear and I think what was done with the last bear prevent a complete correction.

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#4) On May 21, 2009 at 4:16 PM, awallejr (82.72) wrote:

Short term I would agree.  Long term no one really knows, just too many variables, good and bad.

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