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Dan Dorfman

Dan Dorfman

Posted: June 7, 2010 02:27 AM

The Good, The Bad And The Ugly

What's Your Reaction:

Time for an updated version of the good, the bad and the ugly for the nation's 85-plus million stock investors following May's disappointing employment report. That was the creation of 431,000 new jobs, versus an expected hire of 540,000 new jobs, a disclosure that sparked a vicious 323-point decline in the Dow Industrials.

First, the good: the phenomenal 80% rebound from the March 2009 lows, following a devastating 7,600-point plunge in the Dow between October of 2007 and the first quarter of 2009.

Then, the bad: last month's miserable showing which saw the major market averages get brutalized as the Dow, the S&P 500 and Nasdaq got whacked for respective losses of 7.9%, 8.2% and 8.29%. For the Dow, it was the worst May showing in 48 years, largely reflecting swelling fears about Europe's debt woes, which, it's feared, could stall global economic growth.

Now to the ugly, as envisioned by some worried market pros, one of whom from down under, would you believe, sees Wall Street's high noon in June, with the Dow plummeting an astonishing 2,000 points this month. Their basic view: Call an ambulance. Wall Street will be littered with a lot more blood following the recent weakness.

One of our worriers, Olivier Garret, CEO of Casey Research, an economic and investment consulting service out of Stowe, Vt., thinks the ambulance should have been called some time ago since he takes major issue with the widely held Wall Street view, also recently espoused by President Obama, that the economy is getting stronger by the day.

The economic bulls insist the economy is clearly showing sunnier signs on a number of fronts (such as a pickup in jobs, consumer spending and manufacturing), signaling that increased and sustained vigor in housing and employment is only a matter of time. Garret, on the other hand, expects the real estate crisis (both residential commercial) to come back with a vengeance, in turn afflicting bank balance sheets with more and more delinquent loans and foreclosures, which will have to be written off and turn bank profits into bank losses. That, in turn, he predicts, will create another domestic crisis, leading to a sharp reduction in consumer spending, lower retail sales, higher unemployment and accelerated bank failures (72 so far this year as of May 14).

The latest S&P/Case-Schiller report lends credence to Garret's housing concerns. It showed a 20-city decline in housing prices between February and March. In other words, after rebounding, housing, which kicked off the most recent financial crisis, has weakened again, a reflection of an ending of the government incentives, an inventory of roughly a million unsold homes on the market and rising foreclosures.

"Financing (stimulus packages and bailouts) is continuing to hide how sick our economy really is," says Garret, "but you can only do so much magic to hide the truth. The fact is our economy is on very shaky ground."

Further, pointing to mounting debt and money printing, Garret worries that the U.S. is rapidly being enveloped in the same plight befalling the weaker Eurozone countries. "We're not too far behind Greece in our level of debt," he says. For example, U.S. government debt, as a percentage of GDP, stands at 61.9%, versus Greece at 95.6%. The average for the entire European Union is 66%.

"It tells me," Garret observes, "that unless there is a strong reversal of financing for government programs, new job creations, salvaging of banks and the coverage of health care expenditures, we're going to be in a terrible fix."

Thanks to government programs, Garret sees first-half GDP growth of 4% to 5%, but then a collapse in the second half on the order of a 5% to 6% decline. And for all of 2010, he expects a retreat of about 1%, with full-year unemployment wrapping up at 12%, versus the current 9.7%.

As for the stock market, Garret looks for another crash, driving the Dow down to last March's low of 6.500 either this year or by the first half of 2011.

"We see no sector that's undervalued," says Garret, who views the overall market as expensive, based on fundamentals. At market bottoms, we see price-earnings ratios of 6 or 7, but now, he points out, we're 2 ½ times that, which is typical of a robust and healthy economy. It means, he tells me, that "there's a lot of room downwards."

Where would he put money? Our bear has two favorites: Gold and cash. That's it!

Carter Worth, the chief market technician of Oppenheimer & Co., doesn't mince any words. "This market is sick -- sick enough," he says, "that the all-important smoothing mechanism (the 150-day moving average) has turned down." By that time-tested definition, he notes, the bullish phase for global equities in effect since last March has turned down. When this happens, observes Worth, often there will be a counter rally back up to the 150-day average, which ends abruptly and then turns back down.

Meanwhile some grim news from down under, which could put investors down and out. It comes from Cornel Campeanu of Techpro.com, a market chartist and a HuffPost reader in Brisbane, Australia. In early February 2008, he accurately predicted a looming crash that would last more than 12 months. Sorry to say he's predicting an encore. He e-mailed me the other day to say his work has triggered a combination of critical sell signals which he describes as "a death signal." In brief, he writes, "it appears likely that the Dow may slide 2,000 points in June."

What do you think? E-mail me at Dandordan@aol.com