Summer of '09: 'Grim' and Bear It

Sweeney Todd is dead on with his observation that "the history of the world, my sweet is who gets eaten and who gets to eat."

As far as investors go, they've been doing the eating, gourmet style, in fact, in recent months, what with the S&P 500 shooting up a stunning 40% from its March 9 low. But in recent weeks, investors have gone back on a starvation diet, as the market stalled and got bogged down in a narrow trading Dow trading range of between the low and upper middle 8000s.

So what's next? If this past week is any indication, look for a resumption of financial heartburn. The reason, and an inevitable harbinger of tough investment times: The market is starting to go down on good news, not up. Surprisingly, this is occurring just when it looks like things are getting somewhat better on the economic front and the investor mood is turning more positive.

Art Ricchold, a Los Angeles day trader who has e-mailed me a number of times in recent years, summed up this sunnier mood in an e-mail he sent me last Saturday. As a forecaster, it's worth noting Ricchold is batting 100%. I've never known him to be right. He's a super contrary indicator.

In his latest e-mail, Art wrote, "Dan, I know my forecasts to you leave a lot to be desired, but even boobs eventually get it right at some point and you can definitely bank on this one. We're off to the races. The stalemate is over and the stock market is ready to run again.

"Just look at the facts. The economy is looking better. Both Morgan Stanley and Wachovia are saying the recession will be over in the summer, Housing is getting healthier, corporations are able to raise money again in the bond market, the government is guaranteeing the stability of the banking system and the 40% rally we've had since March shows that many investors are aggressively returning to the stock market. What more evidence could any anyone want that we're in a for another upswing?"

Based on his track record, I guessed the market would soon be heading lower and I was right. The following three trading sessions after I received his e-mail were all down days, producing an overall loss in the Dow of about 300 points. Significantly, there was good news on two of those days -- the kind of news that should have pushed stock prices higher.

On Tuesday, for example, a day in which the Dow plunged 107 points following a 187-point loss on Monday, news came out of a 17% jump in May's housing starts, suggesting the much troubled housing market could be stabilizing. On Wednesday, when the Dow was tagged for a loss of nearly 7.5 points, we got another favorable revelation, notably that Goldman Sachs, Morgan Stanley and a number of other banks had begun repaying their government loans. Interestingly, the shares of both Goldman and Morgan Stanley were losers that day, as was Best Buy the previous session even though it reported better than expected first-quarter results.

The market rebounded on Thursday, thanks largely to a double dose of positive economic tidings, namely a sharp drop in the latest weekly jobless claims and better than expected results from the leading economic indicators in May. But the size of the Dow's advance that day, nearly 58.5 points was widely viewed as disappointing, given the 300-point loss that preceded it.

To a number of pros, this action suggested the market could be in for a bummer of a summer. One is money manager Raymond Stahler of London-based Stahler Dearborn Ltd. "I think the bloom is off the rose," he says. "We're seeing a June swoon in the market, but no one is saying it, and that could be a prelude to a bad summer."

"Investors," he believes, "have been sold a bill of goods that the economic decline is all but over, but that's open to serious debate, and investors buying this nonsense by increasing their equity portfolios could pay a stiff price for wearing blindfolds."

Wall Street's latest Dr. Doom, New York University's economics professor Nouriel Roubini, who called the current recession, continues to flash an economic S.O.S., noting in a recent Reuters interview that "aside from the green shoots (signs of improvement), there are yellow weeds threatening any economic recovery."

Some of these yellow weeds have popped up recently. Among them: Interest rates are on the rise; credit card defaults in May rose to a record level, which signals even growing weakness in consumer spending; industrial output has declined seven months running, the capacity utilization rate (factory output) hit a record low in May. In addition, it's noted, the number of foreclosures and abandoned homes (now totaling about two million) are still climbing, while incomes continue to decline and employers cut compensation and lay off personnel.

San Francisco money manager Gary Wollin minimizes the Dow's 300-point decline. "Nothing goes straight up," he says. "It's just normal profit-taking and it's no big deal because we're seeing more and more signs that the trend is still up."

Online investment adviser Mark Leibovit of VRTrader.com sharply disagrees. He describes the latest action in equities as unimpressive, suggesting the recent corrective action has farther to go. He also questions whether there's enough fuel in the tank to push stock prices higher. Importantly, Leibovit notes, the beaten-up financial stocks -- the darlings of the bargain hunters which have turned sour recently -- are acting like they could be in for a nasty correction. Another worry: The market is treating the dangerous events in Iran and North Korea like they're non-events.

Market guru Elaine Garzarelli also tosses in a note of caution, observing that her two-week average of bullish investment advisers is now at 65%. This is near 70%, which is her range for a correction.

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Comments

[RRoadrunner]

I don’t see any tangle evidence that our economy is improving and baffled by those who are optimistic about the near future. Anyone whose been “burnt” these last two years and is still in the market is either a “gambler” or desperately hoping against hope. What in our economy is going to spur growth? Spending by our government by enlarge has benefited some sectors of our economy and allowed vulnerabilities to be hidden by changing the accounting standards. Any attempt by our government to help the real engine of this economy, the working class, is met with fierce resistance. If Wall Street shows any sign of life in the near future it will be by smoke and mirrors. The fundamentals of our economy have changed and it will take years for any real correction to happen.

I would like to be more optimistic, but it’s hard to do when you see history repeat itself over and over. The Wall Street “bubbles” have real done a number on us….

[grateful4thedead]

we'll see 600's in the spx again....j­ust a question of when.

at the end of the day (just don't know which day) the efficient market theory will come home. it has always happened, always will.

disclosure: 70% short and ready to put the other 30% short.

[thoreauing]

Hey Danny Boy,

Read your blog and you suck! I learned it this way in Econ 100: rising prices in a diminishing capital market = depression. Save the band width gibberish on your financial acumen or lack of and write about something you know, maybe fishing like fishing for a story?

[cdrach]

don't forge the 800 pound gorilla in the room- rising oil prices thanks to G. Sachs and hedge fund thugs. People get gun shy on purchasing big ticket items when they see gas prices creeping up and flashback to summer of '08

[themodernleader]

My small business has declined every week since March1, 2009. Credit card use is down a shocking amount. And the malls are full of vacant stores. Apartment buildings can't find tenants, indicatiing an out-migration of people looking for jobs or going back to Mexico and other countries. We are bracing for massive layoffs in government jobs as muncipalities and school districts lose their revenue bases. A well placed rumor has it that our city can't pay its bills. I am continually confronted with the accusation that this country is going down the drain.
The Obama entertainment team will soon find that they are acting upon the wrong job description as the Americans look for new leaders and leadership. Leadership vacuum begs to be filled one way or another.

[watchTVgetSTUPID]

See this interactive map showing the monthly increase in unemployment in every California county. Note the increase gets going in October 2008 and really picks up steam in December.
http://www.sacbee.com/1232/rich_media/1698037.html

[mbaty]

2 million foreclosed or abandoned homes? Who cares about the stock market if we are all sleeping in the gutters of main street? At the end of the day, none of this financial gobbeldygook means a d@mn thing if people are going hungry and homeless. This is not the America the founding fathers wanted to create. We are making all this money up anyway. Most of it is just in a computer. It's time to pause the game and rethink the rules. What is value? What is money? What do we need to be a healthy stable society that thrives and adds to the richness of the world with our unique contribution?

[olephart]

Examine the green shoots:

“a 17% jump in May's housing starts”

This is from the record low in April and is 50% lower than a year ago and 75% lower than the peak.

“a sharp drop in the latest weekly jobless claims”

Claims are still running greater than 600,000 per week. The May job loss figure, minus 345,000 was bogus as have been the preceding months due to the outsized birth/death adjustments. The ADP estimate of private job losses was minus 532,000. Had the cut back in hours worked in May been converted to its equivalent in job losses it would have been minus 920,000.

“and better than expected results from the leading economic indicators in May.”

Three of the upward components were stock prices, money supply and confidence and are not fundamental economic measures.

Adding Roubini’s yellow weeds to this and it looks like many investors are set up to be Purina Bear Chow.

[usna73]

Hi Ole. Like you I like my data raw, not "cooked" or spun. The "good news" last week about decline in continued UI claims is not "good." They simply exhausted benefits and remain unemployed.

Here is a chart of the rate of exhaustion. It is frightening:

http://www.ritholtz.com/blog/wp-content/uploads/2009/06/exht-rate.png

[Artos]

The Stock Market can plummet for all I care. It seems that the MSM and all the economic experts attached to same, have this concept in their heads and that they would like to pander to the public, that what happens on the Stock Market is an indicator of the health of the economy. Lies. The Stock Market and it's investors and by that I mean the hard core investors with money, are the only ones who benefit from stocks. The Stock Market has a habit of going up when the publics employment is going down. It does well at the American peoples expense. It is no indicator of the health of our economy, merely an indicator of the amount of carrion that it is getting fatted on. I for one hope the stock market hits bottom.

[WorkingClass]

The recent stock market bounce was engineered so the banksters could feast on private money. Its over now.

[Rule Of Law]

Correct!

[grateful4thedead]

Absolutely correct.

[usna73]

You are correct. XLF, XHB, and RTH all rolling over with lower highs. Lowry buying power index not much higher than when March 9 lows were put in. 5 days rallys often come after 90% down days like last Monday. Look out when reactions to Fed meeting this week. There are buyers above S/P 959 and sellers below 200day MA. I am a "seller:.

[Artos]

If I know the Fed and the Treasury, they will lie. Their sole interest is in seeing to it that the Stock Market, the Banks and the Corporations stay well fed and sated. Of course they will pretend that it is in the interest of all Americans, but that's just a lie.