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Sunday, June 28, 2009

Mauldin: End of Recession?

In New from the Frontline, Mauldin dissects the posted stats and figures to illustrate why they are being spun off for more than what is really the case.

This is not to say that the news is bad or good. It requires deeper interpretation for its consequences. For example, Mauldin also notes that later this year or next, GDP will rise...when compared to previous quarters and years. One bad year will most likely likely follow with a good one because the comparative baseline year was so bad.

My analysis is below.

Recession's End Vs. Stock Market
In 2003, when the market finally turned up, we were already well out of recession. And the market had a very quick 12% or so drop while we were in recovery, while later we went on to a 90% run-up! Was the drop telling us anything, or do we explain it away?

"In the short run," St. Graham said, "the market is a voting machine. In the long run it is a weighing machine." The voting is based on current sentiment, but what the market weighs in the long run is earnings. The market tries to forecast future income streams. And it gets it wrong as often as it gets it right.

...

The CNBC host talked in breathless terms about the importance of the 50-day average moving above the 200-day average. It means nothing until it means something, and we won't know what that something is for some time.

Analysis:

Most analysis I have done from a macro level strongly suggests that the market needs to fall. This has not happened for four months. Even though traders have made some 40% in this time period, investors need to review earnings, ongoing losses in commercial real estate, and option ARM (adjustable rate mortgages). The unknown factors (helping the markets) still exist around policy and monetary policy, which is distorting the natural behavior of the markets.

About Unemployment:

  • Should labor market conditions proceed along the path taken in the 1992 recovery, the unemployment rate could peak close to 11% in mid-2010 and remain above 9% through the end of 2011
  • Projection indicates that the level of labor market slack would be higher by the end of 2009 than experienced at any other time in the post-World War II period, implying a longer and slower recovery path for the unemployment rate [incorporates involuntary part-time workers plus standard unemployment rate]
  • When the economy rebounds, employers will tap into their existing workforces rather than hire new workers. This could substantially slow the recovery of the outflow rate and put upward pressure on future unemployment rates.


Analysis:
It is difficult not to read into "positive" economic news, but the focus must remain around the level of unemployment, progress of shift into new sectors, and economic changes/trends in the manufacturing sector.

How Income...and Savings...Both Rose

A large increase in "government social benefits" and a decline in personal taxes accounted for all the gain, and then some. The increase was the effect from the recent stimulus package, which is (for now) temporary, and not the result of a recovering economy. Hardly green shoots. It is just borrowed money from another (government) source.
Analysis:
Who's paying for this again? Oh yes. You are. You, the tax payer. It is easy to be skeptical on how much longer the stimulus package will be funded. Tax will not likely go up in the U.S. for another 3 years. This statement is based on the assumption is that the current government will want to be re-elected.


John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore



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