Chris Lau - Seeking Alpha

Sunday, June 07, 2009

What is Next: Stock Rally or Selloff?

How does one not become distrustful, cynical, and doubtful about things being merry again overall?

Wise words would dictate that the stock market is all-knowing, and is a forward indicator of the health in the economy, but who exactly said these words?

I am doubtful that all is well for the economy despite most major indexes now up 40% in a 3 month period. Annualized, that is a 120% return. Investors need to pay careful attention with market prices (all stocks on average are up 40%) rising to quickly against declining fundamentals. Look out also for speculators to take profits, further adding pressure to stocks in oil and gold to possibly sell-off.

What has changed over the past few months are LIBOR spreads. LIBOR spreads are not at worrying levels, implying that banks should begin lending again with credit flow improving. In that time, distressed companies in the resource sector and in REITs used that opportunity to raise cash and to improve balance sheets.

I noticed news media continues to report bad news by ending articles with suggestions that "this might be an indicator of a bottom." Most recently, in the U.S., unemployment increased 345,000. The unemployment rate continued to rise, increasing from 8.9 to 9.4 percent.

On Mish's blog, he notes the following:
  • there are 9.1 million people are working part time but want a full time job. A year ago the number was 5.3 million
  • The official unemployment rate is 9.4% and rising sharply. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

    It reflects how unemployment feels to the average Joe on the street. U-6 is 16.4%. Both U-6 and U-3 (the so called "official" unemployment number) are poised to rise further.
Source: http://globaleconomicanalysis.blogspot.com/2009/06/jobs-contract-17th-straight-month.html


As noted on CalculatedRisk, the current recession is now one of the worst recessions since WWII in percentage terms (not in terms of the unemployment rate):


Additional Areas for Concern

I realize that this entry is admittedly full of "concerns." It's no wonder that bankers, stock traders, and investors pretty much always have a grim look, even in good times, but I digress.

Bonds/U.S. Dollar
Over the past two weeks, yields in longer-term U.S. Treasuries rose. This indicates that the "great" economic experiment to pump money into the system is being rejected by the economic system. Look for repercussions to take place in the currency market (weakness of the U.S. dollar, Pound, Euro) in the days and weeks ahead.

Commodities
I am not convinced that the rally in the energy sector will hold. Ditto for gold and for silver. The rally is not even based on an argument about inflation. The strength in this sector is due largely from countries like China accumulating raw materials in place of accumulating U.S. debt or assets in U.S. currency. Watch out for the possibility this summer for a sell-off in gold and oil, and a flight to safety to the U.S. currency. The way things play out will depend on how well the stock market holds its level of confidence, especially if economic figures continue to show a deterioration in unemployment, effects of de-leveraging, and the impact of a permanent decline in consumer spending (and higher savings rate).

Charts:

US Dollar Collapse: Double Peaked between Oct/08 and Mar/09.

Volatility, what volatility?
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