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We’ve Seen This Movie Before

Posted by Larry Doyle on March 10, 2009 2:37 PM |

The stock markets are having a very robust, broad based rally today. All major market averages are up almost 5% or better. Gold is down approximately 3%. Foreign stock markets also had significant rallies. Can we put this pain behind us? Is it finally over?

In dealing with markets and the economy, it is never over. The critical, mental acuity in dealing with the markets and economy is understanding the dynamics at work and the associated risks. Along with a host of other goals, I firmly hope that my work here at Sense on Cents is able to help people understand those dynamics and the accompanying risks. It is a process, but I will keep after it and I hope you find it enlightening and informative. If so, please comment and share Sense on Cents with your friends. (In fact, you can share this piece, and any other piece here at S o C by using the “ShareThis” link underneath the title line of each story). Let’s assess today’s market action.

The market is up primarily on the heels of Citigroup CEO Vikram Pandit’s statement that the first two months of 2009 have been the best first two months to a quarter in the last two years. Citi’s stock is up 27% on the day!! It is now trading at $1.33 (still less than an ATM fee)! Pardon my sarcasm.

Let’s take a deep breath and maintain perspective. For the month, the major stock averages are still down 3%. Government bonds are flat for the month, while other credit sensitive sectors of the bond market are down approximately 2% with the high yield sector down 5+%.

Has the market bottomed and can we at least stabilize here? Perhaps. Markets have been trading on much lighter volumes indicating that the bulk of activity is primarily day trading versus longer term investing. As day traders get caught overly short, the market is very susceptible to rallies of the sort that we are experiencing today.

Markets also never move one way all the time. That sort of price action would not be natural. In fact, it is not inconceivable that the market rallies another 3% which would bring us back to unchanged for the month and down approximately 18-19% for the year. If we do rally another 3%, it would bring us back towards the 7050 level on the DJIA. Last week I commented that I was very surprised we went through that level as quickly and easily as we did. It would make sense for the market to revisit that level.

Ultimately, though, we need to focus on the underlying forces at work in our economy and determine if those forces portend a real turn in our economy and, in turn, our markets:

Housing: most analysts see further price deterioration given the massive supply overhanging the market.

Unemployment: forecast to increase at least to 9% with many economists now predicting double digit levels. This move will continue to keep consumer spending under wraps and pressure retail stores.

Earnings: no indication of any improvement based upon orders received. At the current expected level of earnings, the market looks to be quite expensive.

Global Pressures: according to noted Harvard economist Martin Feldstein, Europe is “in denial” about the current woeful state of their economy and is not willing to undertake the necessary fiscal stimulus. While the EU has the monetary facilities in place to make a collective move, they do not have meaningful fiscal facilities in place to do the same on the spending front. Europe is the weakest spot on the global map and they are the slowest to move both monetarily and fiscally. This lack of action will lead to a very contentious meeting of the G-20 (group of 20 leading economies) in April.

Defaults/Writedowns: the worst remains in front of us, especially on the commercial front. Do I think banks, insurance companies, private equity, and other holders have recognized these expected defaults? No.

In summary, I will take a +5% day versus a -5% day. However, I am not anywhere close to adjusting my views on the economy or markets. Tougher times are ahead.


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