Just a brief note today. The New York Times Fred Norris wrote a great piece on the recession today that compares our current economic downturn with other recessions.
Lets take a look:
My Take:
Note that the numbers above include the data for March 2009. Its pretty obvious here that the economy is showing no signs of recovery. The overall index shows that the economy continues to fall like a rock.
We have pretty much officially blown away the '82 recession at this point. My guess is by the summer we will have blown right past the brutal '73/74 recession. The market is pricing stocks for a recovery later this year. This is not surprising considering the massive amounts of stimulus thats been thrown at it by the Fed and Treasury.
Whats interesting is Fred notes that the wage decrease is deceptive because it includes the cost of benefits like health which have been rising at an alarming rate. If benefits were taken out of the wage number the drop would be considerably more significant.
The bottom line here is this folks:
LOOK AT THE NUMBERS ABOVE. WE ARE CONTINUING TO TANK. THE NUMBERS NEVER LIE. ONLY THE ANALYSTS DO!
DON'T BELIEVE THE HYPE!
The significant bounce we have seen in the markets is a result of many different factors in my opinion. The massive stimulus that's been thrown at the economy by the government is one big reason. We all must realize that this is temporary relief and cannot be sustained.
There has also been a lot of noise around the blogoshpere that blames a lot of this bounce on massive buy orders at the larger trading desks on Wall St like Goldman Sachs.
This appears to be significantly moving the markets because the number of investors in equities are more scarce and thus the market is less liquid. The theory is the big boys can manipulate the market higher with massive buy orders.
This could potentially trigger more buying by many of the large quants. Many of them were caught short when this bounce began.
As a result: when the market moves higher, the quants are forced to buy massive amounts of stocks as a hedge against their short positions. Some of these quants are huge(up to $100 billion) so when they are caught on the wrong side of a trade and they are forced to buy equities as a hedge, this can force the markets even higher because the positions they must take on the long side to properly hedge are HUGE!
The bottom line here is in an illiquid market, equities pretty much turn into a casino because the trading volume is so thin. This makes the market highly susceptible to manipulation. When the market moves higher huge quants and mutual funds must buy and move with it.
My fear here is this is not sustainable. Corporate earnings are collapsing and equities do not accurately reflect this in my opinion. The market will eventually get this right and correct and we all must be wary that the same thing that triggered this "snowball effect" move to the upside could easily occur on the down side. Selling could force more selling due etc. etc. We saw this back in September and October of last year.
However, we all must greatly respect the feeding frenzy that occurs when stocks move sharply higher like this. This is why you must scale into positions on the short side.
Remember, the market can always stay irrational longer than you can stay solvent. I personally want nothing to do with this market right now because every move to the upside and downside is so exacerbated. This market action tells you that its not healthy.
Trading the market with large positions at this point is similar to going on a suicide mission. If you get caught in the wrong direction your investments could easily get slaughtered.
I refuse to invest in something that makes no sense and I can't understand. I will play around with minuscule positions on the short side simply because I think the market is overpriced. If they go to zero based on things I cannot control its no big deal because the positions are so tiny.
The bottom line here is sitting on the sidelines and hoarding cash sounds like the most intelligent thing to do at this point.
2 comments:
Thanks for your last posts, Jeff!
The so-called "stress tests" are the equivalents of FDR's bank holiday in 1933. They have been devised to instill confidence. But when there will be weakness again in the financial system - and very probably there will be just because of the one-time effects that won't show up in the earnings next quarter - the confidence will be gone completely and we will have the next leg down. Freefall style.
John
Thanks.
Yeah I totally agree.
The market is trading on psychology versus fundementals.
This makes it very vulnerable to wild swings up and down depending on the news.
Equities have turned into a cesspool as far as I am concerned.
I trust nothing that I am reading and the government cannot continue to carry all of the deadweight insolvent companies that should be bankrupt by now.
This is all going to end very badly. The question now is how long can the government continue to keep this charade going.
As people continue to lose their jobs and suffer they will eventually rise up and realize that this recovery is a farce.
The timing of this is the hard part.
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