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Ouch.
Not a great week, thanks to the worst Friday in over a year. It shouldn't
come as a huge surprise, considering the week before was the biggest
weekly gain we'd seen in over a year. Whiplash, or an omen of
dire things to come? The truth is, it's just too soon too say - despite
the fact that the bearish pundits are pounding the table harder than ever.
But what exactly
is so bearish? Interestingly enough, most of the so-called experts
are still a little ambiguous about what the market's actual problems are....
an alarming approach to making buy sell decisions, as a lack of a specific
(and scientific) reason for an outlook is really just a guess.
With that as
a backdrop, today we're going to lay out some crystal clear bullish
and bearish arguments. It's an important exercise to undertake, as
it will give us a needed framework to gauge the market's true direction.
First though,
a look at some recent blog entries you may have missed:
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The
Bearish Case Vs. the Bullish Case |
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Is
the glass half full, or half empty? Maybe both. It's not
going to stay half-and-half for long though. Here are the arguments both
sides are making. They're important to define, as changes to them (or
lack thereof) will confirm or abate the looming re-entry in to a full-blown
bear market.
The bears
are saying.....
 1.
All the major indices are back under the 20, 50, and 200 day lines; the
50-day averages are also under the 200-day averages.... the so-called 'death
cross'.
Stock prices
are the final arbiter; if they're under key moving averages (and they're
under all of them right now), it's because investors haven't thought they
were worth owning in a while.
To be clear,
whether they're worth owning or not is irrelevant - a falling stock
is a falling stock regardless of the reason; you simply don't want to
own it. And right now, the momentum is just perceived as bearish, so
investors don't want to touch them. (On the flipside, the ever-changing
opinion on this matter has been flip-flopping a great deal of late... the
reason for all the volatility.)
2. Confidence
is falling again, which coincides with the beginnings of recessions and
bear markets.
While one month's
worth of tumble in confidence levels isn't a 'trend' that should prompt
the sounding of alarm bells, all long-term trends start out as short-term
trends. Therefore, the Conference Board's consumer confidence reading as
well
as the Michigan Sentiment Survey should both be on everyone's radar,
as they both sank - precipitously - last month. If we see lower
scores for two or three months in a row, odds are historically good that
things will get bad
 3.
Things are so bad, rather than inflation - which we're supposed to see
materialize thanks to loads of cash - we're seeing deflation, which
is the ultimate sign of a lack of demand.
Despite tons
of cash in the U.S. economic system, and despite stupidly-low interest
rates, inflation has been contained to the point of being alarming. If
consumers and businesses were even half-optimistic (or able), demand and
prices for everything should be soaring. With last month's dip in
the inflation rate from 2.02% to 1.05%, deflation - a bigger problem
than inflation - is a real worry. Why? It coincides with and
typically exacerbates recessions.
Though deflation
doesn't technically occur until the inflation rate turns negative, the
current trend is pointing us in that direction.
The bulls
are saying.....
 1.
Unemployment is falling, even if at a snail's pace.
Unemployment
now stands at 9.5%, which isn't leaps and bounds better than the peak of
10.2% from October of last year, but it is better. The problem on
this front is more one of perception than reality - even the good numbers
are tainted, with nay-sayers saying the numbers aren't actually reflective
of the true unemployment situation. Some of that argument is valid; most
is not.
Either way,
with new unemployment claims finally breaking their stagnation above 440K
by falling to a multi-year low of 429K last week, the employment picture
is still showing glimmers of hope. (At the same time, it's worth mentioning
that continuing claims haven't trended higher since the beginning of the
year. Granted, part of the reason could be the expiration of benefits for
some; that's only a small part of the reason for stability in the number
though.
2. Credit
is becoming more available, again, even if it's at a snail's pace.
We mentioned
back on July
7th that the lending market - which had been pretty healthy for
the last several months - hiccupped a few weeks ago. It was a short-lived
hiccup though, and its rebound was already underway. Thus, the much-needed
consumer was able to spend more freely again. We saw more evidence of the
credit market thaw in the meantime.
Though still
not back to early-2007 levels, borrowers who had not been able to get credit
for quite some time are now able to again.... even in the subprime realm.
Borrowers are also - in general - doing better keeping up with credit loans;
only
5.5% were more than 30 days late as of the end of the second quarter, versus
6% from the second quarter a year ago.
So, qualified
(and even unqualified) borrowers are showing interest in borrowing, while
banks are showing interest in lending again. It's still not 'hot', but
it's not freezing up again either.
 3.
Earnings are getting better (and once again, even if at a snail's pace).
Yes, Google
fell short of earnings expectations, bringing home $6.45 per share rather
than the estimated $6.52. However, that doesn't mean profits shrunk.....
an important reality being overlooked by many. In Q2 of 209, Google earned
$5.36 per share, so profits actually increased. Though that shortfall
hurt GOOG shares in the short run, perhaps analysts were unfairly aggressive
with their outlooks. Eventually, that earnings growth will be reflected
in the stock's price.
A similar situation
materialized for a couple of major banks. Citigroup and Bank of America
both posted higher Q2 earnings results, thanks to significantly fewer loan
losses. Declining revenues, however, spooked investors out of those stocks.
Not that falling revenue is something to dismiss, but which is more important
- the top line, or the bottom line?
Ultimately,
the market is still expected to grow net earnings from Q1-2010 to Q2-2010,
and we should see earnings well above Q2-2009's levels. The question
is Q3 and beyond, but even the trend now says Q3 should still be better
than Q2.
So there you
are - six specific things that will be major indications of whether or
not we're headed into a recession/bear market, or an economic growth phase/bull
market.
Obviously all
six are bigger-picture ideas that can't be pinned down in a day. That's
why we're going to keep tabs on all six (and more) over the coming weeks
...so we can paint a clear picture of what's really going on, and
not get sucked into the short-term volatility that's suckering everyone
else into or out of the market (the folks who are flying by the seat of
their pants, blindfolded).
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
