GOOD: Here is a summary of the good news, from the fine economist Edward Harrison, who blogs at Credit Writedowns, responding to the employment report from today:
The unemployment insurance weekly claims report revealed that the number of persons filing an initial claim rose 3,000 this past week to 608,000. While these are still very high numbers, they are the lowest since January, suggesting that claims have peaked in this cycle. Nevertheless, jobless claims are not falling back nearly as quickly as they have done in previous business cycles, making it likely that a lack of employment gains will be a drag on growth for months to come. . .
Conclusion? The job market is still weak. The unemployment rate will easily hit 10% in the coming months. As a result, expect consumer demand to be weak. Nevertheless, the job market is marginally improved and most indication suggest this is likely a permanent but slow trend.
In addition, the Conference Board's leading economic indicators both ticked up and had an upward revision for the prior month. Net production is scheduled to hit bottom and turn upward, and one of these days is even likely to grow faster than population.
BAD: Here's some bad news. Following the Peter Lynch approach of relying on what you know, I am increasingly contrarily bearish. To wit:
In the fall of 2007, with the Dow around 14,000, I had dinner with some longtime friends and stock market investors. They asked what I thought of the market. I responded that I had gotten out of stocks in late summer around Dow 13,000, was surprised that prices were higher, and I strongly made the case that they should sell everything. They listened politely.
In the winter of 2009, my friend called me. They had finally sold everything around Dow 7500. They were eager to get back in at Dow 7100; what did I think? (They took my advice and edged in.) So there's leading indicator #1 of a possible major bottom.
A few days ago, I received an Email from someone for whom I manage money as a favor (I am neither a registered money manager nor investment adviser). She is very conservative re stocks, loves residential real estate as an investment, and is happy if I stay out of the market; though over the years I have made her lots and lots of money in stocks.
What did she do? A friend had tipped her that the friend made 5X her money buying AIG at the bottom; and my "client" went ahead and made the first self-directed "buy" in her account, buying AIG and the "new" GM.
Two contrary indicators: one signaled the bull move off the panic bottom. Does the other signal that the likely end of the recession is more than priced in, allowing a rerun of the 2001-3 economic/stock cycle?
The above is consistent with analysts such as Robert Prechter, who called the March bottom and is now calling for another major decline. Too many people munching on the green shoots?
UGLY: I ignore manipulated GSEs or related entities such as JPM or BAC as predictors of the real economy or markets. Much more realistic are real companies that are far away from these games. Some of the mainstays are Wal-Mart, Costco, and P&G. These are all well-run companies. All charts show the 50-day average below the 200-day average, the stock below both averages, and general ugliness. Forthermore, among non-manipulated financial companies, consider Northern Trust (NTRS) and UMB Financial (UMBF), a well-regarded Midwest regional. NTRS just now has returnd the TARP money that was forced upon it; it was not even a stress-tested company.
Conclusion: Perhaps too many small investors know that the economy is turning for at least the short-term health of the stock market.
Instantaneously, consumer prices are dropping but could be rising sharply in 2 years. Cash therefore provides a positive real return after deflation while eliminating the chance of capital loss should rates rise a lot in the short-to-intermediate term. As the economy shows more contemporaneous signs of stabilizing while inflation fails to erupt as the weeks go by, it is easy to see gold prices erode, as well. There is just too much slack and too much New Frugality for prices to explode upwards "tomorrow".
Treasuries: The prior recession ended in fall, 2001; rates hit their first bottom a year later and 50 basis points lower, in fall 2002; and then rates had an even lower bottom in June 2003. (And obviously rates went lower in 2008!) Probably the single best way to play overenthusiasm about the end of the economic downturn amongst stock buyers is exposure to Treasurys of long enough duration to allow price upside should rates drop a good deal.
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