Thursday, July 16, 2009

Misleading Headlines Make Today's Move Up in the Stock Market More Suspect than Usual has what sounds like a good Roubini reversal to help stocks in U.S. Stocks Rise as Roubini Predicts Recession to End This Year . Today at an investors' conference in New York, Dr. Roubini said that the economy's freefall is over and was quoted in a different Bloomberg article as follows: “We should continue with fiscal stimulus and we might need a second one,” Roubini said. While the worst of the crisis is over, there’s still a “meaningful amount of weakness” in labor markets, industrial production and housing, he said. . He has said this sort of thing many times. Here is what he wrote what some on the Street think may be an eternity ago, though it was actually only two days ago: Mounting Job Losses Will Hurt Consumption, Housing, Banks’ Balance Sheets, Public Finances and Lead to Protectionist Pressures. The Roubini article begins as follows:

Recent data suggest that job market conditions are not improving in the United States and other advanced economies. In the U.S., the unemployment rate, currently at 9.5%, is poised to rise above 10% by the fall. It should peak at 11% some time in 2010 and remain well above 10% for a long time. The unemployment rate will peak above 10% in most other advanced economies (especially Europe and Japan), too, where social safety nets are broader and thus leading to less short term job losses and pain, but where the effects of the crisis on growth have been even more severe than the U.S.

Here is the conclusion of Roubini's post:

Little wonder, then, that we are now witnessing a significant correction in equity, credit, and commodities markets. The irrational exuberance that drove a three-month bear-market rally in the spring is now giving way to a more sober realization among investors that the global recession will not be over until year end, that the recovery will be weak and well below trend, and that the risks of a double-dip W-shaped recession are rising. The alleged green shoots turned to be yellow weeds and – unless policy makers figure out a sensible medium term exit strategy for monetary and fiscal policy – they may turn into brown manure.

The Bloomberg headline completely misrepresents Roubini's current views.

The second topic today relates to the unemployment numbers. Supposedly these were good, with seasonally adjusted claims dropping a lot. The problem is that the raw data show a substantial worsening of these claims, consistent with both anecdotal and data-driven evidence that the economy is at best stalling and at worst is dipping downward again. Here is the data (compliments of Credit Writedowns for the circles:

Anyone can easily see that the NSA initial claims have risen from 559,857 on Jun 27 to 667, 534 on July 11.
Insured unemployment rose apace. The entire release can be found by clicking HERE.

The seasonal adjustments are off primarily due to the extraordinarily early cutbacks at the auto manufacturers, and potentially at some early hiring there as well.

Here are some other headlines from today:

Commercial Paper Falls Most Ever as ConEd Sells Bonds (Update1) The U.S. commercial paper market, the cheapest source of corporate cash, is shrinking at a record pace, raising the cost of capital for borrowers from Consolidated Edison Inc. to Kellogg Co.

Schumer Fees on Insurers May Deplete Profit, Push Up Premiums A Senate demand for at least $75 billion in fees on U.S. health insurers over a decade may raise premiums for people who have insurance while erasing much of the $13 billion in annual profit earned by the industry.

Credit-Card Defaults May Rise as Tax Refunds Wane, Analyst Says Bank of America Corp., American Express Co. and JPMorgan Chase & Co. may face further credit- card defaults as benefits from income-tax refunds wane and unemployment rises, analysts said.

Accounting changes at the consolidating Big Finance subsidiaries of the Federal Government mean as much as the intergovernment bonds transfers that supposedly are going to finance Social Security payments for future retirees. Facts are stubborn things and don't look so hot.

If the stock market has definitively ended in the first week of March, it means that the worst economic and financial crisis since the Great Depression ended with a stock market downturn roughly half as long as the duration between the March 2000 peak and the winter 2003 true stock market bottom, which was associated with the mildest possible recession.

Econblog Review's viewpoint is that the ongoing worst post-Great Depression fall in profits and dividends, and the first fall in total nominal wages since then as well, along with an increasingly less pessimistic Fed still predicting that the economy needs ultra-low interest rates for an extraordinarily long time, argues for caution amongst investors.

The stock market really does not know a lot about the future. Consider: 10 months ago, AIG sold for 40 times what it sells for now. CIT and Fannie Mae sold for 30 times their current prices. In fact, CIT sold for 10 times its current stock price within the past 3 months, losses and current conditions notwithstanding.

In the meantime, breaking news is that IBM has just issued its quarterly report. Sales missed lowered estimates by $300 M and were 13% or so below 2008 sales. Earnings were up due to cost-cutting. This is the same old story. In a bear market with truly excessive pessimism, the same IBM report would be taken negatively and the brave ones would be the buyers. Now, the stock is up post-market on the news and the braver ones are the sellers (if they are long the stock) or the short sellers.

Meanwhile, Wal-Mart and McDonald's cannot get out of their own way. These stocks reflect the average U. S. consumer's buying power (WMT) and the U. S. and global consumer's buying/eating power. Should Wal-Mart break to a new low if stocks mosey downward this summer, that could be a very bad sign.

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