A Bad News Bear WIth a Hot Paw

Reuters is reporting that U.S. likely to lose AAA rating: Prechter.

I repeat this because Mr. Prechter has been hot the last two years. He called a stock implosion related to lax lending practices. More impressive, he went tactically very bullish at the stock market bottom this winter. He is now calling for an end to this Potemkin rally (my term). Here is the article:

Technical analyst Robert Prechter on Monday said he sees the United States losing its top AAA credit rating by the end of 2010, as he stuck by a deeply bearish outlook on the U.S. economy and stock market.
Prechter, known for predicting the 1987 stock market crash, joins a growing coterie of market heavyweights in forecasting the United States will lose its top credit rating as the government issues trillions of dollars in debt to fund efforts to bail out the economy.
Fears about the long-term vulnerability of the prized U.S. credit rating came to the fore after Standard & Poor's in May lowered its outlook on Britain, threatening the UK's top AAA rating. That move raised fears that the United States could face a similar risk, with the hefty amounts of government debt issued in both countries to pay for financial rescues causing budget deficits to swell.
Prechter, speaking at the Reuters Investment Outlook Summit in New York, said he sees investors' confidence in an economic rebound fading, a trend that will drag the S&P 500 stock index .SPX well below the March 6 intraday low of 666.79 by the end of this year or early next.
"There will be a leg down in stock prices, and it will affect all other areas," including corporate bonds and commodities, said Prechter, who is executive officer at research company Elliott Wave International, based in Gainesville, Georgia.
Prechter, who is known for his bearish views, has repeatedly forecast a steep decline in stocks this year, even as the stock market has rebounded from 12-year lows set in March as optimism about an economic recovery has risen.
Despite the government and Federal Reserve's massive rescues for financial companies and securities markets, Prechter expects credit markets to clam up again as they did in the first phase of the global financial crisis and for the U.S. economy to sink into a depression.
Although U.S. banks' recently passed government "stress tests" that assessed the adequacy of their capital levels to absorb losses and have been able to raise some capital in debt and equity markets, "the banking sector is in severe trouble," as more loans turn bad, he said.
The economy "is obviously heading toward a depression," despite the government's efforts to dodge one, said Prechter.
Federal Reserve Chairman Ben Bernanke has not averted a re-run of the 1930s Great Depression, even though investors are becoming firmly convinced that the Fed has avoided disaster and that the economy has hit bottom.
"It's the next leg down (in stocks) that will make it clear that these things are not true," Prechter said.

DoctoRx here. Prechter is also bearish on gold prices for now and predicts more deflation, not accelerating inflation. He joins Nouriel Roubini in not fearing inflation, in expecting a "below expectations" economy, and a poor stock market.

The average severe bear market lasts at least two years. The worst was 43 months (1929-33). The mild recession of 2001 was associated with a 29-36 month bear market, depending how you count.

For this one to have ended after about 16 months would be unusual. No matter how many technicians and talking heads tell the world that the worst is behind us, that A) can only be known in retrospect and B) may be true only temporarily, just as the 1974 stock market low was substantially undercut in inflation-adjusted terms by the prices present all throughout 1982, despite bull and bear markets in the 7-8 intervening years.

For all their troubles, Treasury yields could challenge their lows of December if we merely get what Roubini is predicting, which is a technical economic recovery that nonetheless feels like a recession. For now, cash is king.

Copyright (C) Long Lake LLC 2009

Here are several economic-financial related charts and other data presentations. The first shows the current unemployment rate as compared to the (recently-derived) "baseline" case and "more adverse" (low probability event, allegedly, according to the Fed) for the national unemployment rate.

Whoops!

Here's another example of forecasters getting it very wrong, and recently, from the Philadelphia Fed:

First Quarter 2009 Survey of Professional Forecasters
Release Date: February 13, 2009 (click on the hyperlink, then click on "First Quarter 2009):

An upward revision to the forecast for the unemployment rate accompanies the outlook for economic growth. The forecasters predict that unemployment will rise from 7.8 percent this quarter to 8.9 percent in the fourth quarter of 2009. Previously, unemployment was forecast to rise from 7.0 percent to 7.7 percent over the same period. Unemployment is expected to average 8.4 percent this year and 8.8 percent in 2010. On the jobs front, the forecasters project job losses in the current quarter at a rate of 548,400 per month. They also see a reduction in jobs of 311,200 per month in the second quarter and 202,100 in the third quarter of 2009.

Both of the above were found at Mish's post from today.

Let us examine the facts. Also thanks to CR, consider Regulators Eye Pay Czar:

A Bankrate Inc. survey also released today showed 70% of survey respondents said they felt secure in their jobs despite the rising joblessness. Of those remaining at their jobs, 54% responded they’d received some sort of pay reduction: pay cut, reduced hours, reduced work days, suspended raises, bonuses or 401K match, or a combination of these.

So, the unemployment rate and pace of job losses are well above those projected just four months ago. Deflation in job benefits is proceeding. There is no inflation except in commodities, which are speculative.

Those seers such as Nouriel Roubini and Mish who stated in Q1 2009 that the economy would underperform the consensus forecast have been proven correct. The public is now probably more optimistic than the facts support. Others such as Robert Prechter and Paul Lamont who two or more years ago foresaw the recent, ongoing severe "debt deflation" and then a stock market pop upward beginning a few months ago are fearing a major new stock market downturn, perhaps after more optimism pushes stock prices up higher.

Amongst stocks, there are some that do not reflect the horrible bear market. Here are two charts that reflect successful businesses.

That the price of a security has fallen does not tell you that it has fallen too far. On the other hand, a security that has resisted the fall of most others tells you a lot. If its price has risen consistently over the years and has other fundamental characteristics that you like, it is not determinative as to whether one wants to own that security whether the prices of other securities are attractive.

Right now, the stocks of large consolidators such as Teva (generic pharmaceuticals) and deep discounters such as Ross Stores (clothing), the long term price charts of which are shown above, reflect businesses that are thriving and can continue to grow long-term in any economic environment (excluding complete and utter devastation). They pay dividends equal to money in the bank and have low double-digit price-earnings ratios. While their stock prices will certainly fall if the stock market makes new lows, over a full economic cycle, they are likely to be profitable investments and provide a different sort of hedge from inflation than gold.

Finally, regarding gold, I have previously commented on it as unexciting from a chart pattern. If an increasing percentage of the public remains sold on a Goldilocks scenario and continues to pay rising prices for risky assets, then the price of the perceived safe haven of gold is likely to suffer.

Short term, gold is unexciting at best.

Meanwhile, sentiment remains horrible or even beyond horrible for intermediate to long-term U. S. Treasury bonds. Yet a Goldilocks scenario for stocks has to imply diminishing counter-cyclical deficit spending and acceptable inflation, and thus cannot mean a durable bear market for Treasuries soon.

Copyright (C) Long Lake LLC