Saturday, August 28, 2010

A review of the economy, the stock market and where we are with respect to historical norms

A review of a 2 year chart of the S&P 500 below, shows that on Thursday we broke just below the support level going back to the 2008 lows. We bounced back above it yesterday but indeed it does set up an interesting September and October period. We have been in a relatively tight range now since about June and one way or another we are either going to break below the Red support line or we are going to break above the Blue resistance line. After Fed Chairman Bernanke's speech yesterday, the optimists bet we were going to break above resistance. They succeeded and drove the market back up over the red support line with a gain of 17 points on the S&P 500 or 1.6% and a gain of a whopping 164 points or 1.6% on the Dow, to get comfortably back above Dow 10,000, closing at 10,150. (You can click on any chart here to make it bigger and then go back a page to continue reading)

But the reasoning for this strong rally, which came with an increase in Volume, was that the revised GDP for Q2 wasn't as bad as many had thought, coming in at 1.6%. Fears were that it would come in at 1.3% or less. That was the cause for the celebration. Another situation where bad news (a quarter of only 1.6% growth when we need 3-4% growth) had many fooled into thinking the economy is getting better. It just isn't so, if you look at many of the facts reported this past week. Admittedly, much of the data released this week and last was not good for a recovery. That tells us more about the quarter we are in, than the 2nd quarter, which is long gone. But I suspect, in the coming week or two, many are going to rethink these numbers and realize the most recent data suggests we are getting worse than we were in Q2 and that Q3 may be zero growth to negative growth.

Let's review the data from the past 2 weeks to see where we are with only 30 days or so left before the end of Q3.

The biggest concern was the Initial jobless Claims of 2 weeks ago. They came in unexpectedly at 500K. Expectations were they would have come in at 470K. That's a 30K jobless claims difference. This week they came in at 473K versus an expectation of 476K. Now the headlines were that the number came in better than expected and while that is true, it was only a 3K difference between what was expected and what the actuals were. And they revised that previous week's data from 500K to 504K. No one paid any attention to that revision, as there was not one comment made about that. So overall, is almost 1 million jobs lost in 2 weeks good for the economy for the 3rd Quarter, or not?

Now let's look at the item most affected by people out of a job-- Existing Home Sales-- because they can't afford to pay their mortgages, and are trying to sell these homes before they go into foreclosure. Existing Home Sales came in this week at 3.83 Million Homes. Does this sound like a lot of homes? Let me put it into perspective. It was a decline of 27.2% from the previous month of 5.27 Million Homes. The number shows a huge drop on a chart, as you can see below.

Ok, we've looked at Initial Jobless Claims, and we have looked at Existing Home Sales. Now let's look at whether the Consumer is buying anything, by looking at Durable Goods Orders for July, the first month of Q3. Durable Goods Orders were expected to come in at +3.0% and what came in was a miserly +0.3%. That is a huge difference. Consumers aren't buying and they represent 70% of the economy. Below is what the data looks like charted. Kind of flat, isn't it?

The only thing left to look at is the mood of Consumers. Is it getting better or worse and how does it compare to the past? As you can see from the chart below, we are not at the lows but we did drop a bit and are not where we need to be. Consumers need to be buying products and helping to create a vibrant economy. I could argue that this is a good thing as many were motivated by a spending spree, unparalleled in our history. Changing to a more modest behavior will help people save more and have a cushion, instead of going from paycheck to paycheck to survive. Indeed the Savings rate has been moving up as is shown on the chart below. The Current Personal Savings Rate is 6.2% among Americans. And reporting on my Mini Poll, I asked my readers if they would borrow money from banks if credit were easier to access. 80% said no, with 118 of you voting.

So if you look at all this data, you can come to the conclusion that while we are not at the very lows where we were in 2008, we certainly aren't anywhere near recovery. The only thing showing recovery has been the stock market. In that case, the stock market has moved way beyond reality even if you assume the market is 6 months ahead of current economic data. The reason for this in my view is that companies have achieved their earnings targets. They have done so not by increased revenue form Sales, but rather by belt tightening and layoffs. This is shown by both the Initial Jobless Claims and the official Unemployment Rate not improving, and a case could be made it is getting worse. Besides the real unemployment rate including underemployed is between 20 and 22 Million Americans, as the chart below shows. That is not a good thing. Look at the Blue line on the chart below and notice it isn't dropping at all.

Add to this the political dilemma we are in, with partisanship being led by the Republican Party and Tea Bag movement, enjoined by Democrats, and you have a condition ripe for potential violence. We have never been so polarized as a country in our lifetime. I wrote about this in an earlier post titled, Where are the Adults?! It is related to this, if you haven't yet.

So we enter the most volatile month of the year in a few days and this one will be no different. The only question is how much of a shift will there be? I'm betting it is significant.

Moral of the story: There is BS out there.

Please vote in my new Mini Poll on the right margin. Thanks.

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