ATLANTA— The Dow Jones Industrial Average (DJIA) eclipsed 10,000 yesterday, a new milestone that for many shows the economy is well on its way to recovery. In fact, some might even be suggesting the Obama stimulus package has worked! But man, do we still have a long way to go, in my mind.
Here are my top reasons why I don’t believe this current bear-market bubble, and why I think there are darker days ahead for the market as we head into 2010:
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From a purely mathematical calculation standpoint, it doesn’t hurt that two of the worst performing stocks on the DJIA, CitiGroup and General Motors, were replaced this summer with the much healthier Cisco Systems and Travelers Company. This makes comparisons of the current DJIA to ones in previous years just a little fuzzier (though admittedly this is not a primary reason the numbers look better).
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Companies continue to beat earnings estimates, which is boosting the market higher, but they also continue to do so because of cost-cuts, not top-line revenue growth. You cannot keep cost-cutting your way to prosperity. At some point, you’ve got to expand your business. Google cost-cuts and earnings, and see what I mean.
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The economic headwinds are still precarious.
a. The dollar is sinking fast as a result of fast declining demand for the greenback. The Federal
Reserve is going to keep interest rates extremely low indefinitely, which means this will continue. Already, the cheap dollars are at least partly to blame for the run-up in U.S. equities and commodity prices. But long-term, this is tender for inflation. I am with Jim Rodgers in believing we will see big-time inflation in the next several years. In my mind, we will be talking “Obamaflation” by the 2012 election. Dollar debasing will have disastrous consequences.
b. U.S. deficits are enormous and will continue indefinitely, as a result of our reckless spending. The only solution Democrats seem
to have for this is much higher taxes on just about everything. This is poison either way. On the one hand, too much borrowing will eventually drive up interest rates. On the other, too much taxing will stifle the recovery. I think the combination of the two will begin to wreak havoc on the economy by the end of next year.
c. Commercial real estate is going to tank in 2010, which will put enormous pressure on regional and local U.S. banks. The credit crunch will continue and could get worst.
d. Unemployment is going to stay high throughout 2010, putting more people into foreclosure, etc. This could even put yet another government mortgage entity, the Federal Housing Authority, into a bailout situation by the end of 2010.
My advice is don’t hop on the bandwagon. When markets go up this far, this fast, something is amiss. I’m not a savvy investor, but if I had a lot of money at play, I’d start positioning myself to short the markets over the upcoming months. It could get ugly again for a lot of people. When an economy becomes so dependent on government policy to sustain itself, as ours is at present, that is never a good sign.
My uneducated prediction continues to be that the DJIA falls back down to the low 8,000 range sometime in 2010.
TennesseePaul
Stephen VanNuys
Brooklyn Daniel
The Freedom Thinker
You mean another stock bubble caused by the intervention of the Fed and poor government policy is what is happening here? Shocking!!
Yep – no doubt. I guess the Austrian school folks would call this just about every time. Inflate/deflate, inflate/deflate- to the detriment of us all!
I figure the wheels fall of altogether on the next round. Not sure if you have seen it but they are saying China may be experiencing a real estate/housing bubble as well nowadays.
It is going to be an interesting ride.
Yeah – saw that. Their equities markets up 100% or something ridiculous like that?
I am a believer that China has got to hit a wall at some point in the near future (meaning, in the next 5 to 10 years). I think they’ve freed up some parts of their economy and they are reaping the benefits. But at some point the statists will foul it up. “State-directed capitalism” is an oxymoron (even if it is the ideal for American leftists). The state always proves to be a poor predicter of demand patterns, and accordingly grossly misallocates resources. I think right now, they are flooding the markets with ultra-cheap credit, and are finding their people and businesses scooping it up much faster than anticipated, resulting in these bubbles they are seeing.
As long as you have workers living pretty much as slaves and little regard for human rights or the basic value of life. They could always go gangbusters from a financial sense, not a quality of life perspective.
I’m a contrarian to an extent as well. I don’t buy into this growth bubble but I thought Google’s earnings were spurred by top line revenue growth? I thought revenue was up 6% which is a sign of business spending on marketing.
Even top line revenue growth though (although a good sign for corporations and financials) doesn’t change the fact that unemployment is still growing, the dollar is being destroyed, deficit’s are growing, and real estate never corrected like it needed to and commercial real estate has been propped up.
The emperor is now being shone to not be wearing any clothes – Bank of America’s loan losses are just the first of many more to come.
What is sad is that the fact situation surrounding this has been known for quite a while. So – are restatements needed?
Certainly there are some companies that are getting some top-line revenue growth, I definitely don’t intend to talk in absolutes.
But my understanding is that a significant chunk of companies are still relying too heavily on cost-cutting to make earnings.
Probably some capitalizing op expenses too
True indeed.
Baby got you up? Pretty early comment back for a Saturday.
I’m up b/c I’m increasingly finding I cannot sleep as long as I did when I was younger. Was exhausted last night, so went to bed early. Now here I am, 6:30 AM and out on the Missive and other blogs on our blog roll…
Yes, baby had me up. He punched me in the face and told me to feed him. I abided. Today’s youth – they scare me.
[...] — Adding to the recently posted articles by the very discerning Stephen Van Nuys regarding the wackiness of the recent stock market rally and the long-term implications of employment in this country it is apparent there are some major [...]
Well- I told my theories above on the market to some friends at work last week and they sold their shares and took their profits on Wednesday, after our conversation. They think I’m a genious now that the market finished last week under 10,000. Ha! I’m no genious, but I still think this thing is headed down. People are selling the news, taking their profits, and the negative headwinds are starting to blow a little stronger…