Tuesday, July 7, 2009

Bears Bag More Bulls

Those "green shoots" we heard so much about in April and May have apparently withered and died with the onset of summer. Fact of the matter is that the US economy is being kept afloat by a combination of stimulus money, bank accounting rules changes, gobs and gobs of fresh currency via the Federal Reserve and the burgeoning welfare-government state.

US consumers are alternately tapped out or scared, or both, and the tiny steps the federal government has employed thus far have done little to stimulate the economy. Trade flows are down, sales everywhere have redlined and state governments are on the verge of default. In California and New York, the two largest states by population, tax revenues have not kept pace with projections. Incomes are stagnant and tax increases have not filled the budget gaps which threaten to implode the entire apparatus of those two state governments.

With the economy in such desperate throes, stocks - and, for that matter, all other asset classes - cannot sustain current price levels, especially after the huge run-up from March through June. Stocks fell to their worst levels in two months as the Obama administration begins touting another round of stimulus, the latest trial balloon coming from presidential advisor Laura Tyson.

The problem with more stimulus is that it is exactly what won't work. Job creation programs for small business and fiscal restraint from Capitol Hill and state assemblies are the proper medicine. Government spending, the Keynesian solution, is simply piling up new debt that has to be repaid at some later date. The American people have had their fill of deficit spending, but the voices calling for restraint have been silenced and neutered by congress, the administration and the mainstream media. Instead of solving the crisis with spending cuts, the plain truth is that the government now is in a no-win position in which it has to keep spending to prevent the economy from falling even deeper into a deflationary spiral.

Government payments to welfare moms, disabled persons, and the aged are all that's keeping the US economy from complete collapse and taking down most of the rest of the world economies with it.

In all likelihood there will be another stimulus bill, aimed at selected, favored industry groups with their hands always out, instead of the rock-solid small business segment from which 2/3rds of all new jobs are created. We are entering an even more dangerous phase of the recession cycle: another retreat and round of job cuts is not far off. There simply has been no new job creation for more than 18 months, and with the recession by most accounts now stretching into month 20 or longer, it's time for the big wigs to admit that this one is different, longer, deeper and more serious than anyone has previously thought.

We're hurtling headlong into the most severe crisis in the history of our nation. Worse than the Great Depression and possibly even the Civil War. We are looking at the complete destruction of our financial system, fiat currency, Federal Reserve system and all the rest. The damage done by years of neglect, greed and horrible decisions by the Fed and Treasury is likely far beyond the understanding of even the brightest economists. We are in uncharted territory and the crowd which got us into it - the Larry Summers, Ben Bernankes, Tim Geithners, et. al., are uniquely unequipped to get us out of it.

By this time next year we could see vast segments of the economy completely wiped away, the currency (Federal Reserve Notes) unwanted by foreigners and US citizens alike, and a return to hard cash and barter. Nothing the government has done or will do (unless they have some miracle cure) will save us from currency debasement. It's going to be a long, hard time for many and not over in just a couple of months or years. This depression will last well into the next decade, probably until at least 2013.

On the day, stocks continued their descent back to the March lows. There's almost no doubt that we'll revisit the 6500 level on the Dow before year's end. The Dow has lost some 637 points since its close of 8799 on June 12.

Dow 8,163.60, -161.27 (1.94%)
Nasdaq 1,746.17, -41.23 (2.31%)
S&P 500 881.03, -17.69 (1.97%)
NYSE Composite 5,654.64, -115.36 (2.00%)

Today's trading was a continuation of Monday's downbeat tone, but with more participants on the selling side. Advancing issues were bludgeoned by losers, with declining issues ahead, 4879-1498. New lows continued their recent trend of outnumbering new highs, 76-43. Volume continued to be anemic, but these low trading levels are becoming a permanent feature of the market as many participants have either tapped out or left for either safer or more lucrative venues.

NYSE Volume 1,107,764,000
Nasdaq Volume 2,047,618,000

Oil took it on the chin again, losing $1.12, to $62.93. Other energy-related commodities registered similar declines. Gold bucked the trend with a gain of $4.80, finishing at $929.10. Silver lost 2 cents, to $13.22, just below the point at which old silver coins produce a melt value 10 times their face value.

Stocks and commodities should continue to fall over the next few weeks and continue their downward trajectory into the late summer and fall months. Second quarter earnings from US corporations are predicted to be marginally better than those from the first quarter, and how investors treat the news should provide direction for the overall market. The betting is that most will not be happy with "less bad" at this juncture. Investors with cash on the line will want to see actual improvement in reports. If not, profits will be quickly taken off the table, leading to another round of outright selling in which nobody wants to be left holding the bag. The final week of July and first two weeks of August could be quite disruptive to many portfolios, rivaling the declines seen last fall and earlier this year.

We are headed for a sizable shakeout. Alcoa (AA) starts the earnings parade on Wednesday.

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