The Dow did something today, I must admit, I thought could not be done and that is cross the 10,000 mark. Now the question is whether this is "real" or whether this is fabricated by cheap money and a psychological trend. One has to ask what has fundamentally changed in the economy to cause this massive up tick in the Dow? I submit not much has changed and that is why this is, in my mind, a "micro bubble" within an overall very bearish market.
The Pragmatic Capitalist writes an article entitled: The Two Ways to View the Current Rally. Essentially, the author submits you can look at the rally as a purist in which case you would say the market is forward looking, it is outlooking growth and prosperity and the run up in value is an expected and normal part of the market dynamics. It is a natural response to what he calls a market semi - crash from 2007 to 2008.
The other way to look at this is to say that nothing really fundamental has changed in the economy. The author quotes retailers who believe this is going to be a disastrous Christmas season as we have become a nation of savers. The author believes the bear market is the overall trend and it has just been "usurped" in a way by the cheap money flooding from the Fed. The Fed is essentially creating another asset bubble in the stock market.
Except this time, the tools they used (printing money, free money, and very high deficits) have bankrupted the economy. Sooner or later they will have to pull back (an "exit strategy" - a term borrowed from war). When they do, the market will collapse. The question is do you believe the collapse will be rapid and therefore a lot of people will get caught, once again, holding the bag or will it be gradual? That is the only question. Whether it crashes from its current levels or not is not a question. That is a fact. It will.
At CNNMoney, they caution us: Don't Trust Dow 10,000. Why? Mainly because of what I have been saying for a while now which is no recovery can truly occur and be sustained without job recovery. Although we are no longer in the abyss of losing 1,000,000 jobs here and there, we are still losing jobs. It is a fact that unemployed people do not spend money. When the consumer makes up 70% or so of the spending in this Country, if the consumer shuts the pocket book then the economy starts wobbling.
The article also cautions us to not over react to "good" early earnings reports for the third quarter. Most of the "growth" in earnings is coming from cost cutting and not revenue growth. While this helps companies get through bad times, it is not sustainable. You cannot "cut yourself" into prosperity. The author quotes:
"The companies are cutting fat, and in many cases cutting bone and muscle. There's no organic economic growth there," said Yamarone.In conclusion I just cannot see any evidence of sustained economic growth that would justify this movement of the stock market. I think market psychology is now ahead of actual market fundamentals and it will be painful when this corrects itself; it will correct itself. The CNN article wraps it up nicely:
Barry Ritholtz, CEO and director of equity research at Fusion IQ, said that despite their reputation as a leading indicator, the stock markets do a terrible job forecasting the economy.
"Beware of economists pointing to the stock market," he said. "The rallies tend to be false starts because it's a reaction to what came before. The sell-offs tend to be overdone because, as they gain momentum, they lead to panics."
You Can Resist Even if You are In The Military!
