The numbers tell a story. We are entering this week following six straight weeks with every major average moving up. Most averages have gained about 20% or more from their lows six weeks ago. Furthermore, these moves haven't happened all on their own. They have been responses to not only better than expected earnings but all sorts of better than expected economic data. So, now the question is asked. Are we at the beginning of a sustained rally or is this still a bear market rally? I continue to remain bearish and here's why.
First, while we have seen a rally it has also been very volatile. Significant volatility, like what we continue to have, is a sign that the market is driven by traders not investors. Traders are in it for the short term. Investors are in it for the long term. If this is driven by short term traders, then it's also driven by technical rather than fundamentals. That's a sign of short term up not long term.
Second, while the numbers have been good, in reality they have merely been better than expectations. It isn't as though people are happy with the economic data per se. Rather, they are happy because it isn't as bad as they expected. That's how markets work. We have expectations and then the market responds depending on whether or not things are better or worse than expectations. Well, now we've had a six week run. Now, people expect more of the economy. Now that the expectations are higher there is a bigger likelihood that we won't meet expectations.
Third, the bank earnings are mostly smoke and mirrors. Almost each and every bank that made money, made it through accounting for one time activities like buyouts. That's what happened today to Bank of America. They crushed earnings but deep inside the numbers we find out that most of their earnings occurred by the way their buyout of Merrill Lynch occurred. Remember, they received a whole bunch of TARP funds and so in fact the tax payers funded those earnings.
One analysis has near $5 trillion in so called "toxic assets" that remain on the books of the banks. That's no minor problem and it isn't going away. I have little confidence in the Geithner plan to deal with them, and so in my view, the banks continue to have significant long term structural problems.
Fourth, we continue to lose north of five hundred thousand jobs monthly. What kind of an economic recovery includes half a million in lost jobs monthly. Yes, we've all heard that jobs are a lagging indicator. In other words, the rest of the economy recovers first and then jobs come back. Also, during 2002-2003, the economy began to gear up while we lost jobs. This happened mostly because productivity improved dramatically and so we didn't need more jobs. That's not happening now, not on the scale it was. If half a million people are losing their jobs monthly, I don't see what kind of a recovery we are having.
Finally, from my perch in the mortgage industry, I can tell you that credit continues to be frozen. In my seven years, this is by far the most difficult period to get a loan done. There are long waits. Banks routinely go out of wholesale mortgages. Programs are changing daily, and the guidelines continue to get more and more restrictive. If credit is still frozen, then what recovery do we have? I don't see how we can have any sort of sustained recovery if credit is frozen. That's what we have now, and it is getting worse not better.
I still continue to be more bearish than most. I made the prediction that the Dow would reach 5000 and I am holding to that.
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