Wow! Things must be good again. The stock market just had its best first quarter run in a decade, up 6.4% for the calendar quarter ended yesterday. The U.S. Labor Department said that 216,000 jobs were created in March and the unemployment rate has fallen to 8.8%.
Good times are rolling again. Luxury retail brand Prada says that its net income rose to $355 million in 2010, up 150% from the year before. Most of the luxury-brand stocks are rising again, and this morning we have the NASDAQ saying it wants to buy the NYSE for $11.3 billion. Deal-making is back, big-time.
My gut tells me that this will all turn out to be a bad April Fools’ joke for investors.
Sure, I may be the only economist and stock analyst out there today who is warning investors. But I was also the only one telling my readers to buy gold at $300.00 an ounce in 2000, telling them to get out of U.S. real estate in 2005, and predicting a severe recession in 2007 when the stock market was at a record high. It’s okay; I’m used to going it alone. (Maybe that’s why this investment e-letter continues to gain 30,000 new readers a month.)
Okay. Enough talk. Let’s look at what is unfolding here:
Phase I of the bear market: Bring stocks down to the point where investors bail out of stocks, and create deep negativity and fear surrounding stocks and the economy. This occurred during most of 2008 and early 2009, culminating with the Dow Jones Industrial Average collapsing to 6,440 on March 9, 2009. Only a few months earlier, in October 2007, the Dow Jones was trading at a record high of 14,164.
Phase II of the bear market: Bring the suckers back in. Slowly spread the feeling that “the economy is getting better again” and “the worst is behind us.” Bring stock prices higher, make investors feel they are missing the boat on the economic turnaround. This morning, the Dow Jones sits 91% higher than it did in March of 2009. Greatest turn-around story of our generation! Unfortunately, Phase II of the bear market is close to turning into Phase III.
Phase III of the bear market: Just when the great majority of investors and citizens feel that the economy has fully recovered, pull the carpet from under their feet again. Start bringing stocks back down, some weeks slowly, other weeks violently. Phase III of the bear market is not far off. Ideally, it will hit when the current bear market rally has risen 100% from when Phase I ended, which would be 12,880 on the Dow Jones or five percent to 10% either way of that number.
Please read my “Personal Notes” and “Where the Market Stands; Where it’s Headed” commentaries for today below, as they relate to the above.
Michael’s Personal Notes:
It’s absolutely ridiculous to see so many investors and analysts glued to the newswire this morning waiting to hear the U.S. job numbers report for March. By this point, I’ve trained my readers to be skeptical about the “official” unemployment rate posted by our government.
Keep the following in mind:
1) The job numbers are always revised the following month. For example, this morning the U.S. Labor Department released the March unemployment rate and the “revised” job numbers report for February.
2) There has been stark criticism of how the government determines the unemployment rate. In compiling the “official” unemployment rate, the following are excluded: people who have given up looking for work; prisoners (1.5% of the working population); retirees who have involuntarily accepted early retirement; part-time workers who want full-time jobs; and professional students who stay in school because they cannot find work.
3) Eight million Americans lost their jobs during the 2008-2009 recessions. If the U.S. created 200,000 jobs every month for 40 months straight (which it will not), it would take over three years just to be back where we were before the recession started.
Bottom line: I never trust the job numbers report. As crazy as it sounds, when the U.S. Labor Department said this morning that the official unemployment rate is now 8.8%, I added 75% to that number to get a real unemployment rate of 15.4%. The “underemployment” rate (includes part-time workers who want full-time work and those people who given up looking for work) stands at 15.7%.
Where the Market Stands; Where it’s Headed:
It was an outstanding first quarter for the stock market, with the Dow Jones Industrial Average gaining 6.4% for the quarter ended March 31, 2011. This bear market rally has more steam to blow off. And I’m looking for one more shot above the Dow Jones’ post-crash high of 12,391.29 set this past February.
Yes, I continue to see stock prices rising in the immediate term. But short-term, the market’s internals are looking worse. The bear market rally that started in March of 2009 is getting “long in the tooth,” as they say, and getting close to finishing its run. Part III of this bear market rally, coming to us soon, promises to be a doozy.
What He Said:
“I’m getting very worried about the state of the U.S. housing market and its ramifications on the economy. The U.S. could be headed for its first outright annual decline in home prices on record, adjusted for inflation. And I really believe this could be a catastrophe for the U.S. economy.” Michael Lombardi in PROFIT CONFIDENTIAL, August 2, 2006. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else