Economic Recovery: Trouble in Paradise

Looks like trouble in paradise… We hear and read all kinds of reports telling us that the economy is improving, yet yesterday the Conference Board reported that its index of U.S. leading indicators fell in April for the first time after nine consecutive months of gains. And that's just the tip of the iceberg! Looks like trouble in paradise…

We hear and read all kinds of reports telling us that the economy is improving, yet yesterday the Conference Board reported that its index of U.S. leading indicators fell in April for the first time after nine consecutive months of gains.

And the National Association of Realtors said that sales of existing U.S. homes “unexpectedly” fell in April. (Who are they kidding with the term “unexpectedly” in their release? Aside from millions of homes already foreclosed upon, over five million American homes are either in the foreclosure process right now or are at least 30 days late with their payments on their mortgages.)

On top of the above, the Federal Reserve Bank of Philadelphia reported last week that its general economic index fell last month and sits at its worst level since October 2010, about the same time the yields on U.S. 10-year treasuries started to rise.

Then comes the release of the Federal Reserve’s April 26 to 27 meeting minutes, in which we see that the majority of policy makers discussed how to unwind the Fed’s monetary stimulus.

The sequence of events consensus: stop reinvesting proceeds from maturing securities, then raise interest rates, and then sell assets. (By the end of next month, the Fed will be sitting with $2.6 trillion in securities on its books.) Great plan, but I don’t think they’ll be able to execute it for a while.

With the cracks in the economy I’ve listed above (leading indicators falling, home sales still falling, general economic index falling), the Fed can talk all it wants about unwinding its unprecedented monetary stimulus, but it likely wouldn’t be able to take any such action until 2012, unless inflation gets out of control.

I’m still in the camp that believes we’ll likely see a new version of the expiring QE2 before we see the Fed withdrawing monetary stimulus.

Where the Market Stands; Where it’s Headed:

Well, we’re in the home stretch. As we enter the final full trading week of the year, the bear is alive, well and looking forward to summer. But will the bear market make it through the summer? That is the real question.

The bear market rally that started in October 1934 lasted until August 1937—35 months—and took the Dow Jones Industrial Average from a level of 90 to 185, a gain of 106%.

The bear market rally that started in March 2009 has lasted 27 months so far and has resulted in the Dow Jones gaining 96%.

If the current bear market rally follows the same path as the bear market rally of 1934 to 1937, we have eight months left before the next phase of this bear market gets underway, which brings us to the end of December 2011. I have a feeling that this bear market will not make it that long.

What He Said:

“A Stock Market’s Obituary: It is with great sadness that we announce the passing of the Dow Jones Industrial Average. After a strong and courageous battle, the Dow Jones fell victim to a credit crisis and finally succumbed on Friday, October 3, 2008, when it fell decisively below the mid-point between its 2002 low and its 2007 high.” Michael Lombardi in PROFIT CONFIDENTIAL, October 6, 2008. From October 6, 2008, to November 27, 2008, the Dow Jones Industrial Average experienced one of its biggest two-month losses in history.