Stock Market Says Economy Not as Bad as It Seems

This is one of the more important columns I have written so far this year. And considering it’s a Monday and this is a somewhat longer than usual article, I hope you do take the time to read this important message.

I’m somewhat of a contrarian. That’s likely why you read my PROFIT CONFIDENTIAL columns. Here are four contrarian examples you may have followed in these columns, which made or saved investors some money.

When real estate was booming with no end in sight, the Dow Jones U.S. Home Construction index starting turning down in the summer of 2005, I took the contrarian view and made the announcement that the real estate boom was history… even as prices were still rising. Today, the U.S. home property market is in its deepest bust of this generation.

Back in 2002-2003, amid my growing concern for the viability of the U.S. dollar, the gold charts told me that the yellow metal had bottomed out and was starting to rise. I told whoever would listen to get into gold. The metal was $300.00 an ounce back then and every time it gained $100.00, I would say to buy more. Today, gold bullion is at $1,000 an ounce.

In 2006 and 2007, I was the first (that I know of) to predict that oil would reach $100.00 a barrel. I remember my phone ringing with customers and analysts telling me I didn’t know what I was talking about… that the spike in oil prices was because of traders pushing the price higher. Today, oil is at $110.00 a barrel.

Finally, in 2007, long before the trouble in the credit market, I came out and said that we would be in a recession in the first quarter of 2008. And that’s exactly where we are today.

No, I’m not a magician. Nor am I tooting my horn, as I am a very humble market watcher. The fact is that I’ve spent most of my adult life fascinated by the markets, studying them almost to the point of an addiction. Nothing makes me happier than to guide my readers to ideas, opinions and forecasts that come to fruition and help people.

In the days that follow, I will comment on the unprecedented Bear Stearns (NYSE/BSC) fiasco. But my message of today is important and I wanted to get it out to you ASAP. Here it is.

The stock market: I’m a huge believer in it being a leading economic indicator. There is no doubt that when the popular Dow Averages hit their lows in 2008, they were looking ahead to the problems we are experiencing today, and that’s why they hit those lows back in January.

My fascination is that the general stock market is not faring worse given the almost daily flow of negative financial news. We have some very disturbing news coming out:

The Federal Reserve keeps reducing interest rates, but mortgage rates are actually rising, because banks want to make back the money they have lost. A 30-year fixed mortgage is 6.37% compared to 5.5% in January. Bear Stearns has $10.0 billion in its market value wiped out. This is the first time that I remember the Fed bailing out a non- bank company. We are in recession. The U.S. Commerce Department said that Thursday retail sales fell 0.6% in February, while analysts had been expecting a small increase. Over 100 subprime lenders have either closed down or gone bankrupt. Totals losses stemming from the subprime crisis have reached about $200 billion. U.S. home foreclosures filings surged 60% in February. Housing prices continue to fall, as foreclosures continue to rise. According to the Mortgage Bankers Association, late payments on mortgages are at a 23-year high.(I will talk about all the above individually in more detail in the coming days) But despite this almost daily barrage of negative financial news, the stock market is not reacting as negatively. The Dow Jones Industrial Average is still above its January low. While the Dow Jones Industrial Average trades at about 15 times earnings, the S&P 500 is still trading at 16.4 times earnings. One day last week, we actually had the Dow Jones U.S. Home Construction Index jump 8.7%!

In my humble opinion, the stock market is looking ahead as a leading indicator and saying that the economic situation is not as bad as it seems. I realize that this may be hard to believe given the negative news about the economy out there, but historically stocks do not trade at 15 to 16 times earnings when the market is worried about the economy.

Does the stock market know something we don’t? Unless I see stocks starting to fall more rapidly in the coming days and weeks ahead, my answer is yes, the stock market sees better days ahead for the economy: It is actually discounting the worst as being behind us for the U.S. economy.

As always, I am watching the charts of the popular market averages and will keep you posted as things change. But for now, unless those January 2008 lows by the popular Dow Jones Averages are decisively broken, the stock market actually sees better times ahead for the economy.