Economic
Recovery Still Not In Sight!
By Sy Harding, editor
Street Smart Report Online
In
response to media reports that he had passed away, Mark Twain
replied, "Rumors of my demise are premature." I suspect
that is the case with the current groundswell of confidence that
the economic slowdown has already reached its end.
Sure there are encouraging
moves underway aimed at sparking a recovery, but the economic
numbers just keep getting worse.
Over the last five
months, the Federal Reserve has treated the economy and the market
to the most aggressive sequence of interest-rate cuts seen in
two decades, in an effort to prevent the slide from winding up
in recession. For its part, Congress has approved an unprecedented
across the board income-tax refund of up to $300 for individual
consumers, up to $600 for a couple, which it hopes will not be
saved or used to pay down credit card debt, but will be spent
on something that will get products moving out of factories and
warehouses again.
There are certainly
no signs of panic among investors, in spite of $4 trillion of
stock valuation having disappeared from the stock market, and
their portfolios. There's no sign of panic among consumers in
spite of the reverse `wealth effect' of the bear market and the
faltering economy.
But these once in a
lifetime moves by the Federal Reserve, and Congress, sure do
look like panic on their part. At the very least it indicates
they don't believe the popular opinion that all is so quickly
okay again.
Are they aware of something
ominous on the horizon that hasn't shown up yet on Wall Street's
radar screen, or just concerned that we're now only one month
away from the beginning of the second half of the year? As last
year drew to a close Washington and the Federal Reserve assured
the country that although the economy might slow further in the
first half of this year, it would be in recovery mode by the
second half. Obviously, time is running out on that scenario.
Meanwhile the economic
numbers move in the opposite direction.
It's no secret that
economic numbers related to the housing and auto industries are
of particular importance, as those sectors traditionally lead
the economy into and out of recessions. That makes sense. Both
sectors have a very broad impact on the economy. When housing
thrives, its good times embrace everything from lumber and cement
production to furniture and fabric makers, from mortgage lenders
to insurance companies. When the auto industry thrives, its prosperity
reaches out to everyone from steel and aluminum producers to
parts suppliers, freight haulers, and auto salesmen. The downside
is that when either is in the dumps their misery also spreads
to the rest of the economy.
While plunging auto
sales last winter led the economic slowdown, home sales have
held up surprisingly well until recently. But latest numbers
show that new home sales plunged 9.5% in April, while the sales
of existing homes declined 4.2%. Added to declines in mortgage
applications, the numbers are raising concerns. Mark Vitner,
economist at giant First Union Bank, says, "I think housing
has peaked for the year." David Lereah, chief economist
at the National Association of Realtors, said of recent housing
numbers, "These numbers raise concerns that the housing
sector may have topped out in March, and any slowdown in the
housing sector does raise concerns for the future of the economy."
On the employment front companies have been scaling back production, closing plants, and laying off workers due to declining sales. In addition to sharp cutbacks in the auto industry, the slowdown has been particularly hard on the tech sector, which had substantially over-produced for the already saturated market for PCs, cell phones, internet connections and the like.
Auto industry analysts expect auto sales for May to show continuing declines in spite of aggressive rebates and financing by automakers. The tech sector continues to warn of problems it had not foreseen. If the housing market has now topped out, that's not good news for a whole range of companies that have not yet been affected by the slowdown.
When we told you in late March to expect a significant rally, we also predicted that by the time it was over investors would be convinced the economic slowdown and bear market were history, but that although significant, it would be a bear market rally from which profits should be taken quickly in anticipation of a resumption of the downside.
The market's next problem will be the `earnings warning period' that's about to begin, when companies will reveal how this quarter, which ends at the end of the month, is shaping up, and will project the outlook for upcoming quarters. Given the continuing deterioration of economic numbers it's hard to envision that those projections will encourage the current thought that an economic recovery is already underway.
Editor's Note: Sy Harding is president of Asset Management Research Corp., 169 Daniel Webster Hwy., Meredith, NH 03253, publisher of The Street Smart Report, 1 year, 17 issues, $225 (now in its 13th year of exceptional market research for professionals and serious investors) and The Street Smart Report Online at www.StreetSmartReport.com. Mr. Harding has been consistently ranked in the Top Ten Timers for years. He authored the book, Riding the BearHow to Prosper in the Coming Bear Market, $12.95. In Riding The Bear, Mr. Harding reveals that while many Wall Street pros urge investors to hold steady during market declines, these same Wall Street pros and institutions sell quickly at the first sign of a market turning. He explains in plain English how the market reacts, how cycles work, and how to take advantage of them to hold onto your bull market profits and actually increase them during a bear market. Available at most book stores, amazon.com, barnesandnoble.com or StreetSmartReport.com.
