Friday, June 3, 2011

The U.S. Stock Market and the U.S. Economy - UP, DOWN, UP, DOWN, blah, blah, blah

The following is an excerpt from an article, authored by Adam Samson of Fox Business News, published on the web at 8:31 this morning…the title of the article was….

“Futures Slide on Disappointing Payroll Data”

As of 8:31 a.m. ET, Dow Jones Industrial Average futures were down 117 points to 12,121, S&P 500 futures slipped 13.4 points to 1,299 and Nasdaq 100 futures fell 26 points to 2,300.

The state of the economic recovery has been a major theme in recent trading sessions. A flurry of disappointing economic data released this week has sparked concern that the recovery that seemed robust late last year might be hitting a soft patch.

The monthly non-farm payroll report is considered an important gauge of the health of the labor market and the broader economy. The number of non-farm payrolls increased by 54,000 in May, far shy of analysts' estimates of a gain of 150,000. The unemployment rate unexpectedly ticked higher to 9.1% from 9% the prior month, higher than the 8.9% Wall Street forecast.

Many economists blame two factors for the sudden downshift in the pace of recovery: high energy prices and disruption to the automotive sector caused by the tsunami and earthquake that devastated Japan in March.

Fears of a slowdown have taken a toll on Wall Street, with the blue chips shedding more than 300 points in the last two sessions. Indeed, if the Dow doesn't tack on 193 points on Friday it will be headed to its first five-week losing streak since 2004.

Joel’s comments:

Analysts were expecting an increase of 150,000 jobs (non-farm jobs) for May, but the number came in at 54,000. Goes to show you how much the analysts know!

As to the “two factors” that “many economists” blame for the sudden downshift in the pace of the “recover” (a “so to speak” recovery, I might add) – high energy prices and the tsunami/earthquake in Japan – I disagree that those are the two main factors. Continuing problems in the real estate economy in the U.S. are the driving force behind the slowing pace of the economy. We’ve got to get the real estate industry (A/E/C, residential and non-residential) back on track. And, tight credit conditions are exacerbating the problem. The Fed made it cheap for banks to borrow, but lenders are still very discriminating and tight-fisted; lenders are, in effect, sitting on the money. And, our elected officials have yet to figure out how to legislate a fix to the lending problem. Before the crisis, lending was way too lax. Now, rules are being discussed (and are probably already in effect) that would make lending way too tight. We have a tendency in the U.S. of going to one extreme, then, when we find that that extreme is stupid and that it caused a big problem (the crisis), we reverse course and head for the complete opposite extreme! Common sense cries for finding an answer in the middle.

We are still in the situation where half of the country’s financial analysts are predicting a continuing “up-trend” in the U.S. stock market and where the other half are predicting the exact opposite. And, these idiots get paid for their guesses. Which are just as good as my guesses (and I don’t get paid for mine.)

Which are just as good as my guesses (but, I don’t get paid for mine.)

Finally, here’s another article I just found; the guy who wrote this article is one of the financial experts who believes strongly that the current downslide in the market is simply a minor blip and that the market will recover in a very, very robust way…….

10 Reasons the Dow Will Hit 20,000

SMARTMONEY JUNE 2, 2011, 2:33 P.M. ET

James Altucher on why the Dow will soar.

“The market fell like a brick on Wednesday (June 1st). People can't handle any piece of bad news without saying "this is the big one." We have visceral memories of May through July 2010, just a year ago. We have visceral memories of 2008, when it seemed like no end was in sight. Nobody wants to be caught trying to catch that knife with their mouths like in a circus act. You get cut up that way, and the blood isn't pretty.

But it's not going to happen. Even God took one day to rest. The market every now and then needs a day or two to rest. Maybe even more than a day or two.

But over the next 12 to 18 months I expect to see Dow 20,000.

Here are some reasons:

1) QE2 has not started. WHAT? You might say? I thought not only has it started last November, it's about to end? Not true at all. Federal stimulus takes 6 to 18 months before even one dollar hits the U.S. economy in a meaningful way. So expect that $600 billion or more to start hitting toward the end of 2011.

2) Then why is the market going up? One major reason is because we are in the third administration of George W. Bush. The tax cuts got extended. This signaled that Barack Obama was going to pay lip service to his constituents while still keeping an eye on the stock market. The guy wants to get re- elected, after all.

3) Multiplier effect. Once the stimulus hits the economy, it's not just $600 billion. It's probably more like $3 trillion. How come? Because when you buy that coffee with $1 at the local deli, what does that deli guy do with it? He buys a newspaper? And then that guy buys a donut. The multiplier effect is up to 10X. To be honest, I'm more worried about a bubble in 2013 then I am worried about a economic slowdown.

4) Nonfinancial companies are at their highest cash levels ever. Almost $2 trillion dollars. They were hoarding the cash just in case bad times were going to happen again. Guess what? They didn't. But what good is that? Well

5) They are spending it. Stock buy-backs are at their highest levels in history. Let me tell you the rule of every market on the planet that we learned in Economics 101: Price is ruled by supply and demand. Demand has been down for the past two years. But that's OK, supply is now going to start going down right when demand picks up. $2 trillion is a lot of supply of shares to scoop up.

6) What about unemployment? Well, according to the Bureau of Labor Statistics, temp workers are at levels not seen since before 2009. Companies hire temp workers first before they hire full-time workers. That happens in every recession in history.

7) Corporate profits are at their highest levels ever. Did you know this is the first recession in history where cash levels in corporate America increased quarter- over-quarter every single quarter of the recession? And now profits are at their highest ever. Analysts expect S&P 500 earnings to come in at $95 next year. What if (as usual) they are too conservative and the number comes in at $100. Slap in a 20x multiple (could happen when the stimulus kicks in), and we have

8) Major stocks are dirt cheap. Apple (AAPL) trades for 12 times forward earnings and has $65 billion in cash and no debt in the bank. Microsoft (MSFT) trades for around 10 times forward earnings. Intel (INTC) trades for around 8 times forward earnings. These are high market-cap companies. By the way, all the major indices are market-cap weighted. So if the big guys go up, the indices go up. All of these big guys can easily double or triple.

9) Innovation. Barely a year ago the iPad came out. Now what's the number of people who have iPads? 20 million? 10 Read 10 Unusual Things I Didn't Know About Steve Jobs.

10) Major demographic changes are occurring that are going to affect stocks for the next 25 years. What are they? Check my article here next week. Or, perhaps more importantly, follow me on twitter where I engage in ongoing discussions on these things. Follow me!

The fight never stops between the bulls and the bears. Last summer was personally grueling for me. The market was falling on worries of Greece, an economy the size of Rhode Island, and every day it seemed a new blogger was using this as an excuse to write a blog specifically trashing me. It's usually a bad idea to personally attack someone to get your point across. It's never really necessary, and it's lazy and bad writing. And yet, my kids would Google their last name, and there would be post after post insulting me personally for my opinions.

The market is up some 25% since then. My feeling for the next year is similar: BRING IT ON.”

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