Head Fake???

My last post was about the market seeming to take off Tuesday with the air leaving that balloon quickly and the market ending up only slightly. I mentioned my expectation that there is a massive amount of cash on the side-lines waiting to enter the stock market and only waiting for an excuse to do so. While the market was up pretty well Tuesday morning it did not have legs, went into red territory for a while and only closed up due to a brief late-day rally. Today, the market had legs and those legs were able to carry the day. So what, do you ask, caused the bounce?

As I said there was a lot of money looking for a bottom - or at least an excuse to expect one - and there was news today that a report that actually comes out tomorrow will show good retail sales:

http://noir.bloomberg.com/apps/news?pid=20601087&sid=a2bxxRzucFoU&pos=1

Now this was not the actual report but I have little doubt that the retail industry one day in advance would say sales are likely to be up nicely in the report without knowing that to be the case. If not, tomorrow will be a bad day for the market.

In any event, I prefer to focus on fundamentals, not daily reports, and whether the increase in retail sales is sustainable. In terms of personal debt levels and increased savings rates, it is not sustainable. Personal debt is still very high and slowly coming down as savings rates are increasing, which is in my book one of the most promising long term developments. Still, it will take many years. So let's look at the employment situation. In a word, it is still "ugly." First you have unemployment benefits to 1.3 million Americans that just ended and hundreds of thousands more in weeks to come. Since these are among the consumers that represent around 70% of our GDP, you will see an impact pretty quickly from this "stimulus" ending. Second, even without the unemployment benefits ending issue, employment otherwise is rather dismal. As noted in the linked article by Abigail Doolittle, the only semblance of positive news in employment figures this past week was due to 652,000 people leaving the labor force. These are by-and-large folks simply giving up, probably because the time lapse for getting a new job is near record levels. Numbers getting better because two thirds of a million people gave up is not good. Now if you focus on the jobs creation - after taking out Census numbers - you will see there was some creation but the numbers are low and we need more than that just to keep up with population growth. In other words, employment is not getting better and people spending money represents roughly 70% of GDP; you do the math on that.

http://seekingalpha.com/article/213251-jobs-and-spending-spiral-down-together

So let's look at something else that has led us out of past recessions - real estate. You know where I am going here - it is still sucking wind. As I usually do on real estate, I refer you to Calculated Risk. This week they have had a dozen or so posts on residential sales, refinancing, commercial real estate, mall vacancy rates and the like. I can summarize them all in a word, "ugly." Just look here for one post:

http://www.calculatedriskblog.com/2010/07/mba-mortgage-purchase-applications.html

Purchase mortgage applications fell off a cliff in May after the tax credit ended and things are getting no better in June.

There are lots of other areas to look at but I think just focusing for now on the two major areas leading past recession rebounds is enough to suggest any market rebound has not got long term legs. And hey, I did not even mention EU issues, China slowing down, government debt, the BP oil spill or personal bankruptcies on the rise.

Disclosures: None.