Economy Free to Recover?

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Happy days are here again. It’s like someone turned back the clock to 2007. You’re a crank and a nutjob if you think there are serious problems in the financial system. Don’t you know this is the recovery you moron!

A report on U.S. payrolls showed that the American economy shed around 491,000 jobs last month. This was less than expected by forecasters and the least amount of jobs lost in the U.S. since October of last year. So in a manner of speaking, losing half a million jobs in a month is an improvement.

Financial markets were encouraged by this news. In fact everything seems to be encouraged. The Dow was up. The S&P was up. Gold was up. Oil was up. Up, up and away!

Not even the news that Bank of America may require US$34 billion in new capital could bring the mood on the Street down. The results of the ‘stress tests’ have been duly leaked so the market can digest the rumour (and sell the news). The good news is that Morgan Stanley, JP Morgan, Goldman Sachs, and American Express all seem to have ‘passed’ the test and do not require additional capital (at least according to government accounting). Of the 19 backs quizzed, it looks like 10 will need more capital and 9 will not.

Whether the ‘stress tests’ really tell the truth about the banks or not doesn’t seem to matter at the moment. There has been a huge cloud of uncertainty hanging over the banks (and thus the market) regarding their solvency. Just the idea that the cloud may be dissipated (and that the economy is free to recover) is sending stocks higher.

Don’t take our word for it. Look at the Aussie dollar. Look at commodity prices. As we said yesterday, risk is back. If we get a resumption of the carry trade (borrowing in USD and Yen to buy higher yielding assets) it can only be good news for Aussie stocks. We just don’t know how long the party will last.

Of course no one really knows how much capital the banks will need over the coming years to offset losses. It could be a lot more. U.S. real estate site Zillow.com says that 22% of Americans owe more on their homes than their homes are worth. That’s what we call “negative equity.” If it were true, it would mean more than 20 million homes are underwater.

Do you think the stress test included the possibility that 20 million Americans would default on their mortgages? Probably not. It’s an almost apocalyptic number. But it IS a credit depression. And it WAS a pretty big bubble in housing.

Here in Australia, everyone’s going berserk spending government money. Retail sales hit $19.3 billion in March. That was a 2.2% gain over February. Nothing like a little national retail therapy to deal with a structural problem in the economy, is there?

That structural problem-similar to America-is an economy built on consumption and housing and the financial industry. That said, this looks like a rally you don’t want to get in the way of.

Even Rupert Murdoch thinks “the worst is over.” “There are emerging signs in some of our businesses that the days of precipitous decline are done and that revenues are beginning to look healthier,” he said, after saying that he expects the full year operating profit to be 30% lower than last year’s figure.

He also said he believed advertising dollars are fleeing print newspapers for good, to the web. And it’s worth noting that one of Murdoch’s properties-the Wall Street Journal-is one of the few newspapers that charges for online content. It’s not a coincidence that the Journal is one of the few profitable papers in the U.S. Its circulation is rising.

Hmm. Charging for on-line content. It’s a thought.

Until tomorrow…

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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34 Comments on "Economy Free to Recover?"

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marko zico
Guest
thanks dan, got hammered on the way down, was keen to get into market in january, but have stayed away on this sites theories ????? maybe it will happen in time, even your writing has changed , now saying its a real rally , thanks mate, dont you think when people have been slaughtered 70 % on the way down ,you could enjoy some upside , ???? now even you say its a rally with legs, just another expert, i bet you guys have made money on the rebound ?? eh,… yeah, yeah, sure your theories MAY come right in… Read more »
marko zico
Guest

youll moderate, as usual. !!!!!!

Ross
Guest
And match the AUD rise to the ASX XMJ index and you see that hot funny money has made its return. It is not Japanese house wives this time around. Now we have had the US government getting into the mezzanining business on top of keeping the off balance sheet devices way open. So we have the new EU banking prudential & capital rules juxaposed against the Geithner and Summers funny money factory and something has to give at some point. The same applies to the MAQ market making using the AU government’s largess with taxpayers money.
Pete
Guest
Mark Zico: Reading this site saved me from both Jan 08’s financial smackdown and the bigger one in Oct 08. If you expect Dan to hold your hand and guide you as to which stocks to buy, then thats a shame. How can anyone accurately predict the exact timing of the trading masses? Dan gives fairly general opinions on the overall economic forces at play and advises accordingly. I really don’t see the issue. Read widely, make your own decisions and hold yourself accountable. Being an effective investor in such volatile times takes a lot more than it did in… Read more »
Coffee Addict
Guest
Marco If you can’t sleep at night over this then its best to stay out of the race. If you had followed my tips on this site you would have got 2 wins and a loss. I’m not Jesus and I don’t have a crystal ball. If Jesus was around he would have better things to do than post share tips. The core advice from the likes of Dan Denning, Bill Bonner and Marc Faber from the beginning of this year has been that the market is for (knowlegable) traders rather than investors. For longer term wealth presevation they all… Read more »
John
Guest

Marco,

Well done. Idiots like you are what is driving the nanny state we live in.

Take responsibility for your own actions.

Perhaps you’d like a bail out from the government?

Muppet!

Oli
Guest
Anyone, anywhere, with any qualifications, who works at macquarie, and gets every call right, and has a swiss bank account SHOULD NEVER SAY THE MARKET IS FOR “KNOWLEDGABLE TRADERS” RATHER THAN INVESTORS OR NEW TRADERS. I am a uni student who has managed around 60% returns so far on the rally which is set to continue in the mining stocks. I had not really traded anything until the start of this year. Your exactly right Marco, the guys on this site aren’t right all of the time, just like most traders/invetors. They were overly pesimistic early this year which, unfortunately… Read more »
Oli
Guest

*i meat to say ‘this is not another suckers or bear rally’

Oli
Guest

When i say it will be hard for the recession here to get worse – i don’t mean we wont see more unemployment (which will rise). But other economic factors such as business confidence, consumer spending etc will slowly begin to rise again

Pete
Guest
Wow big calls Oli. Especially from a new trader. You seem to be like a miniature version of the same people that saw the trend leading up to the GFC and thought it could go on forever. The difference is that your timeline is only 5 months. However, your points are well heard. Not for the reasons you’d like them to be, but for even more confirmation that this is indeed a suckers rally. Such a rally intends to sucker in many, and bring traders back into the fray. Enjoy your returns, and remember that they are only returns if… Read more »
Pete
Guest

Quick DR poll: Who here is getting sick of hearing about how wrong DR is about the suckers rally?

And who finds it somewhat amusing (I do)?

Dan
Guest
It’s always fun to see a bit of a slanging match, even if it is about stock markets. Some of the factories around the manufacturing nations are looking like restarting a bit the next few months, but the markets are exaggerating the degree to which this is likely to occur, IMHO. Perhaps a lot of he new money coming out of the Fed is washing into the system – another bubble? The problem with stocks is it’s speculation and gambling. It’s a mixture of fundamental and trends analysis – who the heck knows what the right balance is. Who cares,… Read more »
Greg Atkinson
Guest
I just think it is amusing how people who believed that the end of the financial world was just around the corner are starting to adjust their stories to cover themselves just in case there is a tomorrow :) I guess the collapse of paper money etc. has been delayed hey? Of course if you are going to call a rally a “fools rally” even if it lasts a year then you really are covering yourself. Why not say 3-4 years and then you cover most bull markets as well! As for Oli..if he has made 60% (I hope you… Read more »
Dan
Guest
Greg, the thing is that most of this is like watching flies on the backside of an elephant. Most are unaware that it’s an elephant, let alone its backside, and they all buzz about when some movement occurs (or a motion). My point of fools rally is because I don’t quite understand the reason for the rally – I admit myself that perhaps I am not believing the unmistakable signs of an economic recovery when I see them – not recognizing the elephant, so to speak. Would you buy into a rally, just because it’s there? Isn’t that why people… Read more »
Pete
Guest
I like your comments Dan. I’m not trying to side against Greg, but both your posts pretty much mirror my thoughts on this topic. Its almost in vogue to be bullish again. Although Greg’s point about suckers rallies is well heard – you could call any beginning of a bull market a suckers rally. Its like the old joke of telling someone that they are in denial. If they deny it then they just add weight to the argument against them. Same for suckers rallies, and the only way to disprove one is to wait and see. However… the point… Read more »
Coffee Addict
Guest

Oli

I stand exactly by what I said to Marko above. The reason is that I don’t like to see anyone being burned at a financial stake. If you can make short or longer term gains in this market then good luck to you – I’d be more than happy to discuss and analyse your tips.

For the record I have never worked in the banking and finance industry.

Coffee Addict
Guest

Is this a sucker’s rally? I don’t know. It’s clearly not a return to the good times. A lot of people truly believe that much higher interest rates are around the corner. This means that my (so called) cash allocation super is about to get fried like Marko’s share portfolio. Interest rate risk may well be leading to higher exposures to equity markets (though I don’t have any stats to support this view).

Greg Atkinson
Guest
Dan, I hear you :) The problem we have I believe is that we hear a little too much from U.S focused commentators and analysts. If you are an American for example things are probably looking very bad and I doubt the U.S economy will ever be quite the same again. But the view from Asia is a lot different and the chances are we are witnessing a lot of economic clout shifting from the U.S to countries like China and dare I say it, even Japan. How often do people in Australia actually read economic outlooks from Chinese or… Read more »
Oli
Guest
Greg, I used a counter cyclical strategy to pick industries hit hardest by the downturn (property, mining, financials) and picked stocks based on some basic chart analysis and making sure their liabilities aren’t too high. No i will not disclose on this site exactly what stocks i have picked but i can give some clues. In the miners i picked mining suppliers because it ment i wouldn’t have to bet on a particular commodity (and the mines still need consumables). All stocks in the sector have got some good returns having been shorted into the ground(MAH/BKN/NWH/IDL etc) In property im… Read more »
Oli
Guest

Also to Greg,

My plan for the future is to sell $2,000 of my stock at the end of the year and take myself to the movies and for a lil holiday with some uni friends.

It sucks being a student sometimes with no money…

Oli
Guest

Also if anyone needs someone to write/draft/edit an investment site/newsletter i would love to. I am just finishing a law/commerce degree at ANU and would do it pro bono if the newsletter gets to people who need it like the poor. I don’t think there is nearly enough investment advice for the poor/elderly.

Dan
Guest

That’s some good insight Oli. And I wish you well with the pro bono idea, with regards to investing for the poor & elderly. They do need decent investment advice, even general living advice – and less scamming from morning TV shows. To understand their society and culture it’s worth doing a bit of soup kitchen type work – you can learn so much in a few hours.

Jon Bain
Guest

Not a suckers rally? Do u think the DOW is going to keep going up until it gets to 14000 again, without reaching a new low? Which comes first 5500, or 14000? My bet would be 5500.

Amazing how marko could not see the sarcasm when told it was a real rally?

Greg Atkinson
Guest
Oli, I agree with you regarding gold. A highly over-rated investment play..just check the long term gold charts. There were plenty of stocks that out performed the gold miners and gold over the last 2 years. DR likes gold I suspect because of the adverts in the middle of the page :) (and a lot of the authors seem to work for gold related investment firms) I am also a fan of high quality mining stocks. I am not so confident about the Indian Economy and even China’s growth might be levelling out. We have been through this cycle before… Read more »
Claytonator
Guest
This commentary is becoming quite amusing! If you bought $1000 of gold(not gold stocks) 2 years ago instead of investing that $1000 in the All Ords you would be quite pleased with yourself at the moment – six months ago and probably for the foreseeable future the same applies. I vote this rally is a sucker rally – all the newcomer paper traders who have had a few wins are out and about spruiking. I’ve been to Greg’s site and I am not convinced by anyone else who seems to think that DR have it wrong. Greg has more adverts… Read more »
Claytonator
Guest

Sorry Greg – just remember judge not lest he be judged – also there is a typo on your site – the opinion button/tab reads “Oppinion” – or was that intentional?

Greg Atkinson
Guest
Claytonator, I do not point people to my own investment products. Nor do I stand to make a cent from anyone investing in anything. The ads on shareswatch are affiliate ads. (ever heard of online marketing?)If you read the site disclaimer before you make a rant you will see that I do not even deal with retail investors. Thanks for the spelling error tip. I will get the web dudes to fix it. Anyway people who question DR are not saying they have everything wrong for goodness sakes. We often agree with them. Try going back and reading some older… Read more »
Claytonator
Guest
Greg – a few exclamation marks does not mean I am all worked up… I fail to see where I have insinuated that you “point people to my own investment products” or for that matter, suggest that you “stand to make a cent…” “”for goodness sakes””.. I’m not new to the internet or blogs and have been reading the DR since 2005. I appreciate your reply – debate is always healthy. I don’t appreciate being taken out of context although most readers will draw their own conclusions on that one. I guess what’s been getting to me is the fact… Read more »
Greg Atkinson
Guest

Claytonator, DR is a blog, not the first, not the last. I even link to DR from my blog. Like many other bloggers out there I enjoy debating issues in the blogosphere as they say.

Sites like DR benefit from other blogs linking to it and from the fact that people like me contribute to it. I suggest you do your research on site rankings, SEO and WordPress before you take the high moral ground on site comments. Blogs help other blogs, that is how we try and compete with the mainstream media. Blogging 101.

Claytonator
Guest

Sorry Greg – honestly didn’t know that much about blogging. My mistake

Greg Atkinson
Guest

Claytonator, no problems. The reason I am here on DR is because I value the site. I may not always agree with what they say but the analysis is far better on DR than what we get fed via most of the major media news sites. Debate is healthy, group-think is not :)

rick e
Guest
I think what hit DR the hardest and got people out of sorts was when DR went threw the metals (cycle within a cycle).which even I got sucked in also as bhp,vale, rio got top dollar for there ore prices. And then the collapse came on 19, 20, of November 2008 This dismissed a cycle within a cycle. (Investors lost a lot of cash) The only thing I can make out of it (cycle within a cycle) is metals are last to fall and possible the first to recover. Other than that the DR is spot on and some time… Read more »
Greg Atkinson
Guest
Rick e – glad you like some of our banter :) The issue with metals for me is how long prices will it take prices to recover. The Chinese and Japanese (the buyers) are now the price givers and so it will take quite a rise in demand for the miners to get back the pricing power they had at the end of the commodities boom. Contrary to the views of some, I do not think China or (Japan) are stockpiling large amounts of iron ore etc. as they fully expect prices to remain subdued for quiet some time I… Read more »
Pete
Guest

Oh wow, we have like/dislike options on comments now.

Click click click

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