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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Comments

  1. 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 time , probably not before most people COULD HAVE RECOVERED ALOT OF THERE MONEY. , as the so called crappy news letters said, so far its crap news letters 1 ,v D.R. 0.. poor call fellas, and p.s., i got into gold and the oz gold minersd are pulling back , !!!!!DOUBLE, TRIPLE WHAMMY MATE !!!!!!!!!!. &^%$#@ experts, my a–.!!!!! sick and tired of following *&^%$#@ know it all no bodies.

    marko zico
    May 7, 2009
    Reply
  2. youll moderate, as usual. !!!!!!

    marko zico
    May 7, 2009
    Reply
  3. 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.

    Reply
  4. 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 the recent bull years.

    Reply
  5. 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 pointed to gold, selected gold juniors, energy and agriculture. Marc liked BHP and some tech stocks a few months ago but that was a few months ago and circumstances change daily.

    Its bad form for you to outsouce your thinking and decision making … then complain that your selective reading didn’t give you the answers.

    Coffee Addict
    May 8, 2009
    Reply
  6. 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!

    Reply
  7. 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 for their readers, has meant a lot of you may have missed out on some great returns if you sold out.

    HOWEVER, to their credit they did pin a lot of effort on the gold call which would have paid off last year.

    Daily Reckoning, admit you weren’t quite right. This to all extensive purposes is not another suckers or bull rally but the real thing. The market will not return to 3100 ever again. Ever (unless a soverign state goes broke- extremely unlikely, or a mainstream bank goes broke- even more unlikely now). Although the market might not move as quickly as it has, and we may just see some sideways action for a few months, the free fall is over.

    The economy is now so loaded with stimulus and low rates that it will be hard for the Aussie recession to get worse.

    Do what you like with your money, but don’t listen to just one site holding themselves out to be experts. If i can have my 2c – commodities will be back sooner than you might think – which is great for our country

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

    Reply
  9. 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

    Reply
  10. 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 you cash in. An intelligent move would be to set some stop-loss on your stocks, unless you are just so sure of your wisdom that you don’t need them.

    Remember, even the great traders can lose money. Are you smarter than them?

    Reply
  11. 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)?

    Reply
  12. 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, I guess, as long as you make your money and run. The funny thing is, heaps of people who would never gamble in a casino or the back room of a hotel will do so in stocks, and think they are not addicts. Keep in mind also that you rarely hear about the losers.

    Fundamentally, the Aussie economy hasn’t had any makeover… infrastructure improvements are years away. The rally is a reflection of events overseas – where there have been some major changes, though again I fail to see how they are going to work a miracle. The way I see it, we just got lucky, and the banks are quietly thankful that they weren’t allowed to all merge – how they hated the ACCC at the time!

    I reckon, though, it is a fool’s rally, even if it lasts a year – it’s great to trade on but watch for trends and ignore the news. The fundamentals are all still a crap as far as I can see.

    Reply
  13. 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 are not annualising those returns?)on the rally, then good luck to him. However most people who talk about good returns and being great market players disclose very little details and use an alias when posting…now why is that?

    Oli, I would be interested in hearing about your future plans and the positions taken recently.

    Reply
  14. 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 are reading websites such as this, looking for understanding and explanation so as to make a steady profit in return for their hard work?

    I accept that there are many who follow patterns and try to estimate market movements from double dips, trend lines, lines of resistance and the like, or following the big fish, but if I used that method in life-death situations there’d be more death than life, I can tell you. Some people are more artful and do profit from it, but it’s far from scientific.

    The only thing that gives a person genuine confidence in stocks is insider information, as far as I can tell.

    Personally, I am not surprised there is upward movement in the market, even a real rally – people have been waiting a long time. I am surprised, though, that the planet is still as peaceful as it is currently, but that’s a whole different subject – even harder to predict.

    In any case, I am not in stocks at all currently. There’s my bias – I don’t directly care if the market goes up or down at the moment.

    Reply
  15. 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 that market bulls miss is exactly your elephants backside analogy. The bigger picture. The reasoning. And I agree that is why some (I hope most?) people come to this site – to try and understand it all.

    Due to the lack of restructuring in the system so far, I do not foresee any continued bull market. Sure, a rally could last for quite a while and regain plenty – but the ‘sustainability’ of those gains in my opinion is very questionable.

    And as for a peaceful planet…we’re yet to see some major black-swans hit (although theres that swine flu thing, it might take off). Pakistan is rumbling…you just never know. I think the market is so fragile at the moment that almost any significant;y detrimental global event could trigger a severe market crash.

    Reply
  16. 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
    May 10, 2009
    Reply
  17. 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).

    Coffee Addict
    May 10, 2009
    Reply
  18. 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 Japanese analysts? These two nations are our biggest trading partners and yet we seem hooked on information from Wall Street,thus investors in Australia are often missing the big picture in my view.

    Would I buy into this rally? Well I might if something interesting popped up, but generally I am a seller during rallies and a buyer during corrections. This helps me get burnt both on the upside and downside :)

    By the way, I am always bullish so please count me out of the recent bulls club meeting!

    Reply
  19. 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 not as bullish but it always tickles the baby boomers to see stocks with high dividends so i thought they might attract a little premium on the upswing. So i bought a stock in this sector

    Financials…’woohoo why would you do that’. Only in the big 4 and in a fund that has a good gearing ratio. (so i don’t have to pick a particular bank – they all seem to have some pros and cons)

    I have a long term view, but that doesn’t mean i will hold everything, even in the short term. Everyone knows the markets are volitile, but even now that risk is arguably priced in. What’s your risk profile? If it’s low then leave the table whenever you want. If your a bit of a cowboy come and take a seat with me.

    Recently i bought a little gold miner. No i’m not bullish on gold in the mid-long term but i bought it to hedge my bets with some of the gains i have made. This stock you can have a look at (just rocked my boat) MLI. I also had some money in but recently traded out of PEN and TTY (both look alright- i don’t have enough money to hold many stocks tho :( )

    I’m just a student with a few thousand whose interested in the markets with a high risk tolerance. Yes even i am a bit concerned that the rally has a lot of heat in it, but it had to happen. When your economy is forecast to shrink 0.5 percent and the ASX goes gown over 50% what do you think will happen.

    I don’t discredit the authors of this sites views altogether. They did make the gold call which would have made the more canny investors looking at small-mid caps a small fortune last/begining of this year. But please look to the future, look to the billions of new consumers coming online in our region and use your nogin to think what they will need from our country.

    china will will oneday = japan x 13
    india gdp will oneday = japan x 11
    Rest of asia ???

    do the math on what they will need from a materials exporter.

    Throw rotten fruit at me, laugh at me and pull my pants down in the street. But all that glitters is not gold and the rest of the market reflects that…so why doesn’t the daily reckoning!?!

    Reply
  20. 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…

    Reply
  21. 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.

    Reply
  22. 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.

    Reply
  23. 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?

    Reply
  24. 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 with the Asian Tiger Economies and at one stage Japan was suppose to take over the U.S as the worlds number one economy. How times have changed.

    Anyway I do discuss some of the stocks I have moved in or out of. You can find the details here: For the record: May 2009

    Feel free to leave a comment there is you have some feedback.

    Hope you end of year trip goes well.

    Reply
  25. 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 on his site than DR !!!! Multinationals – such as Singtel !!!! – How are you able to believe Greg’s opinion ? Anybody think that these guys might run out of relevance very shortly? I applaud DR for allowing Greg and others to emphasise the honesty of this site. I have no shares or gold except superannuation. The information I gleen from this site has tempted me to make decisions which unfortunately I still haven’t made. Still no spam !!! Congratulations Dan, Bill, Mugambo and others. It is the lack of sponsorship for DR which allows the freedom of opinion we see. No corporate sponsors’ gag orders or moderation. Long live DR !

    Claytonator
    May 11, 2009
    Reply
  26. 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?

    Claytonator
    May 11, 2009
    Reply
  27. 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 posts before you start getting all worked up.

    (P.S. Most blog like sites allow readers to post views..are you new to the Internet?)

    Reply
  28. 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 that you have seen what a wonderful idea DR is and have decided to market / affiliate / sponsor / spruik yourself and your site as a healthy non-opposing but non-agreeing DR alternative for those who are to impatient to invest in gold. Greg – I have made numerous, but less than 15 posts since 2005 if you trawl through the DR archives – many of them before shareswatch ever existed, take care with your advice if you have have not done the research.
    P.S. I’m still not really worked up – if you would like me disseminate your site some more – please go ahead and post another effective comment.

    Claytonator
    May 11, 2009
    Reply
  29. 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.

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

    Claytonator
    May 11, 2009
    Reply
  31. 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 :)

    Reply
  32. 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 way ahead of them selves
    Ok DR gives certain scenarios as what will happen.

    The DR also told how the banks will fall, and if you trade in derivatives you could have made a bundle on the banking stocks falling during 2008.

    It is up to you to decide if and when what the DR says will eventuate.

    I am not the smartest guy being a blue collar worker but before the DR I was even dumber. I also enjoy reading Coffee Addict, Pete, Greg, Dan and a few others
    As all of you are my bench mark and also keeps the DR honest

    Reply
  33. 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 would guess. It is a risky business stockpiling resources.

    But who really knows? Once governments start getting involved and tossing money round anything could happen. There are so many governments out there spending and taking other measures that it makes my head spin!

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

    Click click click

    Reply

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