July 28, 2009

Crash Countdown

Ok, it?s official; the stock market shall soon collapse, probably in the next three to six months. I?m betting on some kind of spectacular catastrophe by mid September. Why do I think this?

The Dow?s recent up-tick over 9000, and the whole 30 percent rise we?ve seen since last March, has been a phantom rally if there ever was one, all sound and fury signifying nothing (about an improving economy, at least.) The bump this week came after it was reported that most companies beat earnings expectations this quarter. Sounds good, right? Green shoots?

Well, no. First off, the ?expectations? were not great. And putting aside evil financial firms like Goldman Sachs, which made huge profits trading assets using its evil market-manipulation algorithm (which probably facilitates front-running), companies were only able to increase earnings by slashing overhead?that is, by firing employees. Mass layoffs might, alas, be necessary, but they?re not a sign that American companies are becoming more productive.

What?s really happening is revealed by a graph I ran across yesterday in Casey?s Daily Dispatch, which is probably one of the more horrifying economic graphs I?ve ever seen. 


Says Casey,

While anecdotal, I spend a lot of time talking to merchants, real estate agents, and anyone else whom I bump into who is engaged in providing goods and services to the consuming public. Right across the board, the message is the same?namely that sales stink and that they are managing to survive only by cutting expenses. Even the owner of the local hardware store tells me business has never been worse, so I guess people aren’t even bothering to fix up their homes anymore. And a close friend in the real estate sales business for over 30 years says she has never seen anything remotely close to how bad things are at this moment.

Jumping upwards to the national picture, some companies are indeed reporting better earnings than anticipated by various analysts?the news of which has, of late, sent their stocks satisfactorily higher. [?]

[A]s you can see in the chart above, in no sense are the earnings being posted anywhere remotely close to prior levels.

And so the situation today is comparable to changing the grading curve for a class of students so that managing to drink water without slopping it down the front of your shirt would earn you a hearty ?Well done!? and a passing grade. That several students subsequently get one or two answers out of ten answers correct is, therefore, cause for the whole school to gather together for a celebratory punch party.

And while some poor optimistic souls might be revving up their familys? eTrade accounts on all the good news they?re hearing on CNBC, Wall Street ?insiders? are, according to Bloomberg, selling the rally, dumping equities at the fastest rate since the summer of 2007. Gap Inc.?s founding family has sold off $45 million shares of its own company, in expectation, no doubt, of a massive retail and commercial real-estate collapse in the near future.

The ?recovery? is another credit-induced bubble, inflated after the Fed doubled its balance sheet and ran the printing presses all night long. And this ?Bailout Bubble? won?t last nearly as long as its ?housing? and ?dot.com? predecessors.   

A couple of months ago, as I was witnessing a friend take the New York City Badminton Club championship (no joke!), I met a very nice guy who told me he was starting up a new hedge fund, and was excited that he could ?get in at the bottom? (indicating that he was planning to mostly go long.) I immediately got an uneasy feeling that this well-intentioned young man was about to destroy all the savings of his friends and relatives. My gut feeling hasn?t changed. 

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