Recovery 2010: Summer Update

By Joshua E. Stone

There are a few factors pointing to the possibility that stocks have at least seen their lows for the year, if not found a new bottom. As I mentioned in one of my latest charts posted on the S&P 500, I am expecting 1237 as the next target to be reached. Some of the reasons for this include a strong Euro, a robust German economy, and other macro factors like US economic growth and geopolitical forces such as tax policy and the balance of power. Yet other reasons to be optimistic are there as well, like rail loads to name one…and the Yield Curves.

One needs look no further than the Euro to see that some stability has returned to the market. I read an article that was able to indicate 100 pip moves in the Euro on a daily basis never has happened and are actually an indication of a problem in the system. I for one have never ceased to be amazed at how strong the Euro can be….but I have also come to be equally impressed with its ability to become very weak quite quickly. With all the problems facing the Eurozone in the next year or so it’s no wonder either.  In either case, as with anything you can always find something negative in everything. Another Euro factor is Germany, a behemoth of an economy that is on track for a strong recovery. This cannot be dismissed. Germany is the powerhouse of the Eurozone and if they are recovering then I don’t think the woes of a few small states will bring it down. For now the Euro is a viable currency, and it is not going away anytime soon. Notice how the EUR/USD did not even flinch on Friday the 16th in the wake of all the pessimism, a week when stocks were down more than 2% across the board. The support of China for the Euro can’t be underestimated either. 

Another currency that I often look at for determining the direction of the economy and which accurately foretold the entire 2008 meltdown and ensuing `09 recovery is the USD/JPY. Ashraif posted this chart and analysis that I find supports a new uptrend is in order for the currency some time in the not so distant future. This would seem to indicate there is going to be a continued appetite for risk. What most folks don’t get in my opinion is exactly how long and slow it will be; just as I have been saying all along on this blog.

Looking at the USA, we find corporations sitting on approximately two trillion in capital as they wait on evidence of a sustainable recovery and the election cycle to bring in more certainty and hopefully a friendlier disposition towards business, as 2/3rds of jobs are created by business, politicians will be pandering to the votes that are the loudest and demanding one thing: jobs! Already there are whispers of allowing the Bush tax cuts to remain in affect in some shape. This idea seems to be supported by the FED  who explains that it is too soon to pull life support from the economy yet, but at the same time we must stop spending so much.

The Yield Curve should also be looked at, long term interest rates are lower than short term rates, and this indicates longer term growth….not economic contraction.  I don’t have a degree, but smarter folks than me say this is the case. My horse sense from running a farm tells me that it is only logical that if inflation expectations are higher in the longer term than they are in the short term, then in the longer term the economy is expected to continue expanding. That said, inflation expectations are very low, and the money supply has probably peaked for now....so the biggest problem facing the economy is actually deflation. Though I don’t see it as a threat at this point, it is a longer term problem that will be exacerbated by continued inadvertent genocidal tendencies from our political leaders and the lobbies that have them under their more money than god spell.

There is also much more to support the idea that the recovery is not going to double dip, and I suppose many can find even more facts to support the idea of a double dip; I for one am an optimist and do not let the sad state of affairs overwhelm me. I have always found that it’s easier to report on the bad news than the good news, and this is certainly the case for the mainstream media who amps up every detail of bad news in an effort to divide the country for our routine elections; with unemployment the biggest and best lagging indicator of the recovery being the most potent tool in the partisan belt to divide the nation.


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A Tale of Two Economies

As America struggles with crises after crises, she looks to her people for her future

By Joshua E. Stone


As the S&P closes in and surpasses the 1220 target mapped out in Jan by me, and even earlier by others; the questions are becoming more and more glaring. Where is the volume in this rally? Where are the average investors? Does the rally mean the recovery will be strong? If so, then why is new employment still below 300k a month?
I have come to the conclusion there is a tale of two economies: one in which the traditional job market is gone forever, another where the job market is wide open and not enough talent to fill the demand.
I think the biggest challenge facing America going forward is its people. They are used to getting jobs the old fashioned way, where you go to the paper and find something you can live with, or you get a job at the local mill or car company because that’s all the town has ever known.
While there may not actually be a job posted at the local mill, there is a job there no doubt….its just the management and the seekers don’t see it. At a local mill there is one job I can think of right away that is most likely not being filled: social networking marketer. Another example of a job at a hospital or any big firm that is not being filled: waste reduction engineer. Radio and TV stations are already using social networking or WEB2.0 with great success. The forex industry is a near grandparent in this field already, with social forums and whole websites devoted to experts and consumers alike where you can chat and exchange ideas with like minded individuals.
Between social networking and reducing waste in this economy, we could see vast improvements’ in our productivity and profit thereby increasing the GDP. Things like this are already underway in the form of the Green Economy. These are just two examples I have thought of for the purposes of writing this article, but there are more. For example, it is well known that the high tech industry in the USA is flourishing, but is plagued by a lack of talent in the employment pool and flying vultures in the form of new taxes.
The result is jobs are outsourced, the employment is floundering, industry growth is stagnant and the long term outlook for the economy gets more uncertain to many. Since it appears the people of the USA have been collecting unemployment for the longest time in history, one can’t blame them for feeling like there is no hope for improving their situation.


In theory and in history, the spendicide the US government is committing on behalf of its people will work to get us out of recession in the short term. The problem is that the principles of good economics demand that we don’t run large deficits during the good times. This is something we have failed to do since the late nineties; this has put us in a very bad condition to deal with these tribulations. Aside from the fact the spending policy in Washington has to change dramatically, the private sector has to put the other foot forward and create sustainable jobs for the future, thereby increasing the size of the economy and the revenue base the government has. All that said, history seems to suggest government surpluses as well as taxes that are too low lead to recession.
If this does not happen the next financial tsunami known as the bond market collapse will surely be impossible to navigate and survive in a meaningful way. A strong US economy will help us weather the collapse of the bond market much better, I would think. It also needs to be said that the USA is not Greece or like any country anywhere else, and our bond market crises will not be like the ones we are seeing now in Europe. Will this be good or worse as a result, only time will tell. All that said, history seems to suggest government surpluses as well as taxes that are too low lead to recession. I also do know we can print our own money, so that certainly changes the traditional dynamics of any bond market crises we will have here in the USA.

It is also easy to blame the government for this jobs crisis, the current administration fails to get serious about a jobs creating energy policy. This will ultimately be all of our undoing as the prices for everything continues to soar for the average person. The average person is not going to make it through the transition to more energy efficient models as even the most optimistic plans don’t have everyone driving hybrids in the next few years. I know that high energy prices are deflationary, but cheap energy is a prerequisite for a strong economy. An idea that seems to be lost on everyone these days but the poor folks and business owners who are seeing 60% increases in the COD and fuel expenditures year over year as we transition into the new decade. A VAT tax will put many of the small businesses left in this country right out of business. The recent disaster in the Gulf of Mexico proves the argument and concern beyond a shadow of a doubt: industry and the US administrations have proven there incompetence regarding energy production and policy. Just the consequences of this most recent catastrophe alone may have wiped out nearly an entire gulf and may devastated many industries in one of the world’s formerly most prosperous and beautiful regions for decades to come. In my opinion the Gulf of Mexico has pretty much been quite devastated up to this point by dereliction in policy and industry, and this flow of oil into the sea will certainly not help at all…no matter how lucky we get with the exact details of the cleanup.

My take on the market and the economy at this point are not very optimistic, I do have some optimism. But it is fading as I see the real issues and problems in this country either not being fixed, or even being completely ignored or exacerbated by a seemingly inadvertently genocidal political and corporate establishment.
I do think the current bull market is still in place, as mentioned before on this blog, most bull markets have two year cycles, that puts the current cycle at the age of a toddler by next March and set to end its buoyant ways in the next several months. I don’t see the FED raising rates before then, so that leaves the markets with room to move up baring some development that changes the current trend: like the FED adjusting their language to allow for an increase in rates.


The events in Europe recently have also demonstrated the contagion effect is quite real and could very well if not already have capped the markets in this bull cycle. Some analyst say the market will begin to fall this summer and there is somewhat scary evidence to support that now with the way the markets fell and gold surged on the heels of the Greek crisis in recent days. On the other side the recent uptick in volume could be a sign the average investor is putting their toes back in the water, perhaps as a result of the regulatory bills being passed increasing confidence in the market. I see this market as quite strong still, and the trend we have seen since March of last year though threatened at this point has not quite been broken. The rally and fundamentals are still intact; bolstered by improving economic data and a burgeoning consumer wallet fattened from ripping up credit cards, selling jewelry and walking away from mortgages. I think some sideways action will be in store for summer, then fall will arrive and the market will have done the classic sneak range up by that time.


This leads me to think the most likely scenario for the recovery will be something like what one analyst I saw describe as square root shape. We are seeing a bounce, but I think we will have another recession soon if the taxes go up as many are saying they will next year, and of course as the “business as usual” policy continues.
On the foolishly optimistic side, we could see a history defying economic boom from here on out. I believe in the USA, so I am certain we will do well at the very least. As Americans we can all look forward to the next great road bump, they are hard to deal with and painful, but we need them to wake us up and keep making this world a freer and better place for us all on Gods Green Earth.