It’s been one bumpy ride for Wall Street since the beginning of 2008. It’s been volatile and unpredictable; a bit like Mr. Toad’s Wild Ride, the chaotic and exciting children’s ride at Disneyland. I would have used the E Ticket analogy, but many of the traders would not have understood the classic reference to the level of volatility.
Traders, brokerages, pundits, and analysts vacillate from grave concern to irrational exuberance in the same day, and sometimes in the span of a single hour. It becomes increasingly difficult to predict the direction of the market when the market itself is so capricious.
Some say the volatility is caused by a lack of clear direction from the government. They becry the intervention of the government in private enterprise, protesting that it is leading to socialization. But in the words of the now infamous former Senator, Phil Gramm, they’re a bunch of “Whiners.”
The irony of the criticism, the ‘whining,’ about government involvement is that without the help their precious private enterprise, and Wall Street along with it, were headed for the proverbial toilet.
Like it or not, the volatility will be with us for some time because the Dow is headed for 6,000 or below. And, with it, trillions more in personal wealth will be lost, not only on Wall Street, but on Main Street.
Is six thousand inevitable? How about an S&P below 600? Not necessarily, but all the indicators are aligning to drive the market below early March’s bottom of 6,500.
Could it go even lower? Absolutely! The thinking on Wall Street is relatively myopic, reminiscent of the period before the dot com crash. The signs were there also, but the reasoning was so convoluted that people believed the new model of market share was more important than the fundamentals.
Just like during the dot com explosion the obvious signs of market implosion are in place. Wall Street is ignoring most of the signs in favor of perception. The perception that the banks are doing good, that the housing market is stabilizing, or that the decline in construction is less negative than the last report, is an unrealistic reason to drive the market up. The market is grossly disconnected from the real pain working people, the drivers of the true economy, are feeling throughout the country; throughout the world.
And that pain is translating into a protracted pullback, a retrenching after years of selfish over leveraging, to a very ‘real’ survival mode. Though frequently vilified for becoming savers due to a false fear of an eroding economy and the possibility of job loss, working people are doing what they feel is necessary to feed and clothe themselves and their families.
If this is bad for Wall Street then they had better get use to it because we are in for even more turbulent times.
During the past three weeks there has been an incredible euphoria on The Street. Hard not to be euphoric with the Dow up nearly 1,500 points, a rise of 20 percent from the lows reached in March.
As has happened before in this erratic environment, that euphoria may be premature. Usually forward looking, this time the market is a laggard and will have to correct itself as unemployment numbers, consumer spending, and corporate profits are reported over the next few months.
What evidence can be found in those reports to indicate that the Dow will go down to 6,000?
There has been plenty of evidence in recent reports, but the meteoric rise of the current Bear Market Rally has clouded the judgement of those on Wall Street. As is typical of a rise of this nature many of the players can only see dollar signs. They tend to ignore the signs that might indicate the probability of a down market.
But the signs they should be seeing are open bare across the entire country. There has been a series of negative numbers that are tending to trend lower even when they have a short-term positive bounce. Traders are grasping at even the smallest positives and working hard to use them as a springboard to restart the bull market.
Unfortunately, there is no long-term spring for this rally. There are too many things stacked against it. The market will only hit a ‘true’ bottom when it is reconciled with the bottoming of the economy. The biggest headwind this rallying market faces is rising unemployment. Monthly unemployment numbers, usually a lagging indicator in the bottom of a recession, are so massive that the market can only ignore them for so long before they bite the market on the ass.
The numbers being reported are historically high and are accelerating rather than declining. The job losses in this country, let alone the rest of the world, are beginning to have an effect on all parts of the economy. States are having difficulty meeting their unemployment benefits obligation’s and are having to ask for assistance from the federal government to meet the increasing demand for those benefits. California and Kansas with rates higher than the 8.1 percent national unemployment rate have already received several hundred million dollars in assistance.
Consumers are tapped out and when you add the devastation of losing a job consumer spending will be further eroded. Weekly jobless claims jumped to an all-time high of 669,000 which doesn’t bode well for tomorrow’s monthly job loss report. More job losses will plunge households into defaults on homes, autos, and credit cards. An already steadily declining economy will get worse. And let us not forget that the consumer, with their big appetite for spending, is nearly 70% of Gross Domestic Product.
The loss of jobs will have a major affect on foreclosures. For the last few months the foreclosure market has been moving from one of bad loans to one of unemployment. And a few more months of more than a half million lost jobs will accelerate home foreclosures. That, combined with the remaining bad loan losses, will cause foreclosures to exceed an already destructive 2008.
At the start of 2008, signs that the economy was declining were somewhat subtle, but the subtlety is gone and the data is now in-your-face. Stores closing, declining computer sales, slow restaurants, people repairing their cars and making coffee at home, passing up the stop at Starbucks, are all remarkable signs of a change in lifestyle; a change in spending habits.
When you combine that with other indicators such as deteriorating global auto sales figures (down an average of 40% for March, year-over-year), the ISM Manufacturing number still negative at 36.3 (though up 0.5% from last month’s reading), construction spending down 0.9 (single family homes dropping 10.9 percent), and a record drop in home prices, things begin to look pretty bleak. And the bear market rally mantra of “not as bad as expected” will no longer be a valid driver.
Despite the change today by the FASB to the Mark to Market accounting procedures which is meant to help banks improve their balance sheets, the banks will still show fairly dynamic quarterly losses that will uncover an acceleration in commercial and consumer product losses.
But the most important number that will come out of this week’s data is again, unemployment. The monthly job losses for March are out at 8:30 eastern standard time. We may go to 8.8% unemployment tomorrow. If the numbers show that we lost 700,000 or more jobs the market will look to make a quick adjustment. They have ignored the tremendous weight the job losses will have on the economy in the future for far too long.
There is something inherently wrong with a rising market that has been shored up with public money, when Main Street continues to feel the pain and damage they created.
The Dow may hit 6,000 by as early as the first week of May. All the planets are aligned and the fall is inevitable.
Last September, when the Dow was at 9,200 I told several people that we’d be lucky if the Dow managed to stay above 7,000. Now, I predict we’re faced with a Dow at 6,000 or less, maybe even this month. Submitted as an Op-Ed to the Wall Street Journal, April 2, 2009.