Death of the Sucker’s Rally, Spotting the Recession’s End, A Rapidly Growing Sector and More!

by Addison Wiggin & Ian Mathias

  • Stocks fall again… Rob Parenteau on what it will take to move markets higher
  • Are U.S. equities turning Japanese? Two charts that might have you thinking so
  • The ultimate indicator? One d-list data point that’s marked the end of recessions since 1970
  • President, mainstream media wake up to debt dilemma… our executive sounds off
  • Plus, a sector still “growing explosively,” despite the recession

 

  Hmmm… Is this the beginning of the end for the “sucker’s rally”?

Mr. Market’s suffered two rough days in a row. Since Monday, the S&P 500’s down 3.5%. The Dow has fallen two days in a row as well — its worst two-day streak since the March bottom, in fact.

  Best Buy — of all places — currently offers the best look into the market’s mood. The purveyor of plasma TVs and other adult toys revealed a 15% drop in quarterly profits yesterday. While the loss wasn’t as bad as Wall Street expected, Best Buy refused to brighten forward guidance, admitting "limited visibility to consumer spending in the back half of the year.”

Traders punshied Best Buy’s realistic approach with a 7% sell-off.

  “A recovery requires rising, not stagnant, retail sales,” notes our macroeconomic sage, Rob Parenteau. “Flat sales revenue is not going to get retailers to expand — in fact, to make promised earnings targets, they will have to keep cutting costs, which reduces household incomes.

“We suspect the fiscal stimulus is just offsetting the deflationary pressures that were unleashed in the second half of last year and have subsequently left nominal retail sales at 2005 levels. Stabilization is not yet apparent in some of the most cyclical parts of retail sales — big-ticket items like furniture, home furnishings, electronic and appliance stores — and we suspect private debt deleveraging is still taking priority over consumer durable spending. Even realizing financial asset prices anticipate the future, we find it hard to step into consumer discretionary stocks knowing dollar sales revenue in this category has been deflating for a year and a half — that is, falling in nominal dollar value terms — to the point the sales level in this category is below where it was in 2004!

“Stagnant sales can, indeed, stick around for months on end, as this was the case in the last recession from Q1 2000 into Q3 2001. This time around, the fiscal impulse is larger, but so too is the damage to household balance sheets. Not an easy situation to evaluate, but we believe equity investors need to see something better than stable retail sales if they are to take equity indexes appreciably higher.”

(BTW, The Richebacher Society is currently accepting new member applications. Rob has been doing a great job carrying the late Dr. Richebacher’s torch… see how you too can be a part of his legacy, here.)

  “Japan’s Nikkei 225 index rallied more than 40% on 10 different occasions during the last two decades,” The Rude Awakening’s Eric Fry is quick to remind us. “And yet, the Nikkei remains more than 50% below the all-time high it established in 1989.

“Could a version of this sorry scenario unfold here United States? Sure. Why not?

“The nearby charts place the recent rally on Wall Street in a “Japanese context.” The chart above compares the first 20 months of our current American bear market to the first 20 months of the Nikkei’s bear market. The chart below places this 20-month period in a 20-year context. If the American stock market were to have the misfortune of mimicking the Nikkei, the road ahead would be long and painful.

“Your California editor is not predicting such a scenario. But neither does he believe that ‘Happy days are here again.’ The road ahead — both for the economy and for the stock market — is likely to be long and painful. How long and how painful is anyone’s guess. Our guess would be: Not as bad as Japan’s experience, but much worse than most Americans currently expect.”

  “People talk about green shoots, I see many yellow weeds instead,” the famously bearish (and famously right) Nouriel Roubini told Reuters yesterday, taking the popular cliché to the next level. “ When I look at the data… I see [problems with] consumption, retail sales, production, investment, housing, employment conditions, etc.

“So I expect the recession is going to last at least another six months… given the imbalance of the economy — the weak position of households, consumers, banks, financial institutions, corporates — they all have too much debt… I see a period of two years of low economic growth in the U.S.”

  When the recession is over, how will we know? Last month, we explored the idea of peaking initial unemployment claims being the canary in the coal mine for economic recovery. While it’s worked in the past… we’re not convinced.

Today, check out this D-list data point — Capacity Utilization. 

It’s a simple concept that’s hard to track. Capacity utilization measures what percent businesses are using existing capabilities. 100% marks an economy “firing on all cylinders,” as the corporate catchphrase goes. When consumer demand drops, so too does capacity utilization… and since 1970, it hasn’t picked up until the worst is over.

Yesterday, capacity utilization in the U.S. found a record low of 68.3%. The Federal Reserve said utilization fell another 0.7 percentage points from April to May, to the lowest score since at least 1967, when they started keeping track. Factory output is down 13.4% over the last year, the biggest drop since 1946.

  The return of market pessimism has given the bond bubble a stay of execution. After skimming 4% this time last week, the yield on a 10-year note is all the way back down to 3.65% today. Traders are using the same playbook from late 2008 — sell stocks and commodities, buy Treasuries and dollars.

  But despite the bond bust’s reprieve, mainstream media are finally cluing into our nearly bottomless pit of debt. Exhibit A, this week’s Economist cover:

Exhibit B: “America’s Sea of Red Ink Was Years in the Making,” headlines a recent New York Times article. “This debt,” reads the Old Gray Lady, “will constrain the country’s choices for years and could end up doing serious economic damage if foreign lenders become unwilling to finance it.

“The solution, though, is no mystery. It will involve some combination of tax increases and spending cuts. And it won’t be limited to pay-as-you-go rules, tax increases on somebody else or a crackdown on waste, fraud and abuse. Your taxes will probably go up, and some government programs you favor will become less generous.

 

“That is the legacy of our trillion-dollar deficits. Erasing them will be one of the great political issues of the coming decade.”

“Who would have thought?” asks Addison Wiggin, clearly trying his hardest to stifle a cynical rant. “That’s practically the verbatim conclusion of our film, which finished shooting over a year ago. Funny, it’s also the core thesis of a book called Empire of Debt, which we published in 2006.

“For our efforts, we endured years of being called ‘gloom and doomers’… alarmists not connected with the reality that ‘deficits don’t matter.’ And now these two rags think they’re breaking news about how debt grows over time and will one day cripple our economy? Heh… really?

  "There’s no doubt that we’ve got a serious problem in terms of our long-term deficits and debt," President Obama added yesterday. Very good, Mr. President… admitting you have a problem is the first step.

"I am concerned about the long-term issue of our structural deficit and our long-term debt,” he added in a separate interview, “because if we don’t get a handle on that, then there’s no doubt that at some point, whether it’s the Chinese, the Koreans, the Japanese, whoever else has been snatching up Treasuries are going to decide that this is too much of a risk.”

Yet the president is sticking to his guns… just like those before him: "I make no apologies for having acted short term to deal with our recession.” Once his agenda is accomplished, he assured CNBC, “we’re going to have to close that gap between the amount of money coming in and the amount of money going out.” Right… save that crisis for another day.

  Consumer inflation fell 1.3% over the last 12 months, claims the government today, the biggest decline since 1950. According to Commerce Department data, energy costs are leading the way, down 27.3% annually. Like yesterday’s PPI, the consumer price index actually inched up last month, by 0.1%. That was still notably less than the 0.3% the Street anticipated.

Thus Uncle Sam can still claim inflation is out of the picture… and the printing presses can keep rollin’.

  Last today, an opportunity:

“Phones and mobile devices are still growing explosively,” notes our breakthrough tech analyst Patrick Cox. “About half the world hasn’t even got phones yet. Those that do have mobile phones will be upgrading regularly as more functionality becomes available. In the process, personal computing and the Web will come to most people first through their phones.

“Rather than ‘phones,’ perhaps I ought to use the term used in tech circles: ‘mobile devices.’ In fact, the word ‘phone’ seriously understates the functionality of new mobile devices like the iPhone; Google’s Android; and my favorite, the multi-tasking fully Web-integrated Palm Pre. These devices incorporate powerful multimedia players with room for more video and music than I would even want to have cluttering my house on physical discs. More importantly, they are platforms capable of running increasingly sophisticated software, ranging from productivity to GPS devices.

 

“We know, pretty much, where this is leading. We will carry, in a mobile device, the computer processing chips that run and integrate all our electronics. This includes phones, computers and televisions, as well as various appliances like home security systems and Kindles. Eventually, your robotic business and domestic assistants will also be part of this system.

“Accelerating efficiency in chip performance, of course, will make this possible. As I wrote recently, that acceleration is not slowing with the overall economy. Chip makers are forging ahead, realizing that the downturn will end. They well know that those who are not prepared for renewed growth will fall behind and fail. This is also true, by the way, for investors. You need to be prepared for the recovery. Even if the debt drag prevents optimum economic growth, there will still be sectors that do spectacularly well.”

Patrick’s Breakthrough Technology Alert readers are aptly prepared… are you? Check out his latest special report, here.

 

Thanks for reading,

Ian Mathias

The 5 Min. Forecast

P.S. Right before we sent today’s 5, President Obama unveiled some super-sized financial regulations… likely the biggest shakeup of the fiscal bureaucracy in decades. “We’re going to make sure that we have got a systemic regulator, somebody who can oversee the entire system," he hinted yesterday. Should be interesting… check out tomorrow’s edition for our analysis.

P.P.S. If you haven’t checked out our latest offer, you’re about to miss this opportunity. Click here to learn about Resource Trader Alert… 50% off for the next two days.

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