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Lucky me, I sold last Friday. Is today a confirmation of my prediction of a bear market rally? We shall see...
Written May 21, 2009...
| quote: | Do you guys believe we are in a bear market rally? Here is my take...
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Bear Market Rally?
The stock market has enjoyed a huge rally since March. But is it a bear market rally? Does it look good on paper but in reality bound to end? My answer is yes. This is a bear market rally and it will end. The recession is nowhere near over.
The government has taken unprecedented action with the economy on the principle of Keynesian economics. Keynes wrote in his The General Theory of Employment, Interest and Money that recessions were the result of insufficient aggregate demand. We have witnessed a drastic decline in aggregate demand. Sales in the consumer cyclical sector have done the worst. All you have to do look at the car industry. Who wants to buy a car in this recession? The most unlikely car producer, Toyota, has even incurred its first quarterly loss since 1950. Chrysler has filed for bankruptcy and General Motors is on the brink. The decline in demand is not limited to cyclical products like cars. Aggregate demand has fallen in almost every sector. Even oil demand has fallen drastically. The stock market has appreciated more than 20% since its March low but is this price rise justified? Has aggregate demand recovered? Are people buying more cars? Are people buying more computers? Are people buying houses again? Are banks lending again?
Another aspect of Keynesian economics is the role of government in a recession. Consumption and investment expenditures have fallen off as happens in a recession. Because a recession is caused by a decline in such aggregate expenditures, the only thing which will pull the economy out of recession is the restoration of aggregate demand. Consumers need to consume again. Investors need to invest again. Generally, consumers and investors will not jump back into the economy unless they have an incentive to do so. Government expenditure fills the void left by consumers and investors. This is the purpose of the American Recovery and Reinvestment Act of 2009 worth $787 billion. The government is consuming and investing with the aim of increasing aggregate demand. Only the government is capable of single-handedly stimulating the economy. Such action is demanded by the people who are suffering from the effects of the recession. The government would be in serious trouble if they did nothing.
The role of the Federal Reserve also cannot be discounted. The money supply has been increased by about $2 trillion. The banks have benefited most from this inflation as they were suffering a very serious liquidity crunches. Insolvency was practically inevitable if it were not for the actions of the Federal Reserve. Massive bank runs rivaling that of the Great Depression were in the works. This systemic collapse has been averted. The link between the Federal Reserve and Federal Government in their emergency intervention is the Federal Reserve has financed the $787 billion stimulus package.
All this intervention has finally bared fruit. Most notably, the stock market has recovered a lot of territory since March. But most importantly, confidence in the systemic integrity of the economy has been largely restored. No economic recovery is possible if the very fabric of the economy is ripped apart by bank runs, deflation, and ultra high unemployment. I attribute the rise in the stock market to the actions by the Federal Reserve and the Federal Government. Their stimulus has essentially worked…for now. Such government expenditures are unsustainable and are built upon deficits. The goal was to provide the atmosphere for a restoration of aggregate demand. Has this happened? Are consumers buying again? Are investors investing again?
Consumer expenditures have generally remained flat. Car sales have not recovered. In fact, hundreds of car dealerships are expected to close their doors. Unemployment claims are still rising. Sales in real estate are still flat or negative. A bright spot may be the stock market. Bargain hunters have entered the market en masse. But stock market recoveries need more than just bargain hunters. A bull market needs everyone investing. That has not happened. I expect this bear market rally to finally end initiating flat or declining stock market performance if consumer expenditures do not recover any time soon.
I believe the 10-Year Treasury bond yield is too high. I see this as an indicator of an overvalued market. This reinforced my belief we are in a bear market rally. I believe the yield should be below 3.23% and preferably believe 3%. That is where I believe the yield should be. It is currently above that and I expect to see the yield fall once again when the bear market rally ends.
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Not that much of a problem when viewing the page on the computer, buy if you're checking the site on a mobile phone its damn annoying 
Anyway thats about it.
