The market's continued run has exceeded any correlation to the real economy. It almost as though Wall Street has its own economy -- or it's seeing the same numbers the rest of us are, and interpreting them completely differently.
Two contributing factors for that market run are the weakness of the U.S. dollar and non-existent interest rates. The fundamentals, as seen in the various economic reports, are not giving a true picture due to stimulation and manipulation.
Economic numbers are skewed positively. For instance, take a look at the numbers that are currently the three biggest sources of concern: unemployment, consumer spending and mortgages.
Unemployment Data
The latest report shows unemployment at 10.2%. Not only is this number bad, it has risen to this level more quickly than expected. Further, it is not even the real number!
The real unemployment number is closer to 18%, and the discrepancy lies is in how the number is calculated.
The number does not include people who want a full-time job but are forced to take part-time work. Seasonal jobs also distort the numbers. But the really scary problem with the unemployment calculation is that those who have been unemployed for more than a year and still have not found work are not represented, because it is determined that they must no longer be looking for jobs.
In an economic environment such as this, it is not unusual for people to go a year without finding work. In reality, these people are in worse shape because they are no longer even receiving benefits (though unemployment benefits have been extended in places where unemployment is more than 8.5%).
However, if consumer spending accounts for more than 70% of the economy, as we are told repeatedly by the media, having people with no income at all or subsisting on unemployment benefits for over a year isn't good.
But since these people are not counted in the unemployment number, not only do we not get a true picture of the un- and underemployed, we do not get a true read on anticipated consumer spending from the unemployment number.
Consumer Spending
Consumers spending can be broken into two categories: necessity and discretionary. The real value of consumer spending comes from the discretionary side.
Usually, when consumer spending is up, it is considered good for the economy, but this is not the case if it is simply more necessity spending driven by large increases at the gas pump or by rising food costs.
When this happens, necessity spending takes away from discretionary spending. But, higher necessity spending is still included because a higher consumer spending report is a good thing. After all, as we discussed, consumer spending is more than 70% of the economy.
Does anyone see it as funny that the positive effect of rising gas and food prices is included in the consumer spending report?
This makes the consumer spending report look good while those same rising gas and food costs are taken out of the producer price index and consumer price index reports, because it makes those reports look negative due to potential rising inflation levels.
Housing Data
The other critical component right now is housing data. One of the reports everyone eagerly awaits is mortgage applications, but this report is also skewed positively.
The mortgage application report is calculated by adding up all mortgage applications. This means that if you plan to buy a house and apply to more than one company for a mortgage, each of your applications is counted as a separate application.
In this environment, where mortgages are hard to come by, it is much more likely that more people are filling out multiple applications to get a mortgage. Instead of putting in two applications to buy one house, people are now putting in five applications for the same home. The increase in mortgage applications in itself indicates an increase in the home-buying market that is simply inaccurate and untrue.
Where Does Reality Come In?
Can these numbers and other economic data be fixed to be more accurate? Obviously, the answer is yes, but why would Wall Street and Uncle Sam want to fix them? The changes would reflect more accuracy but disclose more negativity in the economy, as the real numbers will not reflect the level of misplaced optimism that the skewed numbers will.
This, in turn, will lead to consumers having a more pessimistic, though more realistic, outlook. Of course, pessimism will always decrease consumer spending ... and we all know what that will do to the economy.
The true test of the economy will come when the government pulls out of the day-to-day intervention in economic matters and we see if the real economy can stand on its own two feet.
Technical Head Fakes
On the other side of the optimistic fundamentals, the technicals are throwing head fake after head fake on the downside to us.
I have never, ever seen so many sell signals get ignored and reversed on a regular basis, and I probably won't ever again!
With the technicals and fundamentals misguiding us on a regular basis, what can we use to get reliable indications of future market movements?
Year-End Bonus Round
Well, one is market psychology. This is always predictable: The market always wants to go up! You want it to go up, Wall Street wants it to go up, and so does the government.
But now, Wall Street wants it to go up even more. No bonuses last year, combined with the reality of the economy, continued unemployment, soaring inflation, rising interest rates and potential legislation limiting the big Wall Street bonuses has the Street worried that they might not see those fat checks next year.
With a bonus on the table this year, I expect Wall Street to keep this market up until mid-December when bonuses are paid. This year's bonus is important with Wall Street missing last year's and, in all likelihood, next year's.
This year has a big bonus all but written in with the market up at these levels. So, we are in a situation where we have to combine the fact that this year may be Wall Street's last chance to go home with big checks due to potential upcoming legislation, along with the fact that this might be the one bonus year sandwiched between two non-bonus years.
Add it all together, and I see the market unchanged and more likely up into mid-December (bonus time for Wall Street), barring a catastrophic event.
After that, it's anybody's guess, but I will not be heading home for the holidays being long the market.
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