The Dow and the Economy - 5 / 14 / 2009

Its been a few days for me readers, a busy schedule is partly to blame. The other part is watching the markets and seeing nothing new to report. Our collective analysis is playing out as we have written it and now we need to be patient until the next catalyst hits the markets.

We have been hearing and reading a great deal about bad news and the markets. The standard comment is that "All Bad News is Built into current market levels." Don't believe it. At 7,500 bad news or good news the market was heading higher. This was confirmed by 3 weeks of earnings announcements that trounced analysts expectations on the way to a near term Dow high of 8574. But now we have exhausted the appetites of the value buyers that created the last rally. A new floor has been created some where around 7800. And the traders are back fully in charge of these markets.

Here's the bad news for market Bulls and the thinking that a new Bull market has launched. There needs to be a catalyst that turns this Market into a Bull market, and so far we have had none. In 1995 the market rocked past 5,000 on technology IPO's. In 2002 the markets climbed on cheap money and interbank rates that systemically altered investor and finance professionals perspectives, vastly inflating values beyond rational analysis.

We all know the rest.

The problem is that for the next 6 months, there will be nothing but consumer contraction towards stability, job contraction, and business contraction and bankruptcy. It took enormous amounts of capital to stabilize the financial system, 1.7 trillion US dollars, and now we have no choice but to sit and wait for the next, well positioned company and industry to lead us into the next Bull market. WE ARE NOT THERE YET. So be very careful about ignoring or re-entering equity based funds with your savings. We have real issues to overcome.

Here are the 2 issues:

1. The Fed has publicly committed so much money in stabilizing the financial system that as they pursue the job of auctioning off bonds to supply these funds, a massive devaluation of the dollar is occuring and huge inflationary forces are set to take off. In certain cases this may act as a stimulus, further cheapening the value of US exports and making the US more competitive. But that means that the value of US assets will ultimately fall as well - by some estimates by another 25%. Meanwhile home values have stabilized (seemingly) by virtue of the cheap Fed / Obama money and the entry into the lower end of the market by first time home owners - that's the part of the market worst hit by the real estate bubble bursting. My gut tells me the safest place to put money is gold. You may have to deal with volatility, but its the only investment that hedges your savings account balance.

2. We have a significant issue with regard to the Dow Jones Index - it has become a puppet of Day Trader sentiment. It has accelerated past it current fair value in recent speculative bliss, and now has no more legs, no more breath until our next catalyst. Growth buyers (I like to call them value minded speculators) are very reluctant about purchasing equity under these circumstances. Its these growth company buyers that truly lead us into the next Bull market, and they have much to over come. Earnings will stagnate, home values have stagnated, the value of US goods and services will decrease too.

The only way to create sustainable value in a company, or in an economy is by increasing productivity and thereby producing more value. The stimulous packages have done nothing yet but keep the financial infrastructure from crashing around us. They have yet to create value, and unfortunately given the fact that the stimulous money went entirely to groups that have a recent history of taking or leveraging value created by others, I am not hopeful.

Build Value Every Day.

Brad van Siclen