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Bears Are Dead Wrong? Hmmm….

Bears Are Dead Wrong? Hmmm….

Posted by Karl Denninger

Yahoo has jumped the shark with publishing “1,300” on the S&P by the end of the year, a 17% annual increase:

“The bears have been consistently wrong throughout this whole rally,” Altucher tells Aaron in the accompanying clip. “If you followed the bears’ advice at the bottom you’d be dead broke right now.” For full disclosure, Altucher did not call the market crash in 2008. “Better to be consistently bullish than consistently bearish.”

Well now that’s math: 70% of the time the market is ascending, historically.

The problem is that when it declines it almost always goes down much faster than it goes up, and due to that pesky math again if you lose 50% you must get a clean double to be “back to even.”

Someone better look at the 1930s.  We had the same sort of calls then – and there was a ferocious rally fueled in no small part by people who were convinced that 1929 was just a “garden-variety panic.”

They were wrong.  When the market rolled over for the second time instead of collapsing in a spectacular crash it instead ground lower for years, and in fact we did not see a secular bull market again until the 1950s – following a World War!  Worse, while the market did make its “low” in 1932, it still doled out a 50% loss from 1937 to 1942, as you can see here:

The question, of course, is “where are we now”?  From today’s charts you can make a number of arguments but “correlation” is going to be missing in all of them.  Indeed, going back through the entire range on this chart I can’t find a pattern that looks like this – so those who claim “we have a good fit” are trying to fit a thesis to a chart, rather than finding the chart fit first and then extrapolating.

I can make a fairly clean argument that this is a head and shoulders pattern in development.  A fall below ~6,000 in the DOW would confirm this, although such a fall might not come for as many as five years (if the chart is symmetrical.) 

By the way, should that happen the downside target is, effectively, zero (14,000 – 7,000 neckline, approximately = 7,000 points down for the target!)

Is that extreme?  Sure is.  But the S&P 500 looks an awful lot like a double top, and the target on that, if it is, happens to be a full retrace of the move that led to the double top.  Being generous this puts the long-term target at 400, being “aggressive” puts the view more in line with 1988, which is roughly half that.  Now you know where my “SPX 210.23” came from that’s in the header of The Market Ticker.

You could call that sort of view catastrophically bearish, of course. 

Or you could call it realistic. 

To call it catastrophically bearish (that is, ridiculous) you have to make the argument that a burst credit bubble can be re-inflated via some means.  I would like to see someone show me where this has been successfully accomplished in the modern world.  Certainly Japan has tried, yet with 20 years of effort they remain nearly 75% off their stock market’s all-time high. 

Japan couldn’t make it happen – why do you believe we can?

Dave Rosenberg makes the same set of essential points in a piece that Zerohedge linked up today.  And certainly, this rally has been good to you if you bought the bottom – instead of being paralyzed in fear.  Many people (myself included) did, but sold out far too soon – we did not believe that the balance-sheet fraud among banks could carry us this far.  We were wrong.  That’s ok – nobody ever goes broke taking a profit, even if you leave half of it on the table.

Mr. Rosenberg makes the argument that the rally has been essentially fueled by the prop desks selling back and forth to each other and acting like geniuses.  Maybe.  What we do know is that institutional mutual funds are back to 3-1/2% cash positions – where they were in October of 2007.  We do, of course, know what came next.

What we do know is that there are simply no sellers.  Absent sellers prices tend to drift upward.  That’s ok, for how ever long it lasts.  It is the “how ever long it lasts” problem, however, that eventually comes home to roost, as those prop desks can short just as quickly as they can buy.

More troubling as Dave has picked up on is the fact that ex-government handouts personal income is contracting and now has for two months in a row.  NBER uses this indication (as do I) for a real read on whether we are in an economic contraction or expansion.  It is, in my view, much more accurate than the so-called GDP, which is influenced by trade imbalance and inventory cycles – neither of which have a thing to do with organic final demand.

This Friday we will be treated to the Non-Farm Payroll report where the only people trading it will be the Globex (electronic) futures players.  That promises to be a wild ride, and one that I will sit out on purpose.  Surprises either side of consensus are likely to be poorly received – a “hot” (good) number will probably spike yields higher, which is what produced the two late-day sell-offs last week.  A “cold” (poor) number likely hammers yields, but at the same time hammers stocks, as it leads to questions about whether the so-called “recovery” we’ve been promised is in fact real.  So like Goldilocks, we need a “just right” figure (in the eyes of the market, not necessarily the so-called “consensus”) for the market to treat this release with benign neglect. 

Key to this release will be the “ex-Census” figures, since Census jobs are both part-time, of limited duration and relatively-low-paying.  As such everyone doing analysis on the number (myself included) will be backing that out to the best of our ability; one hopes that we get a clean delineation from the BLS so our efforts are not “a guess.”

The risks in the back half of the year are quite a bit more serious.  To begin with those census jobs will be finished, and those employees will get pink slips.  This will impact the NFP number in the back half of the year.  Housing appears to have sputtered despite all the tax credits and distortions and at the same time The Fed is finishing their purchases of MBS (which have artificially suppressed rates); this portends more softness in housing, perhaps a lot of it.

The bottom line on housing, which is underlying this entire mess, is that it is still too damn expensive

Like many Chicago-area residents who’ve lost their homes to foreclosure, Alondra Navarette had nowhere to turn when forced to leave her spacious house earlier this year.

The struggling maid could no longer afford her ballooning mortgage payments when house-cleaning jobs dried up. So she moved into the already cramped basement apartment occupied by her daughter and a roommate on Chicago’s Northwest Side.

Government hacks always prattle on about “affordable housing”, but none want to talk about why houses are so damn expensive – it is the deliberate actions of government, which have protected banks who lent far more than these homes are realistically worth, that prevents homes from being affordable!

Is there any hope for this to change?  Not so far.  The banksters are more important than those of modest means, and the consequences become increasingly severe the longer these outrageous and destructive policies are maintained.

Then you have small business – the engine of job creation and economic advancement in this country.  There’s no joy to be found there:

After some upward trends for most of last summer and into the fall, Discover’s monthly check on the pulse of small business owners measured 75.7 in March, down 9.2 points from February and back to the levels of a year ago.

We’ve seen bigger month-to-month drops, but there is clearly a pattern here: Small business owners don’t like what they’re seeing – both at home and in the larger economy – and they’re responding by pulling back, rather than just holding the line,” said Ryan Scully, director of Discover’s business credit card, who commissions the monthly survey. “Tax season could be having an effect on the overall mood, especially because they’re still not seeing any relief from the government.”

So much for “recovery” among the engine of job growth.

We have a radical divergence between the stock market and opinions in the real world.  Who’s right?  In the end, the real world always wins, but timing is a problem – manias always go further than you think they possibly can, and this one has been and will be no exception to that rule.

I still need to see real improvement in the leading indicators I follow, and so far, it simply isn’t there.  I don’t use “stock prices” as part of my data set for business conditions either – if I had, I would have been catastrophically wrong in 1999, 2007 and 2009!  Rather I focus on consumer and small business confidence, sales tax numbers from the states and internals from the household survey in the employment report.  Of those only one – the internals of the NFP report – and only for one month, last month – has show encouragement, and one month does not a trend make.

Small business and consumer confidence have not put in the sort of forward expectation numbers that tell us people believe they will both hire and be hired, and thus be able to spend freely.  Leverage in the consumer space is still too high, as measured by the HOPE DTI numbers – instead of forcing those who are in fact bankrupt to recognize it and clear their debts (which would also bankrupt the banks that imprudently loaned these people money) we have chosen instead to paper over insolvency with fraudulent accounting.

This, however, doesn’t change the overburdened consumer’s mood nor does it help their long term spending power.  It can (and has) provided a temporary, short-term support to spending, as the government has come in with direct and indirect subsidy.  But this cannot last forever, and without actual economic activity in the private sector the odds rise precipitously of a ruinously bad “double dip”, destroying those people who jumped back in “chasing” this market higher – especially if you were late to the party, as most individual investors were and are.

Be careful.

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