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[TTHQ Staff]

BEING STREET SMART
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Sy Harding

WAS THE ECONOMIC IMPROVEMENT AN ILLUSION? May 1, 2009.

Factors involved in forecasting the market rally included the market’s extreme oversold condition in February, and record level of fear in investor sentiment. I said the catalyst to get it started would likely be temporary improvements in economic reports, especially from the housing industry and consumer spending.

And so it was. Reports in February and March showed home sales, retail sales, even ‘durable goods orders’ had experienced unexpected upside reversals in January and February. Those reports coming in during March helped fuel the rally.

But in this column a couple of weeks ago I asked “can the market climb a higher wall of worry?”, because the reports for March were beginning to come in and showed little to no follow-through to the better January and February numbers.

For the most part that lack of positive follow-through has continued over the last two weeks, with reports showing that retail sales, durable goods orders, existing home sales, new home sales, new home starts, permits for future starts, all reversed back to the downside in March.

In the last few days the Case-Shiller Home Price Index showed home prices continued to decline in March. And the Commerce Department’s ‘Personal Income and Spending Report’, showed consumer income fell 0.5%, while consumer spending declined 0.2%, in March.

It wasn’t all bad news. On Friday the University of Michigan/Reuters Consumer Sentiment Index showed an improvement from 57.3 in March to 65.1 in April. That’s still a dismal number, not that far above its record low of 55.3 in November. But up is up, and an improvement.

And the ISM Mfg Index rose to 40.1 in April from 36.3 in March. However, any number below 50 indicates manufacturing is still declining, so the best that can be said is that the pace of manufacturing’s decline may be slowing.

Meanwhile for the stock market April was a very positive month, with the S&P 500 gaining 9.4%. But all the gain was made in the first two weeks of the month. The market rolled over into a sideways trading range over the final two weeks.

For instance the S&P 500 was at 869 on April 17, and ended the month at 872, just 0.3% higher than it was on April 17.

So perhaps the market has taken notice of the lack of follow-through to the positive economic reports for January and February.

But then it hasn’t been helped much lately by other news either.

The report this week that GDP declined 6.1% in the March quarter, versus the consensus estimate that it fell 5.0%, was not a good indication that the economy is bottoming.

Nor was the news good this week from the auto industry, once the nation’s largest employer, and major driver of the economy.

Chrysler’s bankruptcy on Thursday captured the headlines. But General Motors is reported to also be close to bankruptcy, and has only until the end of May to show its survival plan.

That won’t be made any easier by Friday’s reports showing horrendous declines in auto sales again in April, sales at U.S. and foreign brands down more than 30%.

Meanwhile, Chrysler’s bankruptcy is being touted as a good thing, a positive for the company and the economy in the long run. But first the economy has to get through the short run. And in the short run bankruptcies are never a good thing for most of those involved. Investors are wiped out. Employees have their income impaired. Bond-holders and other creditors usually are paid pennies on the dollar if anything. Suppliers are usually hit hard by the loss of business.

In the case of Chrysler, the company has already announced it will shut down all of its manufacturing plants for the duration of the bankruptcy (but its employees will receive 80% of their pay for not working), and will get rid of a hundred or more dealers. More than that number of dealers will probably go under on their own anyway. Chrysler and the government say the bankruptcy will be a fast-track process, with the company emerging from bankruptcy in an unusual 30 to 60 days. Don’t bet on it.

While the company is supposed to emerge from the process a leaner more efficient company (which will be partially owned by Fiat and U.S. taxpayers), if it emerges too soon it will be coming out of its shell into a still hostile environment, where its survival may still be a problem if the latest auto sales numbers are any indication.

All in all, it does seem that the glimmers of hope offered by the upside reversal in economic reports for January and February may have been temporary. Their reversal back to the downside indicates the economy remains in trouble.

So, I have still seen nothing that changes my original forecast that the market would stage a substantial bear market rally that would be well worth going after, but that when it ends the bear market will resume during the market’s unfavorable season, and profits will have to come from the downside again.

For now the market is still able to shrug off the return of bad news. But stay tuned.





Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at http:/www.SyHardingblog.com. In 1999 he authored Riding the Bear – How To Prosper In the Coming Bear Market. His new book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!