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[TTHQ Staff]

BEING STREET SMART
____________________

Sy Harding

SLIP-SLIDING AWAY. APRIL 15, 2005.

In last week’s column I focused on the consistent seasonal patterns that indicate the stock market is likely to see its low for the year in the October to November time-frame. Those are that the market has most of its serious corrections in the unfavorable seasonal period of May to October, and is also in the first year of the Four-Year Presidential Cycle, in which the first two years of the cycle are historically the weakest, (while the last two years of the cycle are the most positive).

This week we’ll look at the fundamental conditions on which the market depends for support. Unfortunately, they are looking no better than the seasonal situation.

In the short-term, the market trades in response to news events, rumors, brokerage firm upgrades and downgrades, and the like. But the long-term trend of the market depends on what the market anticipates will be the condition of the economy, and therefore corporate earnings, six months to a year ahead.

The big bear market of 2000-2002 ended several months after Washington pulled out all the stops to provide the most aggressive stimulus package ever seen, in an effort to pull the economy out of the 2001 recession. By the fall of 2002 the stock market could see that the tax rebates, tax cuts, low interest rates, and the effects of rebates and zero-percent financing by big-ticket item manufacturers, would produce a boom in consumer spending, which coupled with the increased government spending on the war and homeland security, would give the economy a big boost. In anticipation of that result, in the fall of 2002 the stock market launched into a new bull market.

Last year however, the new bull market ran out of steam as investors, especially institutional investors, began worrying that the beneficial effects of the stimulus package had been used up after achieving only limited results. The concern was that the economy would soon have to face up to the downside of the stimulus package. The economy had recovered, but employment was still lagging far behind. Consumer spending had become spectacular but had consumers heavily in debt. Government spending, and largesse regarding tax rebates and tax cuts, had reversed previous large budget surpluses to record deficits. Corporations had not followed through with capital spending on plant and equipment, leaving the economy dependent on consumer spending even though record consumer debt and rising interest rates would make that increasingly difficult.

Economic numbers have become more worrisome this year, but until a few weeks ago the market was able to ignore the bad news, and concentrate on those numbers that were still positive. However, economic reports of recent weeks leave little for investors to hang their hopes on, as they look out in anticipation of what the economy may look like six or nine months from now.

This week produced particularly discouraging news. The Commerce Department reported the U.S. trade gap reached another new monthly high of $61 billion in February. Three years of a plunging U.S. dollar has still not even slowed the growing trade gap, let alone reversed it. The Treasury Department reported the Federal budget deficit hit a new record high of $71.2 billion in March. (Washington is now spending more than it takes in at an annualized rate of a spectacular $854 billion).

The New York State Manufacturing Index unexpectedly plunged all the way to 3.1 in April, from 20.2 in March. The decline was much worse than economists had projected.

The Commerce Department reported U.S. businesses added 0.5% to their inventories of unsold goods in February, while their sales fell 0.4%. That’s not a good sign for future manufacturing numbers, or the employment picture. Not providing much hope for a quick improvement in consumer spending, the University of Michigan’s consumer confidence index fell to 88.7 in mid-April, from 92.6 in March.

There’s not much support for the market in this kind of news, especially against the backdrop of rising interest rates, and rising inflation, both of which are historic negatives for the market by themselves.

I would much rather be the bearer of good news, but have to tell it like it is.

More and more the situation is supporting my warnings of recent months that the market will have a serious decline this year, and will not reach its low until October or November.


Sy Harding is president of Asset Management Research Corp., DeLand, FL, publisher of The Street Smart Report Online at www.streetsmartreport.com and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market.


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