The Markets: Bull Or Bear By Gareth Milliams

The global financial crisis has been described as economic warfare. Yet for the last month, we have watched the S&P grow nearly 30%. But is it sustainable?

Last week the second largest US mall owner, General Growth announced one of the biggest bankruptcies in US history, going down for $27 billion. Additionally the bondholders of MGM Mirage in Las Vegas led by Carl Icahn have asked for that casino to announce bankruptcy with debts of more than $13 billion.

The big four autos are on their last legs with Chrysler being forced into a marriage of convenience with Fiat and General Motors who after having had to sack their President on White House orders are now seriously considering Chapter 11.

What I find more worrying is that much of this rally has been led by the financial sector who (as Goldman Sachs have shown) are quite willing to outright lie about their quarterly results. Additionally, there is nothing fundamentally strong about the American banking industry.

For those who believe that happy days are here again, take a look at the chart below (with thanks to Doug Short-dshort.com):



These are what Doug Short calls the "Four Bad Bears", 1929-32,1973-74, 2000-02 and 2007-09. 2007-2009 just looks too short, considering that this is (according to Alan Greenspan) a hundred year recession. If this is truly to be a short but deep recession then results have to beat expectations for more than one quarter. It seems to me that the markets are going up, but are leaderless. There is no recovery but only misplaced optimism.

Below is another DShort.com chart, this time looking at previous bear market rallies during this downturn. You'll notice a pattern, that the deeper the point drop, the greater the upswing when the market rallied back.



Looking at the chart, the so called 'new bull' looks suspiciously weak. Presently, the main equity indexes appear overbought and the fundamentals still look negative. From Reuters April 15:

Washington, April 14 - US retail sales unexpectedly fell by 1.1% in March due to declines in all major retail categories except food and beverage stores and health and personal care stores. But the surprise drop in March retail sales follows a 0.3% increase in February, which the Commerce Department upwardly revised from a 0.1% decline.

March's 1.1% drop is the biggest decline since December and well below the 0.3% gain economists expected.

A big factor in the overall decline was a 2.3% drop in auto and parts sales, which followed a 3.0% drop in February. Automotive sales are now down 23.5% from the level seen in March 2008. Gas station sales fell 1.6% in March and are down 34.0% from a year earlier.

Sales at electronics and appliance stores fell 5.9% in March, and clothing store sales fell 1.8%.

Retail sales excluding autos fell 0.9% in March, below economists' expectation of flat sales for the month. Commerce upwardly revised February sales ex-autos to a 1.0% gain from the 0.7% increase it first reported.


So as unemployment keeps rising, house prices continue to tumble and people cut their spending, there are those who are announcing a new bull market.

I'm convinced that it is not. I believe that it is a reaction to earlier sell offs and that the higher the bounce, the greater the upcoming downturn will be.

We have further tests to come in this recession. The first will be in the financial sector and heavy manufacturing such as auto's.Then we will have inflation. Interest rates will go up, testing many home and small business owners, but there will be growth. Inflation is a byproduct of growth & no recovery can happen without it. Higher inflation is created by greater demand than supply for goods and services. Until I see that happening, I'll protect my clients money and ignore these persistent false dawns.