5/18/09: Secular bull, earnings drop, recession’s end, real unemployment, credit card defaults, and the end of America

Do you think last week’s dip was just a gathering of market strength for another push higher? Do you believe the next secular bull market is upon us?

Paul Lim at The New York Times reminds you to define your terms carefully, “because a new secular bull would require not only rising stock prices, but also new all-time inflation-adjusted highs in major stock indexes. That means the S&P; 500 would have to climb to at least 1,890, which represents its March 2000 peak of 1,527, adjusted for inflation. With the S&P; now at 883, the market would have to soar an additional 114% — on top of the 31% it has already climbed over the last two months.”

That 114% gain may be especially hard to pull off considering that “S&P; 500 earnings have declined over 90% over the past 20 months,” according to Chart of the Day. That’s “by far the largest decline on record” all the way back to 1936, and is shown in jaw-dropping glory on this chart:


Your eyes have not deceived you. “In fact, real earnings have dropped to a record low and if current estimates hold, Q3 2009 will see the first 12-month period during which S&P; 500 earnings are negative.”

Given that, it’s easy to see why Donald Luskin at SmartMoney was surprised to learn that Robert J. Gordon, an “acclaimed macroeconomist and professor at Northwestern University, …thinks the recession is over.” Gordon is one of the seven members of the committee that decides for the record books when recessions begin and end, but usually well after the fact. Luskin is “unaware of any previous case in which a member of this Committee has ever stepped forward and declared the end of a recession in real time.”

What brought forth Gordon’s gutsy call? Claims for unemployment benefits. “According to Gordon’s research, in every recession since 1974, the peak in jobless claims came within weeks of the bottom of the recession.” How does Gordon know they’ve peaked for this cycle? By seeing that “the pattern of the decline in magnitude and timing nearly perfectly matched all the previous instances, in which no subsequent higher peak developed.”

That’s great news if it’s true, but believing it sure requires a leap of faith. According to Shadowstats, the current unemployment rate is still rising at a disconcerting angle and is already 20% if calculated to include “discouraged workers,” which were “defined away during the Clinton Administration.” It calls the figure calculated in that manner the SGS Alternate Unemployment Rate, and provides the following historical chart:


It’s enough to make up Jeff Clark’s mind. He thinks the S&P; 500 will bounce a little higher from support at 875, but that the decline will resume again after that. His best-case scenario calls for the S&P; 500 to bottom again at 800, but his worst sees “a new low on the year.” It’s too soon to tell, but it’s not too soon to sell in May and go away.

He says you shouldn’t “listen to the talking heads on the business shows who are telling you to buy into this decline. That’s a recipe for disaster. A reversal is unfolding, and it has the potential to wipe out a lot of the gains stocks have made since March.”

Remember that this entire economic crisis originated in the banking sector. That’s kept many economists and analysts looking for yet another shoe to drop from that gang of misfits, especially after the stress tests proved to be a good deal less stressful than we’d hoped. One popular place to look for dropping bank shoes is credit card defaults. They’re not looking good.

CNBC reported last Friday that credit card defaults reached record highs in April, “with Citigroup and Wells Fargo posting double digit loss rates, as the recession slashed more than 2 million jobs since the beginning of the year.”

Keep in mind that April is one of the better months for consumers because of tax refunds. Even so, Citigroup’s “annualized charge-off rate rose to 10.21% in April from 9.66% in March.” That 10% level already breached at Citi bears watching because if “credit card losses across the industry top 10%, as some analysts and bank executives expect to happen later this year, loan losses could reach between $70 billion and $75 billion.”

Of course, that’s no problem in the new America because the Treasury will just borrow funds from taxpayers like you to save the poor bankers from credit card deadbeats — exactly how you saved them from subprime mortgage deadbeats. With good citizens like you across the land, what bank needs customers?

As Timothy P. Carney points out in The American Spectator, “today, bailouts are commonplace. We all assume that more struggling industries will get on the federal dole in the coming months, and in our next recession we can expect bailouts as a matter of course.”

It’s sad to see our once great nation reduced to that. Could it really be that subprime losers and greedy bankers mark the end of the road started by our forefathers in the heat of revolution and defended by our grandfathers at Omaha Beach and Iwo Jima?

Bill Bonner at The Daily Reckoning says that “if America really wanted to protect its wealth, its power, and its position in the world, it should fight the depression in an entirely different way.” Here’s how:

Instead of bailing out failed businesses it should let them go bust. Instead of coddling the executives who mismanaged their companies, it should turn them loose. Instead of shoring up reckless banks, it should help knock them down.

And instead of spending money on stimulus programs…it should give money back to the taxpayers so they can stimulate the economy, or not, as they choose. Taxes should be cut in line with government spending. This would boost savings, reduce debt, and…gradually…increase investment and consumer spending too.

But that is not the road Americans have chosen. Instead, they found a president willing to go along with history. Instead of scaling down, he is scaling up. Instead of reducing America’s indebtedness, he is increasing it. Instead of going for safety, he’s going for broke.

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