 Dead Cat Bounce
John Browne
Posted Jul 9, 2009
In economics, as in many other
"soft sciences," facts are often overshadowed by theories.
The dominant economic theory currently in vogue is that the massive
government stimuli orchestrated by the Bush and Obama administrations
would produce an economic recovery by the end of this year.
Thus, it is no surprise that
media cheerleaders have seized on the recent steep, but thinly
traded, rally to find the facts that appear to fit the theory.
From where do these talking heads draw this conclusion?
In recent months, we have allowed
for the probability that a bear market rally, driven by seemingly
low price-earnings multiples, would take hold for the first half
of 2009. Months ago, I had stated that the rally would reasonably
last into the summer and that the Dow could reach 10,000 before
the next major downturn begins.
In the depths of the stock
market crash of 2008/9, buying opportunities certainly arose.
By March 2009, stock markets appeared to have been oversold.
Certainly price-earnings multiples on many stocks had been compressed
to generational lows. Ignoring the fact that these low multiples
were underpinned by pre-recession earnings data, investors declared
a bottom.
However, as is the tendency
with sudden declines, bargain hunters entered the market too
aggressively. On relatively thin trading levels, this led to
a steep rise in stock prices which, in turn, drew in investors
who feared being left behind. A steep bear market rally was in
place. This mirrored the pattern of the Great Depression, when
the initial crash was followed by a 68 percent rally in 1930.
But after that rally had fizzled, stocks then declined by an
astounding 86 percent over the two subsequent years.
While we urged caution in this
rally by highlighting, among other indicators, a 38 percent decline
in corporate earnings, speculative traders made enormous profits
as stock markets rose by over 40 percent. But as dismal economic
statistics continue to rain on everyone's parade, the cheers
are beginning to subside. Last week, the unemployment figures
were released and the Dow slid by some 223 points.
Now, even speculative traders
are preparing for a drop. The new-found concern is due to three
basic indicators:
First, the U.S. dollar, linchpin of all American (and
most global) transactions, is appearing increasingly weak. 10-year
Treasury yields, as low as 2.1 percent post-crash, and continuing
to stay below 4 percent, indicate a persistent bubble in "safe"
U.S. bonds and cash.
Certainly, the fiscal situation
of the United States government doesn't warrant the confidence
placed in its debt. The U.S. will soon have to choose between
outright default and hyperinflation. The BRIC countries are already
preparing themselves for the latter eventuality by seeking alternatives
to the dollar.
Second, there has been a realization that the low multiples
of March 2009 were largely illusory. With corporate earnings
falling faster than share prices, price-earnings ratios are still
high and historically expensive for an economy in an official
recession.
Third, employment figures have been so bleak that
the financial spin-doctors have been suggesting a "jobless
recovery!" Reading between the lines, that means even the
most deluded forecasters cannot find an argument for hiring to
resume.
Despite the enormous stimulus
packages, there are now roughly 15 million Americans unemployed,
the highest total for some 26 years. Worse still, the official
figures do not include the long-term unemployed or those who
have been forced to accept part-time employment. If these "unofficial"
unemployed figures were included, the total would be nearer to
20 percent than the official 9.6 percent. Furthermore, annualized
figures show Americans earning less for each hour worked.
There can be little wonder
that consumers are hoarding cash, increasing their savings and
not buying on Main Street. American consumers are in a state
of financial shock. The U.S. economy is heading deeper into severe
recession, even depression.
The facts are universally bearish
for the American stock markets. As for the pundits' sentiments,
you can measure their value by how much you personally pay for
CNBC (very little) versus your cost if they're wrong (very much).
Now, there's a statistic!
###
For a more in depth analysis
of our financial problems and the inherent dangers they pose for
the U.S. economy and U.S. dollar, you need to read Peter Schiff's
2008 bestseller "The Little Book of Bull Moves in Bear
Markets" [buy
here] And his newest release "Crash Proof 2.0: How
to Profit from the Economic Collapse" [buy
here]
For a look back at how Peter
Schiff predicted the current crisis, read his 2007 bestseller
"Crash Proof: How to Profit from the Coming Economic Collapse"
[buy
here]
More importantly, don't wait
for reality to set in. Protect your wealth and preserve your purchasing
power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com, download our free
research report available at www.researchreportone.com, and subscribe to our
free, on-line investment
newsletter.
John Browne
Senior
Market Strategist
Euro Pacific Capital, Inc.
1 800-727-7922
email: jbrowne@europac.net
website:
www.europac.net
 John
Browne is the Senior Market Strategist for Euro Pacific Capital,
Inc. Mr. Browne is a distinguished former member of Britain's
Parliament who served on the Treasury Select Committee, as Chairman
of the Conservative Small Business Committee, and as a close associate
of then-Prime Minister Margaret Thatcher. Among his many notable
assignments, John served as a principal advisor to Mrs. Thatcher's
government on issues related to the Soviet Union, and was the
first to convince Thatcher of the growing stature of then Agriculture
Minister Mikhail Gorbachev. As a partial result of Browne's advocacy,
Thatcher famously pronounced that Gorbachev was a man the West
"could do business with." A graduate of the Royal Military
Academy Sandhurst, Britain's version of West Point and retired
British army major, John served as a pilot, parachutist, and communications
specialist in the elite Grenadiers of the Royal Guard.
In addition to careers in British politics and the military, John
has a significant background, spanning some 37 years, in finance
and business. After graduating from the Harvard Business School,
John joined the New York firm of Morgan Stanley & Co as an
investment banker. He has also worked with such firms as Barclays
Bank and Citigroup. During his career he has served on the boards
of numerous banks and international corporations, with a special
interest in venture capital. He is a frequent guest on CNBC's
Kudlow & Co. and the former editor of NewsMax Media's Financial
Intelligence Report and Moneynews.com. He holds FINRA series 7
& 63 licenses.
321gold Ltd
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