Markets Losing Steam

Stock prices fell yesterday. We would not be surprised to see them fall some more – not simply because the stock market has just achieved its biggest two-month advance since the 1930s, but also because the economy remains just as ill as it was on March 9th, when the stock market rally first started.

The only thing about the economy that has changed during the last two months is the way folks TALK about it. Back in early March, when the Dow was making 12-year lows, the news media carried continuous stories of doom and gloom. A second Great Depression was all but certain.

But now that the Blue Chip index has jumped a whopping 2,000 points, most members of the financial press have recanted their faith in doom and gloom. “The economy is recovering,” they say. “The macro- economic data are showing signs of ‘improvement’ and ‘stabilization.’” Judgment Day has come and gone, they believe. Only the land of milk and honey and TARP fund re-payments awaits.

“While the [economic] numbers are still bad, they’re less bad,” beamed one typical professional investor last Friday.

And so what?

Falling more slowly is still falling…and it will never be rising.

So let’s take a dispassionate look at some of the recent economic reports…and then decide whether these data show signs of “improvement” and “stabilization.”

Last Friday, the Labor Department announced that 539,000 workers lost their jobs during the month of April. Jubilant investors cheered the job losses as “less than expected.” But the Labor Department simultaneously revised the job losses for February and March to totals that were 66,000 more than originally reported.

In other words, if you add the revised losses from February and March to the April total, you get 605,000 jobs lost in April, not 539,000. But even if we take the Labor Department’s numbers at face value, we wind up with 1,238,000 lost jobs since the stock market rally began in early March. What other signs of “stabilization” have surfaced since the rally began? Here’s a short list:

• Industrial production fell for the sixth straight month – hitting the lowest level since 1998.

• The ISM Index of business activity dropped for the seventh straight month.

• Factory utilization fell to it lowest level since recording- keeping for this data series began in 1967.

• The S&P/Case-Shiller Index of home prices fell for the 25th straight month.

• An additional 600,000 families lost their homes to foreclosure.

• The number of homeowners who fell 60 days behind on their mortgage payments grew to more than 5 million.

• The number of homeowners who owe more on their mortgages than their houses are worth grew to more than 8 million.

Obviously, investors do not collude with one another to ignore ominous economic data. It just happens. Happy delusions are infectious. We humans sometimes see what we want to see…and fail to see what we don’t want to see.

By Eric Fry

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