BEING STREET SMART

by Sy Harding 

The Economy's Real Problems! September 30, 2011.

Some of this week’s economic reports provided at least small sparkles in the dark shadows that have dominated economic reports so far this year.

On Thursday, the Commerce Department reported the economy grew at an annualized rate of 1.3% in second quarter, a bit better than the 1.0% it had previously reported. The Labor Department reported new weekly unemployment claims fell by 37,000 last week to 391,000, the first time new weekly claims have been under 400,000 a week since April. And the University of Michigan’s Consumer Sentiment Index ticked up to 59.4 in September after tumbling to near a three-year low of 55.7 in August.

Consumers and investors could use some good news for a change.

I just wish I could be more enthusiastic about those reports.

But it was also reported this week that the Chicago Fed’s National Business Activity Index fell again in August to -0.3, its 5^th straight negative monthly reading. Its closely watched 3-month moving average is now at -0.4, just fractionally above the -0.7 level that has marked the beginning of all seven recessions that have taken place since 1970. And the Dallas Fed’s General Business Activity Index fell further in September, to -14.4 from its already scary minus 11.4 level in August. It was also reported that durable goods orders fell 0.1% in August versus a gain of 4.1% in July.

And while the University of Michigan’s consumer sentiment index may have ticked up significantly as noted, the Conference Board’s Consumer Confidence Index remained at a dismal 45.4 in September versus 45.2 in August.

That seems to tie in with another dismal report on Friday, that consumer incomes adjusted for inflation fell 0.3% in August, the biggest decline in two years, while consumer spending adjusted for inflation was flat.

And from the important housing industry it was reported that new home sales fell 2.3% in August, and pending home sales fell again, down 1.2%.

On Friday the Economic Cycle Research Institute notified its clients that a recession is now unavoidable, saying, “The vicious cycle is underway where lower sales lead to lower production, which leads to lower employment, which leads to lower income, which leads back to still lower sales, and the cycle feeds on itself.” The ECRI said its call is based on dozens of its leading indicators. In response to the question of why should its warning be heeded, the ECRI replied, “Perhaps because, as The Economist [financial publication] has noted, we’ve correctly called the beginning of the last three recessions [1990, 2000, 2007] without any false alarms in between. In contrast, most of those who have accurately predicted a recession or two have been guilty of also predicting recessions that did not occur – in 2010, 2005, 2003, 1998, 1995, or 1987.”

Their recession call ties in with my own research firm’s prediction that the stock market also has unfinished business on the downside.

There has never been a recession that did not involve a bear market for stocks.

Separately from the high odds for a recession, our expectation of a further decline in the stock market is based on dozens of our own fundamental and technical indicators.

It’s also interesting that although the 30-stock Dow and 500-stock S&P 500 are down only 15% from their April peaks, the DJ Transportation Average, which often leads the rest of the market, and the 2000-stock Russell 2000, home of small stocks that are the favorites of individual investors, are both down 24%, across the 20% threshold that defines them as having entered bear markets.

It reminds me of an old analogy regarding how the blue chip Dow is often the last to catch on to what is happening in the rest of the market. It describes the 30 Dow stocks as the market’s generals, leading the troops up to higher ground. When the going gets rough and the generals begin stumbling, and then turn around to see their troops are already in sharp retreat, the generals belatedly rush downhill in full retreat themselves.

There also has to be skepticism regarding U.S. stocks being able to avoid a bear market when most other global markets, including those of ten of the world’s twelve largest economies, are clearly in bear markets, with declines so far of up to 35% and no signs their declines are over.

But the U.S. market and U.S. financial media seem to be fixated on the debt crisis in Europe, and specifically the prospects for another bailout plan for Greece, stocks and moods plunging each time a Greek default seems unavoidable, rallying back each time another bailout plan seems imminent, while pretty much ignoring the worsening economy in the U.S.

 A default by Greece would certainly be an additional negative for global economies.

But would prevention of a default reverse the economic slowdown in the US? Would it create jobs in the US? Would it have Americans rushing out to buy houses? Would it reverse dismal business and consumer confidence, and concerns on Main Street that U.S. policies are headed in the wrong direction?

It does seem that the U.S. market and financial media should be much more focused on the major problems closer to home than Greece.   

Sy Harding is president of Asset Management Research Corp, and editor of www.StreetSmartReport.com, and the free market blog, www.streetsmartpost.com.

These reports reflect our opinions and are based on our best judgment, but no warranty is given or implied as to their accuracy. Past performance does not guarantee future performance.

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