A Market on the Rebound?

The stock market has been on the rise. Yippee!

On March 9, the Dow (DJIA) hit a new low, closing at 6,547 – its lowest mark in a long, long time. Less than a month later, the same index hit an intra-day high of 8,075 on April 2. Hurrah! Hurrah! We’re up by over 23% since we hit that low.

We all heave a sigh of relief. Better days must be ahead, surely…?!?! Or are they?

Should we abandon all caution and start betting whatever’s left of the family home and the kitchen sink into new investments in the stock market and hope to recoup some of what we had lost in the downturn which began over a year ago? Should we take the risk now in order to be early to the game – after all, the early bird catches the worm?

Like you, I have been tempted. I like to be optimistic but I am hesitant. I’m not sure if the extended market uptick of late is based on solid evidence of improving performance or if it is the beginning of another round of “irrational exuberance”?

The trouble with looking at stock indices as a guide for how well the economy is doing (or is projected to be doing) is that the stock markets take into account forward looking estimates which are purely conjectures – assumptions based on other assumptions which in turn are based on further assumptions.

Lest we forget, faulty assumptions were essentially what brought about the dramatic economic downturn. There were too many untested and unrealistic assumptions:

- The assumption that bankers and builders took, that home prices can continue its spectacular rise although the take home pay of the average worker has stayed flat or that it has decreased in real terms or that job growth has been dismal.

- The assumption commodities traders took, that crude oil and gasoline prices can hit new highs everyday with no impact to the end products or services costs and the consumers’ ability to consume.

- The assumption that credit default swap insurers took, that the risks attached to mortgaged based securities are more hinged on the issuing party’s credit rating rather than the ability of the consumer to service the underlying mortgages.

- The assumption that executives at various corporations took, when they sent all kinds of jobs overseas to improve their bottom line (and to get a bigger profit based incentive bonus), never considering the impact that the loss of jobs en masse have on the ability of Americans to consume those very same products or services they produce.

- The assumption that the authorities took, that regulations are unnecessary and that the markets will regulate themselves as the market players will act wisely.

We were all too seduced by the idea of fast money and instant wealth that we lost sight of the risks and consequences of faulty assumptions and the need to understand and manage them.

Despite the outcry and objections of some, the government has (wisely or unwisely) poured in trillions to stave off economic disaster and to bolster confidence. The players are coming back into the market and credit is ‘loosening up’ but that does not mean that the economy is well. It will take time to heal.

Credit is only useful if consumers have the means or ability to borrow and that depends on their capacity to repay which in turn depends on their income, which in most cases, depends on them having jobs.

Similarly, corporations will borrow to invest in production capacity only if they believe that there will be a demand on their goods or services and that again will depend on consumers having the capacity to spend which again depends on whether they have jobs.

Until you hear that new jobs are being created and the employment trend is on the upswing, don’t believe everything you see or hear about the market on the rebound. The job creation effect of the multiple stimulus packages will take time to make its way through the system before the economic recovery can be on a steady path.

Keep your eyes open and your ears pinned to the ground to watch out for significant projects and events that create a demand for workers or raw materials. When you do, that will be the time to put your money into investments that will benefit from the positive impact.

In the meantime, if you “play” the market as an individual, know for sure that you are putting your money at risk, betting blindly that the index will go one way or the other. It is like rolling the dice and hoping for the best.

I guess I’ll never be filthy rich because I am inherently not a speculator. It is OK with me. I sleep better at night not having to worry about the bad assumptions or the risks.

[Addendum: The above was posted on April 2. On April 3, the Bureau of Labor Statistics reported that unemployment climbed to 8.5% in March (up from 8.1% in February) with the US economy shedding another 663,000 jobs in the month. The Bureau also adjusted the January newly unemployed numbers from from 655,000 to 741,000.]

When The Going Gets Tough, The Tough Goes Shopping

It is probably shocking that I should cite (read “promote”) this oft quoted, sassy saying at a time when unbridled spending leveraged on paper gains in asset values appears to be the root cause of what ails our economy. We are in the throes of a big hangover after an all night party, an orgy of booze and whatever else that had added to the fun when it all happening, but, when the clock rang in the new day, has turned out to be yet another case of misbegotten self-deception and ignorance of the consequences of our uncaring actions.

Congress has just passed a $787 billion package of economic stimulus and the President will be signing it into law later today. It is great that something is being done but the reality is that however big it appears to be on paper, it is not quite enough and, echoing the sentiments of the more pessimistic economists, will only help stave off the onset of an economic depression. Extended unemployment benefits is only a temporary relief, barely enough to cover the true cost of living of those who have lost jobs involuntarily. Those who were self-employed do not even have the benefit of unemployment insurance. What we need in addition to job creation is job preservation. We should not keep infusing more blood into the patient if we don’t take the necessary steps to stop the bleeding.

I've been passing on the same message to my friends and acquaintances who have 'recession proof'' jobs and who have been wise to avoid the many ills that led to this recession - go out and spend some money. Forget about buying gold or putting your money away in an offshore account to protect your wealth. If the US and World economies do not recover, there is nowhere truly safe for one to disappear to. What we have seen in terms of collateral damage around the world as a direct or indirect reaction to the problems facing the US demonstrates the tight integration of the world’s economies. We may be living in different countries but we are not isolated from each other’s ills.

Why do I preach the need to spend to the more fortunate ones who have planned and saved for a rainy day? The smart ones spend counter-cyclically - work and save when jobs are plentiful and the pay is good, buy when things are cheap and demand is weak (you get the best picks). If you don’t do your part to help, you may someday conclude that you are not that smart after all.

Here are some suggestions on what you might do that can help the economy recover:

- Go out to dinner. If you can, invite someone you know who have lost a job - it will cheer them up and keep the restaurants running and a long line of direct and indirect jobs going. For one thing, these jobs cannot be outsourced to a foreign country.

- Go on a vacation at a domestic resort. Ski, bathe in the sun, kayak, ride a bike, etc. These industries employ the highest ratio of workers to customers. Keeping jobs going is easier than having to 'create' new jobs. You won’t be getting a tax credit for this under the stimulus package but do it anyway.

- Go shopping. Buy the pair of running shoes you have been meaning to but have not had the time because you were busy working. Buy that tie-dyed T-shirt or hand-made costume jewelry that you’ve always wanted from the local artists. Buy from your local farmers and grocers. While you are at it, give a go at haggling over the price – you’ll be pleasantly surprised if you do ask. You’ll enjoy the whole experience and you’ll be back for more – your ego needs to know that you can do better the next time. If possible, favor the small businesses - they are generally higher in the employee to customer ratio than the big chains. Don't fret over whether the item you buy is 100% local - bringing the item to your local store employs many, many people. Think of the jobs involved in the shipping and warehousing process. Even the task of displaying them on shelves and taking your money at the checkout desk involve people. A big portion of what you pay for any item goes towards these value-added services.

- Trade in you gas guzzling SUVs for the more eco-friendly vehicles - it does not have to be a hybrid that go 50 mpg. You'll be saving the earth and keeping yet another long line of jobs going - from the people in the assembly lines to the salesmen and to the garages that service your cars. Take advantage of the tax incentives in the stimulus package. You'll be treated like gold and you'll get deals that you could not have dreamed of during the boom years. Besides, you'll be better prepared for when oil and gas prices shoots up again.

It takes someone with the right combination of brains and guts to take the right actions. Now is the time for the tough to go shopping.

When the economy is on the road to recovery, you can revert to saving and putting money aside for the next ‘rainy day’. Be smart.

Pointing Fingers

The economy is in trouble and everyone is pointing fingers – well, almost everyone. I’ll make an exception for the children who are too young to know and for those who came through the firestorm with a handsome profit as well as those who had the foresight to anticipate the collapse of the markets and are likely to remain relatively unscathed by the troubles that are yet to come.

Find any man or woman on the street and ask, “Who is responsible for this mess?” and you’ll be bound to get an earful of that person’s thoughts and, I might dare add, venom for those whom they strongly feel have mismanaged and upset their hopes and dreams.

The list of the ‘guilty’ is long. The favorites (not in any particular order) include: overpaid top executives asleep at their jobs; unionized labor with guarantees and benefits that make American products un-competitive in the marketplace; the Administration and Congress for allowing the deregulation of the banking industry; the Fed for not raising interest rates early enough or high enough to nip the housing bubble in the butt, the Treasury Secretary for allowing one of the world’s biggest issuers of commercial papers to fail; commodity traders for pushing the world’s oil prices up to unsustainable levels; mortgage brokers for pushing loans to people who can ill afford home ownership; hedge funds and short seller for their bets for or against a company or a trend; corporations that looked only to short term gains and resorted to the mass-relocation of jobs to developing countries to the detriment of the consumer based US economy; and a media that is too tame to challenge the status quo.

There is no doubt that we're in a perfect storm that has been long in the making – all elements contributing to the disaster coming together at the same time while everyone at the wheel was caught sleeping.

What many commentators will fail to acknowledge is that when we point a finger at others, there are three other fingers on that same hand that point back at ourselves. We, as a whole, are equally to blame – we wanted more for less, we wanted the benefits without considering the consequences and, rather naively, we wanted to believe those who tell us that all that is possible.

Whether or not we agree that we are part of the cause, we cannot stand aside or do nothing and say, “Not I” or “Not on my dime”. While that would be a natural reaction, it is a self-centered one – the same type of “Me First” thinking that led us down this hole in the first place.

Knowing we are in a hole and we are in it together is the first step of the twelve step program to recovery. Kicking the addiction to short term gains requires acknowledgment that the habit is self-destructive.

When we next feel the urge to point fingers, we should look in a mirror. Hopefully, the face staring back at us is a wise one – one that has learned enough and has done enough so that pointing fingers won’t be necessary.