July 27, 2009 | www.CaseyResearch.com How Long Can the Wonder Rally Last?
Welcome to Casey’s Daily Dispatch!
Welcome to the first edition of Casey’s Daily Dispatch, formerly (and forever in my heart) The Room).
This experiment in daily musings will go on for as long as you all enjoy it and find it of value. Unlike its weekly predecessor, the Daily Dispatch will be (hopefully) shorter and more timely.
Other than that, I expect the content to flow pretty much the same way: namely whatever pops out when I sit down to write. And what usually pops out are observations on the passing parade, a parade that includes the fearsome economy, growling investment markets, the elephant of government, and the general idiosyncrasies and inanities that make life so darn interesting.
And, on occasion, I’ll share with you some music that has struck my ear in a favorably dramatic sense, including today, when I’ll share two versions of the same song, Knocking on Heaven’s Door. The first is the original by Bob Dylan, which you can listen to hereâ€¦
Or, for those of you who like the harder stuff, here’s a cover by Guns & Roses, which stays true to the spirit of the song, while being a lot more spiritedâ€¦
Now, it’s on with the paradeâ€¦
The Wonder Rally
Yesterday I ran into a friend of mine, who is, without the slightest exaggeration, one of the most important persons in the derivatives industry. He was brought out of retirement to try to sort out the mess and works for one of the nation’s largest financial institutions, where he continues to labor despite being vilified wholesale by politicians about the compensation he receives.
We briefly discussed the stock market, and his comment was simply that he and his colleagues are stunned and surprised to their core by the extent of the July rally in both equities and bonds. Looking out from the inside, what they see are markets seeking a pin, and a significant correction coming in the near future.
Of course, the markets can stay irrational longer than your money can hold up betting against them, but with the S&P 500 having now returned to just about halfway back from its bubble highs, and with the economy still in widespread distress, it is hard not to be a little extra bearish for the stock market.
Ed Steer, who will soon have his own Casey-published daily letter, about which we’ll send you more when it is ready to go, forwarded along the following chart over the weekend that shows the projected inflation-adjusted earnings of the S&P 500 once the tally for Q2 09 is made.
Quoting its author, chartoftheday.comâ€¦
“Today’s chart illustrates how earnings are expected (38% of S&P 500 companies have reported for Q2 2009) to have declined over 98% since peaking in Q3 2007, making this by far the largest decline on record (the data goes back to 1936). 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.â€
While anecdotal, I spend a lot of time talking to merchants, real estate agents, and anyone else whom I bump into who is engaged in providing goods and services to the consuming public. Right across the board, the message is the same namely that sales stink and that they are managing to survive only by cutting expenses. Even the owner of the local hardware store tells me business has never been worse, so I guess people aren’t even bothering to fix up their homes anymore. And a close friend in the real estate sales business for over 30 years says she has never seen anything remotely close to how bad things are at this moment.
Jumping upwards to the national picture, some companies are indeed reporting better earnings than anticipated by various analysts the news of which has, of late, sent their stocks satisfactorily higher.
But it’s important to recognize that there are three things at work here. The first is that, having been caught with their proverbial knickers down by the first big leg down in this crisis, analysts dramatically revised their earnings forecasts downwards for virtually all the companies on their watch lists. Thus, given the decidedly lackluster expectations, it’s relatively easy for a company to â€œoutperform” those expectations. And secondly, as per above on a local level, much if not all of any gains in profitability are the result of slashing overhead (read “workers”) and not a pick-up in sales. Finally, as you can see in the chart above, in no sense are the earnings being posted anywhere remotely close to prior levels.
And so the situation today is comparable to changing the grading curve for a class of students so that managing to drink water without slopping it down the front of your shirt would earn you a hearty â€œWell done!â€ and a passing grade. That several students subsequently get one or two answers out of ten answers correct is, therefore, cause for the whole school to gather together for a celebratory punch party.
While I may sound like a broken record, I and the entire Casey Research team remain convinced that what we’re experiencing here is nothing more than a beautifully set bear market trap that is allowing insiders to dump their shares as quickly as they can be dumped. Don’t buy it.
A President to Believe Inâ€¦
In the history of American presidential politics, there has rarely been one like him; a man of humble origins who seemingly appeared out of nowhere, with no serious chance of actually winning the presidency, but who won nonetheless.
Perhaps his success was due to a public disillusioned by his predecessors and looking for a more intelligent, competent, and yet sympathetic leader to take the flock forward. That intelligence, competence, and sympathy echoed in his inaugural address, excerpted here…
The American dream endures. We must once again have full faith in our country and in one another. I believe America can be better. We can be even stronger than before.
Let our recent mistakes bring a resurgent commitment to the basic principles of our Nation, for we know that if we despise our own government, we have no future. We recall in special times when we have stood briefly, but magnificently, united. In those times no prize was beyond our grasp.
But we cannot dwell upon remembered glory. We cannot afford to drift. We reject the prospect of failure or mediocrity or an inferior quality of life for any person. Our Government must at the same time be both competent and compassionate.
We have already found a high degree of personal liberty, and we are now struggling to enhance equality of opportunity. Our commitment to human rights must be absolute, our laws fair, our natural beauty preserved; the powerful must not persecute the weak, and human dignity must be enhanced.
We have learned that “more” is not necessarily “better,” that even our great Nation has its recognized limits, and that we can neither answer all questions nor solve all problems. We cannot afford to do everything, nor can we afford to lack boldness as we meet the future. So, together, in a spirit of individual sacrifice for the common good, we must simply do our best.
To be true to ourselves, we must be true to others. We will not behave in foreign places so as to violate our rules and standards here at home, for we know that the trust which our Nation earns is essential to our strength.
We will fight our wars against poverty, ignorance and injustice, for those are the enemies against which our forces can be honorably marshaled.
No question about it a man with a passion for humanity and a mighty wielder of the sword of justice. A man you can trust. A man with a plan and a fresh perspective to change the world for the better.
Unfortunately, Jimmy Carter’s words ended up as so much dust in his mouth, as the pretty dreams and visions he conjured blew up in his face and ended his presidency in ignominy after a single term.
Yet, according to the job approval ratings, as poorly as Jimmy Carter fared as president, at this same point in his presidency, President Obama is doing worse, with a 58% approval versus Jimmy Carter’s 62%.
To be clear, approval ratings are no statistically valid predictor of Obama’s presidential fortunes; at this point in their respective presidencies, the first Bush was rated at 66% but lost after one termâ€¦ and Bush the Second was rated at 57% approval, and he went on to win a second term.
But there are, I believe, some important observations that could be made. Starting with the Bushes. It is fair to argue that if 9/11 had not happened, then Bush Junior’s ratings might have continued to roll downhill, as it is equally fair to ponder what might have happened if George Sr. had not made the devastating misstep of publicly violating his most vocal campaign pledge “Read my lips, no new taxes.”
Or, put another way, in the first instance, Bush Junior’s presidency was saved by the sort of martial crisis that has proven so effective at driving the herd together in the past, while Bush Sr. lost by a glaringly public reversal of his number one election pledge.
Likewise, in the context of the Deus Ex Machina, President Obama’s success from this point forward could be determined by an unforeseeable “event” or by an avoidable yet massive political misstep for example, if he were to pass a VAT tax and the regressive nature of that tax were made to be widely known by the disloyal opposition therefore publicly breaking his pledge not to raise taxes on the middle class.
Yet, neither of those conditions could occur and still Mr. Obama could follow in the disappointing steps of the Georgia peanut farmer, if he fails to heed the distinct lesson offered by the Carter administration, a lesson summed up nicely here in the National Journalâ€¦
A self-imposed May 1 deadline for filing welfare reform legislation proved too ambitious, and only a statement of principles was released by that date. But perhaps the most extreme example of overreach was the Administration’s effort to enact a comprehensive energy program in the 90 days following the President’s now-infamous Feb. 2 fireside chat. During that talk to the nation, a cardigan-clad Carter declared a national energy crisis, citing the growing dependence on foreign oil. The resultant legislative package developed with few contributions from Congress, the Cabinet, or interest groups later had to be scaled back and took six months to pass, not three. “We completely overburdened the congressional circuits with too many initiatives,” admitted Deputy Treasury Secretary Stuart Eizenstat, who was Carter’s chief domestic policy adviser.
â€¦ The internal party divisions that Carter faced made matters worse, because these divisions diluted the advantages of Democratic control of Capitol Hill. Carter’s New Democrat beliefs clashed with the expectations of congressional liberals, who longed for the return of the free-spending, big-government policies of the Lyndon B. Johnson era. “There was always ideological tension,” said Wexler, who now runs a lobbying shop, “and it lasted for the whole four years he was in office.”
As noted, even Jimmy Carter’s party majority in Congress wasn’t enough to protect him from the political collapse resulting from his early legislative overreaching and stentorian management style. It’s far too early to say whether or not Barack Obama will go down in history as a â€œJimmyâ€ Obama, generally ridiculed and chased from office as ineffectual. But for those of you who wince at his every fresh announcement of this new government program or that bit of legislative sleight of hand, may I suggest that you instead encourage him in his many efforts, as that will be the surest way to bring his octopus-like regime to a quick end.
For those of you who support him, you may want to email him with my personal mantra for a satisfactory life, namely “Everything in moderation, including your excesses.”
Casey Research Energy & Special Situations Summit, Sept 18-20, 2009. The schedule has now been posted for this first-ever event, being held at Denver’s beautiful Westin Tabor Center. View the schedule and learn more by clicking here.
As you’ll read, this is a working session. While there will be abundant opportunities to rub elbows with the blue-ribbon faculty and share notes with like-minded people, the summit is being designed from the ground up to provide you with a serious download of virtually everything important you need to know about the most exciting investment opportunities in the large and vibrant energy sector.
Not to put too fine a point on it, the Energy & Special Situations Summit will be a one-of-a-kind â€œintensiveâ€ designed to put you in the know on where the real upside potential is in energy going forward. Given the importance of the energy sector, this is not an event to be missed. Click here to register.
The More Things Stay the Same… Here’s a CBS 60 Minutes video from the 1970s about swine flu that you may find interesting from an historical context. While there is no question that the current variations of the flu are pretty virulent, by keeping an eye on the Southern Hemisphere, which is still in its flu season, you can get a good sense of what’s headed to the Northern Hemisphere this fall and winter. So far, the death toll is still well within seasonal norms which is to say not even a blip compared to the catastrophic death tolls that accompanied the flu that swept the earth in the early 1900s.
And that, dear readers, is it for today. Before signing off, I would like to clarify one point about some of the changes that are going on here at Casey Research.
Based on several emails and phone calls, it appears we failed to properly communicate to current International Speculator subscribers that the subscription price they now pay will be “grandfathered” for two full years, so they will not have to pay the significantly higher new subscriber fee that goes into effect on August 31.
(As for non-subscribers, don’t miss out on this opportunity to lock in the same low price for two years by subscribing before the August 31, 2009 price change goes into effect. Click here to learn more.)
Ditto, for those of you who consider joining the rapidly growing membership of our Casey’s Club submit your application prior to August 31, and you’ll lock in the lowest rate we’ll ever offer for this lifetime subscription to all Casey Research services. Learn more here.
It’s too early in the day to comment on the stock market action, but later this week, we’ll be taking a close look at the unprecedentedly large Treasury auctions now underwayâ€¦ especially as we get toward the end of the week when the longer-duration paper is being offered. Should be exiting.
Until tomorrow, thanks for reading and for being a Casey Research subscriber!
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