Is It May 2008 Again?

We have had the Greek Debt Crisis a few months ago, accompanied by a near meltdown in the sovereign debt and currency markets.  Nothing has been solved, but the animal spirits which drive the financial mavens to their destiny have pushed the markets back near their recent highs.  Yet, there is a disquiet that is almost material.  A feeling that things are not quite right and susceptible to unknown and unseen forces, which may not have our best interests at heart.  At least the interests of those who are long paper instruments of many kinds.   There are imbalances in the stock market, the main is that of a narrow advance fed by a surprising amount of giddiness and ebullience characteristic of tops in 2007 and 2000.  The financials are punk, while the "tech bellwethers" (high beta consumer discretionary in drag) are flying high.  To see what I mean look at AAPL, AMZN, NFLX and PCLN to name a few.  Compare these with BAC, GS and MS.  Throw in RIMM, SHLD and URBN to round out the middle of the bunch.
The 1st group are the "consumer tech" stocks.  Dependent on 20%+ earnings growth and multiple expansion.  Never mind that their multiples have already expanded to 40x, 130x, 93x and 30x five-year average earnings.
The 2nd group is the financials which are all rolling over despite one of the strongest months in history, especially for the worst performing month of the year, traditionally.  BAC is plumbing the lowest levels of the year, while GS and MS are only 10-15% above their 2010 lows.
The 3rd group are bottom feeders.  Poor performers who are essentially consumer stocks of one type or another and have largely been slammed in the last few years, although Urban Outfitters has rallied nicely off its 2008 lows, it is rolling over pretty seriously of late and threatening new lows for 2010.
There are a number of ways to interpret the action.  Maybe consumers are tired of the same old stuff and looking for quality.  Maybe the shrewdest operators are grabbing the bulk of the remaining dollars.  Maybe iPad is worth more than Kenmore.  All true (especially since you may not need a new washing machine when your house has been foreclosed).  But it is all starting to look eeriely familiar, with the thin breadth and low volume advance, punctuated with sharp, early morning sell-offs which are quickly corrected near the close and overnight moves, where relatively large advances can be achieved with minimal volume, leaving a maintenance operation for the following day.  Is the PPT at work?  Maybe.  Are the big boys distributing their holdings?  Maybe.
As usual, a picture tells speaks 1,000 words.  And the following one says that despite the sharp rally, momentum is fading and divergences are steepening.  Does it have to fall apart just because cracks appear?  No.  Maybe it will all be OK, the economy will recover strongly, unemployment will drop, people with underwater mortgages will be able to refinance while the market recovers reasonably strongly and keep their houses, while the debts will be repaid in some orderly fashion.  And maybe the Irish, Greeks, Spaniards and Hungarians will dig their economies out from under debts bigger than their collective (declining) GDP.  Maybe but simple mathematics would suggest that when debt are climbing 10% plus per annum, while output is declining by 10% plus per year, eventually the difference will become so large as to swamp all wishful thinking down the toilet where it belongs.  And when that happens, where will the Dow, Euro, Junk Bond Market be?

Come on You Stinker!

In an effort to demonstrate that I am more than a one-dimensional character, I share this real life anecdote:
A grandmother was withdrawing some cash from the ATM with her grandson.  The child was anxiously pressing buttons interfering with her activity.  "Now Johnny, don't press any buttons", she mildly chided him.  "But how come you're pressing buttons!" he replied.  "Because I need to withdraw some money, but I need to press the right buttons and only those buttons." she explained. "But whyyyy?" he implored in that faintly whiny, but endearing tone of an earnestly inquisitive 5 year old.  "Now just wait Johnny...." she implored.  A few seconds of near silence followed pierced by the electronic tones of a few buttons being pressed leading to a fruitless transaction.  The lady muttered "Oh dear...." to which the child took to scolding the machine:  "COME ON YOU STINKER!!!"

I couldn't have said it better myself kid!

Demographic Risk

Brett Arends at Marketwatch.com has an interesting commentary on Ben Bernanke and Fed Policy and forecasting.  It is interesting enough in itself and can be found here.  But the really interesting part to me is the statistic that 81.2% of working age men (25-54) are employed, meaning that 18.8% are not working, for whatever reason.  What is disturbing about this is that men are, by nature, the more violent of the sexes and this age group is only second to the 15-24 age group in violent behavior.  What sort of social unrest is in store when one out of five men of working age are unemployed?  Some of these people are starting to run out of unemployment benefits after 2 years being without work.  What will happen if the unemployment problem gets worse?  Simple common sense would imply that having 1/5 of men sitting around doing nothing productive is a recipe for them to get into trouble.  A sensible society would investigate policies to get them working again.  Tax holidays, wage reduction programs for unskilled unionized workers, restricted immigration policies, pro-male hiring standards, tax incentives for expanded hiring, welfare reform, educational improvements, etc. are potential policies which could address the imbalances.  The society which encourages women to enter the workforce in unprecedented numbers and discourages men from working is courting disaster.

This Top is Twice as Big as 1929

If that proposition that this bubble and this top is twice as big as 1929, then it follows that the correction of that excess will be twice as bad.  If so, would that mean that we would have a 96% correction in the stock market?  Would we have a depression that lasts 20 years?  Who knows.  But a 96% correction in the DJIA would put the number at 570, roughly the 1974 low.  A 20 year depression would last until 2027, or at least 2020, depending on how you count it.  Am I predicting that will happen?  No, but I do not dismiss it out of hand.  It is entirely possible, especially when I see our "leaders" making mistakes which, in the long run, will make the situation worse.  I think Dow 3,000 would be cheap and that the worst will be over in 5 years.  But it is important to remain open to possibilities.  And my opinion is that the possibility of seeing the Dow trade below 1,000 is higher over the next 20 years than the Dow trading above 30,000.