Thursday Stock Market Summary: Is The Bear Market Over?

Drum roll please… NO

Today the media (and others) have proclaimed that the bear market may have ended. The reasoning behind this claim is today’s revised GDP data for Q2 which went from 1.9% up to 3.3%.

The Q2 GDP was revised up on two main components. The first was the Governments claim that final sales (GDP less inventories) increased at a 4.8% rate, and the second being exports rose significantly from the last quarter.

The GDP is a backward looking indicator, not forward. Or if you wish to think of it in technical analysis terms it is a trailing indicator, not leading. In order to put some sense of forward looking guidance for the GDP we only have to look at what caused the GDP to be revised in the first place, as well as other economic conditions that exist now.

What impacted the Q2 GDP:

The Government stimulus checks started to hit the mailboxes in the second quarter. Any increase in consumer spending can be attributed directly to the Government handout.

Exports rose on the very weak US dollar. American goods were ‘on sale’ for the rest of the world.

What do we know about future GDP numbers:

The stimulus checks was a one time event. That money has already been exhausted and flushed through the economy.

Global economies have begun to deteriorate noticeably in the past few months. And in doing so other currencies have begun to fall. Now the advantage of the cheap US dollar has been taken away as the difference between the dollar and other currencies is no longer so one sided anymore. Weaker foreign economies equates to lower US exports going forward.

Corporate profits continue to decline. The raw data for the Q2 GDP says that corporate profits declined and we know that since the quarter ended corporate profits have continued to decline further.

Retail spending continues to slow. Regardless of what the Government statistics show, we continue to see on average lower sales figures from the US retailers. Additionally, the outlook for future sales continues to guide lower.

US Mortgage rates are moving upwards. In spite of the Federal Reserve’s aggressive rate cutting, the mortgage rates in the United States have continued to move in an upward path and the US housing market continues to worsen. Even FOMC member Mr. Lockhart expects housing prices will decline another 15% from their current levels.

Unemployment in the United States continues to increase. As corporate profits have been shrinking so to have the number of employees at many firms. In the recently released June figures from US courts, corporate and personal bankruptcy filings have risen 29% from the same period one year ago. And it is anticipated to increase further.

Availability of credit has continued to shrink. Rising interest rates and tighter lending standards have cut off the flow of cash so many have relied on for years. Credit card balances have continued to rise as people have turned to plastic for cash. And now credit card delinquencies have begun to rise.

Bottom line: The US economy has only been able to show growth on the heels of available credit, not organic growth. Only through credit has the consumer been able to sustain the economy over the past decade. That credit is now gone, and with it any future growth potential.

Tonight after the market closed Dell reported their quarterly earnings and they missed pretty badly. More importantly is that they said global I&T spending is contracting. That does not sound too good.

Bear market over? Not by a long shot in our analysis.

Posted in Categories: Contributor, Economy, External Research, USA.

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