These days confusion reigns. Hmmm … Perhaps uncertainty is a better word to describe the current economic and market environment. Then again, uncertainty is a product of confusion, so confusion rather than uncertainty … Oops … I guess my uncertainty about confusion exemplifies the point – these uncertain economic times are creating confusion in the market.
What is the near- and far-term future of the market? Every day, we hear opinions about what will happen economically and in the market today, right on through to the end of the year. This is a fool’s errand, even if it is a necessary one. We need the analysts to analyze, but we can and should form our own conclusions. As I have said before, the analysts’ conclusions are not important; it is the analysis we need, but only if that analysis is specific, detailed, and objective.
On this excursion to answer the reader’s concerns (See last Friday’s column), however, my goal is to be broad and objective, not specific and detailed. Over the next few days, my intention is to lay out the economic and market issues we face and then draw them all together to see a potential conclusion and to highlight that we should all tread (trade) carefully in the coming months.
First, we are emerging from the confluence of a big recession and an unprecedented collapse of the global financial system. This unto itself should tell us to tread lightly, especially since the global financial system is not completely healed. Issues still exist – myriad lawsuits against the biggest names in the financial industry for bundling and selling worthless mortgage-backed securities, European/U.S. investigations into collusion among the big banks regarding the $28 trillion credit-default swaps industry, failing U.S. regional banks (39 this year so far), and the toxic assets still on the books of just about every bank, large and small. This brings us to the commercial and residential real estate markets.
Because banks burned themselves with the “no-verification” home mortgages and commercial real estate took advantage of the banks’ willingness to allow them to overextend, as well as government regulation tightening qualifying standards, banks are holding back on investing in anything but the next big trade. And why not? Money is so cheap (think the Fed) trading is quick profit, at least until the commodity bubbles burst (a serious concern). There are indications this is changing, as personal and commercial loans are on the rise, and banks are slowly cutting back on trading in compliance with Dodd-Frank regulations coming down the pike. As of now, though, the residential real estate market is anemic, bumping along the bottom, and commercial real estate is faring better, but not by much. This is negatively affecting the U.S economic recovery more than anyone in the government or in the private sector would like.
The last quarter saw a big drop in the U.S GDP, but corporate earnings are beating expectations 3 to 1, and that is keeping the market in an uptrend, even if volume is low, which is an important indicator of uncertainty and, perhaps, confusion. Yet, the CBOE VIX is also low, which usually means a lack of fear among investors, an indication that the market will continue to go up. For the near term, this is probably true, but soon enough, the political rhetoric about the debt ceiling, the debt, and deficit will begin, and that will last right through July, I suspect. Tomorrow, I will discuss this a bit, and then I will move onto the global economic picture. After that, I will come back to the USA for a look at the particulars of the U.S. economy and the overall market. Get ready. The complexities and interweaving of all of this might be confusing.
Trade in the day – Invest in your life …
