Posted by: Dwight Johnston | April 29, 2009

On the Good Ship Lollipop

That was easy!  It appears that the markets, all the associated pundits and officials now believe we’re on the way to recovery.  The stock market clearly does.  The Fed hinted strongly at such in the FOMC statement release today.  And, economists saw beauty in the hideous -6.1% GDP report.  Without going into the gory details, economists are basically concluding that some elements of this quarter’s results were so bad it must mean the next quarter will be better.  Mathematically they might be correct, but what is so great about an economy that contracts at 3% vs. one contracting at 6%?  Contracting economies still mean slower growth, fewer jobs, and shrinking incomes.

But it’s a happy fizzy party.  I’ve written often about the importance of psychology in the market place, at least when it comes to shorter-term movements.  We’re seeing the impact of that now.  The economy has just gone through the most severe two consecutive quarter contraction since the Great Depression, banks are likely less than halfway through realizing their losses,  there is no improvement in the job market, the pipeline of foreclosed homes is bulging, and two of our three auto companies are broke.  Sounds like a dream economy to me.

Regarding the auto companies — the markets are treating this as old news.  Whether it’s through bankruptcy or a dramatic restructuring is irrelevant.  The market is shrugging this off as “not a factor.”  But the bankruptcy is just step one. What still is yet to come is the economic costs that will play out over the next eighteen months or so.  Just because GM and Chrysler aren’t going completely out of business doesn’t mean that the re-structuring won’t come with a big economic cost.  It will.

But for the time being it’s all about wishes and hopes.  I’ll stick with the general theme that stocks will do fine for most of May and perhaps into June.  Certainly 9000 is doable and maybe a push toward 10000 as the Wall Street gets ever more giddy about the possible return to “Big Bonus Land.”  After all, that’s what it’s all about on Wall Street.   But I contend that you want to be completely out of stocks after June.  I think the second wave of attackers will land on the beaches in the late summer months.

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