Notes from vacation

I snuck out of town for some relaxation in Mexico.
I came up for air today and wanted to share some thoughts

My investment premise is that we are headed for a major recession. In addition, as I’ve shared in previous blog postings, history shows that the markets – when they fall - fall very fast.

I call it the LAST GASP THEORY. It is typified by a series of up-and-down cycles in the DOW averaging 10% and ending in one, final surge of ~15%. In addition to this technical barometer of my own devising, another common point shared by recession-related market pullbacks is the deep divide between an exuberant market and an economy already weak and getting weaker. It’s as if everyone knows the party is ending and they want one more dance.

Because it is obvious that a downshifting economy reduces both a sector’s P/E and a company’s ability to meet EPS. Worse, surprises are to the downside not the upside. Oh, certainly, many begin shedding staff and spending to maintain EPS, but sales suffer and very few remain lean and mean.

I believe we are near the top of that final surge – the Last Gasp.
* Economy is either in or near recession - but the markets are simultaneously surging
* Current surge is >10% This is key. Until now, the cycles have been ~10%. Today saw the Dow touch 12,940 – a rise of 11% above last month’s low of 11,650.
* More companies are missing earnings releases and guiding down. I can’t find the citation, but I read that for the first time since the last recession, over 50% of the Blue chip stocks are missing or guiding down.

Am I rationalizing the market surge? Could I just be flat out wrong? I have researched and let the data show that the markets collapse always follows a major surge and right after evidence of the start of the recession.

What I believe is happening is this. Go back to March when the markets began to free-fall. What precipitated that was a combination of banking crisis and liquidity drain. All of a sudden folks realized that the housing collateralized debt was worthless, and therefore most banks and lenders and investment companies were sitting on a pile of worthless assets. Worse, they needed fresh capital to stay in business. The Fed stepped in and did two things. First, it turned on the taps full blast – expanding the money supply at an unprecedented rate. Second, they turned a blind eye to fundamental insolvency at most lenders.

That rush of cash helped and the markets rebounded. Because the banks could go back to lending and confidence was restored.

In addition, the rapid collapse of the dollar has made multinational companies look more prosperous than they really are – by selling the same amount as last year but enjoying the higher dollar value. I have shown that this will end within 2 quarters as the dollar’s downward trajectory slows.

I don’t want to call it, but I think 2 weeks from now is when things go south fast. This week, the market will sing and dance as the Fed drops rates again. But this is the time for a while. The Fed is facing incredible domestic and international criticism as inflation surges and we export our inflationary problems globally. Unfortunately, the Fed counted on the inflation to not come back here, but today’s economy prevents that from happening. Wheat has international prices. As does oil and steel.

The real killer won’t be the market reaction to signs that the Fed is going to end the rate drops. Instead, it will be the April monthly GDP estimates. The recession lights will be flashing. In addition, the April housing data will be out – this is the biggest month for home sales.

I know that I am contrarian and my portfolio’s value is paying the price. But just as the market can zip up 10% in 1 month, it can crash 15% just as fast.