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US - Why the Market is down

  1. From http://www.comstockfunds.com

    Why The Market Is Down--The Real Reason
    Although the market decline of the past two days is being attributed to the terrorist threat, we suspect that the high valuations, lack of profits and the fragile economy are more to blame. After all, following September 11, when did the terrorist threat ever recede? If it did, somebody forgot to tell us at Comstock. We think the financial powers that be would rather blame the poor market performance on anything else rather than admit the dreadful fundamental and technical conditions currently facing the market.
    The Conference Board leading indicators and the chain store sales report added to the increasing amount of evidence that the economy is faltering. After holding even for three months the leading indicators for April fell to its lowest level since December. Chain store sales declined slightly, but it was the third drop in the last four weeks and the fifth in the last eight weeks. With the labor picture also weak, it is likely that the tepid chain store numbers are reflecting a harsh reality. Now that the macro numbers are hesitating it is becoming increasingly apparent that America’s CEOs may be on to something when they insist they see few signs of economic recovery.

    The economy began to slow down in 2000, went into recession in March 2001, and was still declining at the time of the September 11 attack. Following the attack the economy came to a virtual halt, and then began to bounce back, aided by a number of one-time events. These were zero-rate auto financing, heavy discounting on general merchandise, a big increase in the money supply, the 2001 tax rebates, heavy mortgage refinancing (REFI), an unusually warm winter, lower oil prices and recent tax refunds. All of this helped clean out excess inventories, and resulted in a big inventory swing that was a main component of the strong first quarter growth.

    Now these one-time temporary lifts are gone, and it is doubtful that the economy can grow once the inventory swing ends. In order for the recovery to take hold and continue, corporate spending must come back strongly, and this looks highly unlikely. Corporations are suffering from excess capacity, lack of pricing power, narrow profit margins and record debt burdens. As a result they are continuing to slash costs for labor, capital expenditures and general expenses. If anything, layoffs can negatively affect consumer spending long before consumer spending leads to any kind of corporate rebound. All in all, it is no coincidence that the stock market is down 16 months after the Fed began to ease. That last happened in 1929 to 1930.



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