Is the selloff here?
Posted by Ray on September 1, 2009 under Main | 
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This question is being asked by many people, especially the media which I find interesting since they are supposed to be in tune with the experts. Clearly we are taking a breather and I suspect that the downtrend will continue as we were way overbought. There is a caveat to this, liquidity.
My primary thought has always been that liquidity was the primary driver of this parabolic rally that we have had. That liquidity remains the wild card in markets as some liquidity will be removed through, supposedly, the Fed reaching its limit on quantitative easing. However, money is definitely abundant and can continue to drive stocks higher, but, in my opinion, that just increases the danger of a steeper decline.
I do not think anyone is surprised by the ISM data today as the primary driver of the increase was artificial stimulus form the government, primarily the cash for clunkers program. Unfortunately the demand from this stimulus will be short lived and as the market is telling us the good news was already priced into equities. One must also remember that the ISM flipped positive in 2002 as well, but proved to be false as the pain continued for months afterwards.
Furthermore, sales reported by Ford and Chrysler today were not so hot as they missed estimates. This shows that these firms should not be boosting production as demand is still very lax and will more than likely not improve as unemployment continues to be a major problem. As I have said previously, unemployment is the primary problem we face now as this is a credit led recession, not an inventory recession.
Realize that the ISM number is good news, but I believe it to be completely supported by government intervention, which is bad. The government cannot intervene forever and when they stop, which they have to a certain extent, then we will have real demand data, which is pretty bad. I know you have been hearing the talking heads trumpet the good news as the end of the recession is over and everything is great now, but that may not be true. As I said above, the ISM had a very similar rebound in 2002, but the recession went on.
We are still having problems with real estate which is been a bit convoluted with the data that you have been presented with, but based on what we see only lower end homes are moving and prime mortgages are now defaulting. There is no question that the economy is in better shape than a year ago, but the problems are still here. Frankly, all that has happened is that banks have relaxed accounting rules and the government simply supported the whole system. If the support system was removed and accounting went back to where it should be the whole thing would fall apart and everyone knows that.
As far as real estate it is estimated that over 2 million new home sales are because of, drum roll please, the $8K tax credit! Take that away and there goes demand. My point is that artificial demand has created more of a problem than a solution because when real demand is figured out the market will retract significantly. Creating confidence in a system that is sure to disappoint when support is removed is just plain wrong, but that is what we have.
Yes, liquidity can drive the markets higher, but what we are seeing today is just the beginning. People have figured out that good news has already been baked into the cake and demand is not real demand so people are exiting stocks for safer investments. Today, gold, silver and short-term treasuries are doing fairly well, which is what I hold I might add, while riskier assets are getting hit pretty good today. Outside of precious metals and defensive names, like Wal-Mart or McDonald’s, I am not inclined to buy anything right now.
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