Recession Looms…Or A Really Big Rally Is On the Way (Includes a Review of the Past 12 Months)

By Duru

August 31, 2005


The headlines are getting heavier than the dark skies over the Gulf Coast.  Hurricane Katrina has killed scores of people, looters are wading through the streets of New Orleans, the United States's oil and gas complex faces sustained damage as natural gas, oil and gasoline continue to soar in price, long-term bond yields continue seeping downward in anticipation of a weakened economy, the Saudis are warning they may not be able to meet growing global demand for oil in the coming year, popular retailers like Wal-Mart are warning of a slowdown in consumer spending, and even President Bush's approval ratings are at all-time lows (in fact, only Nixon has done worse at this time in an American presidency).  Let us not even talk about the gloom and doom spreading across global news desks.

All arrows are pointing down and a recession must be around the corner.  If the Fed has its way with short-term interest rates as it seeks to bust the housing bubble, we must assume and prepare for some tough economic times ahead.  However, it is often during times as dark as these that the market finally decides the news cannot get any worse….and the buying in anticipation of better times ahead begins.  It is impossible to say of course which course lays ahead for us.  Even a big rally could become the last gasp before a recession finally chokes off the last hopes of the optimists.  What I can say is that things do not look good and few catalysts lay in wait to take us back into rally mode.  The two main saving graces I can fathom are 1) the Fed declares an end to their persistent campaign to hold the economy down, 2) energy companies declare that damage from Katrina is not nearly as bad as they feared possible.  #2 is more likely than #1, and even if a relief rally ensues from #2, the market will only further pave the path for the Fed to continue raising rates.

Now that I have spread such cheer about the coming future, I think this would be a good time to do a quick review of some of the larger pronouncements I have made in the past year or so:

NVEC:  This stock is down another 50% since I echoed revelations about the smoke and mirrors used at this company to promote its technology.  Too bad I did not make a single penny from that call.

Intel:  Intel still trades at higher levels than it did at the time I finally turned from bear to bull on Intel.  I am now neutral and suspect my worst fears from a year ago  are nowhere close to fruition.

Gold, housing, and retail:  Gold has remained in a large trading range since selling off in late 2004 even as the U.S. dollar has rallied strong all year.  The housing index has put on yet another 25% in value even as it has swooned over 10% since Fed fears set in again.  The retail index is pretty much where we left it in December of last year.

NASDAQ:  This volatile index of happy-go-lucky technology stocks has provided lots of drama this year.  From toying with 1999 for the umpteenth time to making a roundtrip to and from and now back to 2100, the NASDAQ has as expected proven to be an accelerated marker for the market's imminent direction.

The Dow Jones Industrial Average:  10,000 proved golden in marking a bottom for the year.  That low has still not been broken, and my point of maximum bearishness proved to be a notable bottom for the year!

Steel:  Ever since my excitement in steel marked a notable top in the commodity, it has never recovered.  There was a brief moment of hope and even now steel hangs around like a drunk waiting for one last round at the bar.

Oil:  I last cooed about gas prices by pooh-poohing an industry report that showed a marked decline in the demand for gas.  I have been saying it, and I will say it again…the trend is up and will continue up…at least until all these analysts stop anticipating a rapid return to $40 or $50 oil in the coming months or year.  It appears now that only an all-out recession will making these men and women correct….and who wants that?!?

Program Trading:  My analysis of program trading showed a growing occurrence of extremes in volume.  The data suggested that this year's high-volume program trades foretold of future weakness.  Instead, the bombings in London helped to embolden the market to rally against all the negative headwinds that are now finally weighing down on the market.

Iraq:  I have tried to slow down my criticism of the President and his administration over its policies, especially in Iraq.  But things are so bad, I simply cannot help myself sometimes.  At the start of this year, I lamented how long it can take for a nation to wake up against an illegitimate war.  I wondered whether "…once enough sons and daughters fall for a questionable cause, enough parents begin to question and then object."  Sure enough, we now have grieving mother Cindy Sheehan trying to get an audience with the President and the country's conscience to put an end to the invasion and occupation of Iraq.  Given that there remain plenty of military families who fully support the war, I highly doubt much progress against the war will happen in the near-term.  We will need to see more relatives who still have family members serving "over there" speak out against the war before any progress is made on this front.  Regardless, Iraq has dimmed from the country's larger conscience, and it has now become a blip on the economy's pulse…for now anyway.

I have been right and wrong in the past, and I will do the same for the future.  My main hope is that I keep you thinking independently of the media's conventional wisdom and encourage you to always consider alternative rationales and approaches to these crazy markets.  Be careful out there!


Independent Thoughts
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© DrDuru, 2005