Tuesday, May 19, 2009

The Shape of the Recession

CNBC seems to like to promote bell-curve analysts: those analysts and portfolio/hedge fund managers who routinely advise their clients based solely on the SHAPE of the current market/stock/commodity/etc. timeline graph. It seems a sensible route to trade and invest if the market were a machine, unaffected by emotions and unaffected by humanity. It seems impossible that trades and buying/selling cycles are so linear and concrete that one can view them, interpret them, and predict them based solely on shape. That's something an astrophysicist might be able to rely on when predicted the shape of a planet to far away to see--only detect from its magnetic field--but not for a trader.

These traders like to predict what the market will do based on something they refer to as the 'head and shoulders' model, in which a stock will be essentially flat (shoulder), then will suddenly increase (neck) and more or less level off (head), and then plunge (neck) and then level off again (other shoulder). That seems...feasible, I suppose, but less reliable than I would put my money on.

Nevertheless, in using their own models, I'm making some of my own predictions about the market. From early autumn '07 to early autumn '08, the market decreased incrementally, but then plunged in September, and basically continued until March.

Alright. So now, we're seeing an upswing. I think this upswing will be akin to the plunge we saw recently (from September to March). I think we should expect 6 months or so of sharp upticks--essentially bringing us to the 10,500-11,000 level on the Dow by September/October/November '09. I think that's feasible and probably; and based on these graph and timeline models, it makes perfect sense using the upside-down head and shoulders method. What happens after that is what I predict to be another incremental upturn (akin to standard growth). That means we should expect a leveling off for standard growth to occur around the 10,500 level on the Dow (sometime in early-to-mid autumn '09), making the final quarter of '09 the technical end to the recession (say around 2 years or so). Of course, they'll label the end of the recession based on growth, so we won't know until March of April of 2010, but I think 4th quarter '09/1st quarter '10 will be the end of the recession/technical beginning to growth again and prosperity--perhaps not worldwide, but at least an emergence from recession/depression all over the world.

That means we shouldn't expect to see (based on these head and shoulders models) the 14,200 level on the Dow (which is where we topped off at in October '07) until sometime in 2012 or early 2013. So if one were to measure recovery and growth by a return to the annual growth, stock market levels, and slid 3.5% or less unemployment rate, one would have to wait until mid-to-late 2012 or early 2013. As scary a thought as this is to ponder, that is essentially three years away.

And in three years we'll see a return to the housing market, the stock markets, a return to profitability (and notoriety/trust) for banking and automotive companies, pensions and 401ks return to most of their glory, the unemployment rate drop (and this is my prediction of 10.7%...I'm calling it [almost a full 2% points higher than it is now..making it just slightly higher than in the 1980s and 1970s recessions]) from 10.7% or so all the way back down to <5% t0 3.5%, and the government begin to get control of our finances once again.

Wait! That's a bad thing? It once was, but now it's a good thing. As I've said before...there are too many untrustworthy and greedy figures out there in the financial world right now and left unregulated they're like kids in a house with no supervision: they're going to break into something, break something, light the house on fire (what has basically happened) or hurt one another. This is what we're seeing and it's about time the government got back in to regulate that and, if necessary, take a few dollars more of our taxes to make life A LOT better.

When conservatives and uber-capitalists have been in charged, life has temporarily bloomed, only to wilt and freeze in the post-unregulated winter. I think you'd be hard-pressed to find someone happy about what's happening in the world right now--and I think we know who we have to thank for it. Not to use the term all-encompassing though, there are many shining stars among the black holes and asteroids of our financial marketplaces.

News has just come out about housing starts and building permits--declines in multifamily, but upticks in single family homes. Building permits have also dropped off, but less than last month, which I interpret is a positive sign. You can't have tons of new buildings made, and new apartment complexes made, when so many buildings are being renovated into apartments, and so many buildings are vacant due to bankrupt businesses. It seems like a no-brainer. I'd consider both of these to be good indicators we're beginning to swing back to positivity.

I would be completely sold if we saw another drop in job losses, and maybe only a .1 or .2% increase in the unemployment rate for the end of this month, and fewer vacant homes and properties (including commercial real estate) across the country. I think those should be the gauges we're scrutinizing the most.

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