Tuesday, December 16, 2003

Economic Recovery or Set Up for a 2004 Crash?

Is the economy coming back? The nightly business shows and commentators would have us all thinks so. Certainly the Bush administration is hoping so. Manufacturing is up. Growth is up. The DOW back up around 10,000.

But a little reading and research raises some questions.

Bear market rallies:
These types of rallies have four characteristics:
1. Low prices aren't that low
2. The hot stocks are the same type as during prior bubble
3. The upswing is sharp, speculative and persistent
4. Investor confidence bounces back.

Doing a little more online reading I found out that right now:
1. The low in September 2002 wasn't that much lower than the highs during the bubble.
2. The leading sectors are growth and tech stocks, same as during the bubble.
3. The rally has certainly been sharp and persistent. Speculative? Well apparently NASDAQ margin debt is at an all time high.
4. Newsletters are as confident as they were in 1999 while cash holdings are far below normal.

Looks like a sucker rally to me.

Some point out, however, that this rally has gone on much longer than other bear rallies. What's going on? Maybe this really is a recovery.

Well this is where it gets interesting. Apparently there is something called the presidential cycle, in which the administration stimulates the economy in year three so year four will be good. Since 1932 on average years 1 and 2 are down by 4 points, year 3 is up by 8 points, and year 4 is flat or up a tick. This administration has done a really good job of artificially stimulating the economy. So we're in the middle of Bear Market Bubble being propped up by year three of the presidential cycle. But historically the presidential cycle effect pretty much disappears by year four. Could we be looking at a spectacular "correction" sometime next summer or fall?

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