The Economic Downturn is Not Over

Interesting video clips from the Yahoo! Tech Ticker summarizing the bears coming out against the stock market.  Roubini, Soros, Faber, Rogers, Stiglitz, and many others are predicting a downturn--at some point.

From a trading perspective, we have to respect that the bulls have been in charge of stock market prices and go with the trend until that trend changes.  We can see the inverse correlation between the dollar and the stock market.  Obviously, that correlation has to end at some point if our thesis of a lower dollar and weaker stock market come to fruition.  We're not sure when that may be, but it will be an important part of this economic cycle.

It's a question of "when," not "if."






Roubini Sees Stock Declines as Soros Warns on Economy

Oct. 5 (Bloomberg) -- New York University Professor Nouriel Roubini said stock markets may drop and billionaire George Soros warned the “bankrupt” U.S. banking system will hamper its economy, highlighting doubts about the sustainability of the global recovery.

“Markets have gone up too much, too soon, too fast,” Roubini, who accurately predicted the financial crisis, said in an interview in Istanbul on Oct. 3. U.S. stocks may suffer a “major decline” after climbing to the highest levels in almost a year two weeks ago, according to technical analyst Robert Prechter, founder of Elliott Wave International Inc.

Stocks have surged around the world in the past six months as evidence mounts that the economy is emerging from its deepest recession since the 1930s. The Standard & Poor’s 500 Index has soared 51 percent from a 12-year low in March while Europe’s Dow Jones Stoxx 600 is up 48 percent. The euphoria contrasts with warnings from policy makers and investors like Soros, who said today that the U.S. economic recovery will be “very slow.”

U.S. consumers are “overdebted” and the country’s banking system has been “basically bankrupt,” Soros said in Istanbul today. “The United States has a long way to go.”

Group of Seven finance ministers and central bankers also struck a cautious tone after meeting on the shores of the Bosporus over the weekend, saying the prospects for growth “remain fragile.”

‘Barely Recovering’

“The real economy is barely recovering while markets are going this way,” Roubini said. “I see the risk of a correction, especially when the markets now realize that the recovery is not rapid and V-shaped, but more like U-shaped. That might be in the fourth quarter or the first quarter of next year.”

U.S. and European stocks gained today after reports showed service industries expanded on both sides of the Atlantic.

“Stocks are very overvalued,” Prechter, who advised betting against U.S. equities three months before the market peaked in October 2007, said in an Oct. 1 telephone interview. “Stocks peaked in September and are back in a bear market.”

The S&P 500 will probably fall “substantially below” 676.53, the 12-year low reached on March 9, he said. His projection implies a drop of more than 34 percent from last week’s close of 1025.21. It rose to 1031.77 at 10:05 a.m. in New York.

Valuations

Gains in the index have pushed valuations to more than 19 times reported operating profits from the past year, data compiled by Bloomberg show. That’s near the most expensive level since 2004.

U.S. stocks fell last week after manufacturing expanded less than anticipated and unemployment climbed to a 26-year high of 9.8 percent. In the 16-nation euro region, the jobless rate is at 9.6 percent, the highest in more than a decade.

HSBC Holdings Plc Chief Executive Officer Michael Geoghegan fears there will be a second global economic slump, the Financial Times reported today, citing an interview. Geoghegan forecast a W-shaped recovery and said the “reality is that profits will be quite reduced,” the newspaper reported.

The International Monetary Fund predicts the global economy will expand 3.1 percent in 2010, led by growth in Asia, after a 1.1 percent contraction this year. That is still “anemic” and “very weak,” Roubini said.

If growth doesn’t rebound rapidly, “eventually markets are going to flatten out and correct to valuations that are justified,” he said. “I see a growing gap between what markets are doing and the weaker real economic activities.”

Creating Bubbles

Stocks will continue to advance, according to Byron Wien, vice chairman of Blackstone Group LP. The S&P 500 is poised for its biggest fourth-quarter rally in a decade as the economy recovers and earnings exceed analysts’ forecasts, Wien said in an interview on Sept. 28.

The global equity rally has added about $20.1 trillion to the value of stocks worldwide since this year’s low on March 9. Governments have poured about $2 trillion of stimulus into the global economy while central banks have cut interest rates to close to zero in efforts to revive growth.

“In the short run we need monetary and fiscal stimulus to avoid another tipping point and to avoid deflation, but now this easy money has already started to create asset bubbles in equities, commodities, credit and emerging markets,” Roubini said. “For the sake of achieving growth stability again and avoiding deflation, we may be planting the seeds of the next cycle of financial instability.”

To contact the reporters on this story: Shamim Adam in Istanbul at sadam2@bloomberg.net; Francine Lacqua in Istanbul at flacqua@bloomberg.net