Stock Market Increases? Be Careful...

It's been a great few weeks, from a market standpoint. People have started to think that they have survived the worst of it, and that their retirement portfolios are on the road to recovery. Also, there has been a sobering reality that is starting to creep into the perception of the Democratic and Republican parties. The Left is beginning to realize that it's HARD to govern, and that the mere mention of the words "President Obama" don't translate into an immediate improvement of all of what ails us. The Right is coming to the realization that merely calling the opposition names and getting angry is NOT a plan to return to power. These realities stink, if one is a true partisan. But it is going to get worse before it all gets better. This optimism in the market? It cannot last. Here's why:

1. Unemployment continues to surge ahead--I understand that the stock market is a leading indicator, and unemployment is a lagging indicator. However, there does not appear to be any indication that employment cuts are abating. If anything, the cuts I have started to see recently are more focused in the services sector, with announcements at places like Law Firms and Consulting Services Companies. These are white collar jobs, and there are large salaries attached to those jobs. My hope is that my perception is NOT reality, but I need a positive month, where job losses drop down to the 300-400k level, before I begin to believe we have jumped the shark on this recession.

2. Auto Company Failures will sink the Midwest--It looks like President Obama has had enough with GM and Chrysler's failure to turn the corner on their business models. It may not be GM's fault that the economic realities are brutal to their company, but at this point, it may not matter. A Chapter 11 Bankruptcy (Re-organization) could turn into a Chapter 7 (Liquidation) if it isn't done properly. My concern is that the best case scenario would lead to hundreds of thousands of jobs lost. The worst case is upwards of 1-2 million jobs lost. The mid-west would be devastated. It isn't exactly the stuff of better stock prices.

3. The Chinese are contemplating life after the dollar--Joshua Cooper Ramo was a most compelling guest on Meet The Press today. He discussed the notion that in China, there has been immense pressure for the Chinese government to move on from the dollar. This type of shift of policy from the Chinese would lead to this concern: the lack of interest from the Chinese would mean that the Fed would need to get dollars into circulation through other means. Auctions could mean more US investors, which could generate more of the hyper-inflation situation we saw during the early 1980's. If the Chinese don't participate in buying US dollars, could there be failed auctions, like those recently in Britain? This would not be good for a government that has just made credit promises in the $8-12 Trillion range over the upcoming decade. This cannot be a positive sign for the stock and bond markets here either.

4. Earnings are only NOT as horrible as previously thought. They aren't better--How is the fact that earnings are lousy, but not as lousy as we thought, a basis for a climbing stock market? This reminds me of the absolutely TERRIBLE Ford Motor Company's recent marketing line, "Have you driven a Ford Lately?" The reason THAT tag line is so bad is that it basically assumes that we all have it in our heads that Fords are lousy, and that if we just "drive a Ford again," we might realize that NOW it isn't so bad after all.

In that vein, the mere fact that the world didn't end last quarter does NOT mean that Dow 10,000 or S&P 1,000 should be in our immediate sights. These markets sold off for a reason, and those reasons don't appear to have been solved. I am bracing for more losses on the averages, and I am just not seeing enough out there right now to endorse a further run up of stock prices right now. I am concerned we will see DOW 7,000 before we see DOW 9,000. Let's see how things pan out...