Stock Market Rally, Doing the Maths

By: StocksBuddy

The early part of the rally in the US began with a "Hope" that things will get better as days progress. In the subsequent days/months, almost all of the media, news channels and websites were inundated with news such as "Better than expected" which drove and is still driving the market higher. What is this "better than expected" and the math beyond this is what we intend to analyze here. You will be really surprised to see "The Math".

Stocks jump after better news on unemployment

Stocks soared to new highs for the year Friday after investors got reassuring news from the employment front. The Dow Jones industrial average rose 113.81, or 1.2%, to 9,370.07 after the government said unemployment fell for the first time in 15 months in July. Employers cut 247,000 cuts, much fewer than expected. The Labor Department also said the unemployment rate dropped to 9.4% from 9.5% in June. Economists forecast the rate would rise to 9.6%.

This is like a "Rewind-Play" of the same statement, "Employers cut FEWER jobs than previous month", so stocks will rally as it suggests recession is ending. This is the MOST ridiculous statement to come out from the media. Why? Let us explain with an example. Let us say Intel has 100000 employees.

Owing to the downturn it starts cost-cutting measures when it first realized that economy was going down the drain. Let us say it was December of 2008, Please check the table below. Dec 08 - 5000 Jan 09 - 5000 Feb 09 - 4500 Mar 09 - 4450 Apr 09 - 3500 May 09 - 3300 June 09 - 3100 July 09 - 3000 Aug 09 - 1000 Say the same continued further.

However, if you carefully look at the pattern you will see something that is "Just pure commonsense". And what is that? Initial panic triggered the highest layoffs. Then the intensity of layoffs reduced considerably. By about August, there wasn't anymore layoffs possible because that would result in Intel completely closing the shop. Because those are the bare minimum folks that are needed to keep the current projects and work going.

Does that mean things are getting better. At least the whole market, news channels believe so and forced everyone to believe. But even a layman looking at the above can easily figure out that this is all hype and no meat. Just because the number of layoffs reduced doesn't mean things are getting better. Actually, it is even worse.

If Intel is STILL laying off even a 1000 employees after 7 months of consistent layoffs it clearly suggests that Intel is unable to sell their products and make any money. To keep the shareholders happy, they are cutting costs further so that they can show profits. In essence, the 5000 that were laid off in December don't show this pathetic face of Intel when compared to the 1000 that were laid off after 7 months of consecutive layoffs. This company is unable to even pay for it's employees all these months. In short, this is the story of Corporate America right now. If you are STILL seeing layoffs, regardless of the number, that means things are actually getting worse than getting any better.

The same is the case with GDP. GDP Numbers for the last few quarters

Gross domestic product -0.7 1.5 -2.7 -5.4 -6.4 -0.7

The above are the GDP numbers ending in Q2 of 2009.

Personal consumption expenditures -0.6 0.1 -3.5 -3.1 0.6 -0.9 Exports -0.1 12.1 -3.6 -19.5 -29.9 -4.1

If you look at the numbers above you will realize that almost ALL of the GDP growth that is shown came from EXPORTS. Voila. What does this suggest. CLEAR DEFLATION. Why? Nothing is moving within the US. So how to fix it? Devalue the currency so exports can increase and that reflects in GDP growth and shows a much better view of the US economy which in fact is NOT growing or improving. Bottom line is that the picture that is being shown to us via News Channels and media is just purely incorrect.

Yes, GDP is NOT shrinking as much and is potentially growing but that is NOT because US economy started growing but purely because of exports. Once $$$ starts strengthening, you will see massive downside of GDP if just not the revisions.

Conclusion: The "Better than expected" mantra that has propelled the Stock Market seems to be working ONLY on ONE aspect, Sentiment. Investor and Public sentiment has just reversed the course from being 90%+ negative to 90%+ positive. May be this whole 8 month exercise was just to do that. But again, what happens when reality strikes? We will be looking at 4th quarter of 2008 all over again.

Source : http://www.stocksbuddy.com/blogs/?p=9717

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