The doubts about all the positive economic data coming out are beginning to show up in the markets.  First, let’s consider the unemployment rate.  It supposedly went down from 10.0% to 9.7% while job losses increased.  Does that make any sense at all.  The problem is the Bureau of Labor Statistics is using a Birth/Death Model that cannot render reliable conclusions in these unique conditions. I won’t go into the details because this isn’t an economics lecture.  Suffice it to say that this model has nothing to do with people.  It has to do with the Birth/Death rates of businesses.  I think I mentioned in a prior post that many businesses were closing down at the end of the year and we still haven’t seen that data yet.  Expect to see major revisions to the unemployment rate soon.

       Second, I have made mention of the U.S. Gross Domestic Product or GDP and how it needs to be above 3% -4% to indicate any sort of economic recovery.  In the 4th quarter it was reported that the number was 5.7% for the quarter.  The market has seen through that horse shit.  Gene Epstein of Barron’s explained that the part of the GDP that reflects recovery is the Domestic Final Sales element or the DFS which reflects consumer spending plus business and investment in plant and equipment.  The DFS needs to be substantially higher than the 1.8% in the 3rd quarter and 1.9% in the 4th quarter.  So GDP is nowhere near where it needs to be.  It might benefit from the increase in spending to rebuild inventories (or so they say).

     Third and probably most important is the alternatives available for investors to put their money in.  The vast majority of it is going into U.S. Govt treasuries and now German Bonds are starting to draw assets.   The problem is U.S. Govt  treasuries have become another asset bubble that will burst down the line.  Think about it.  If everyone is demanding U.S. Govt bonds, the price goes up and the yields go down.  At some point, the massive U.S. Govt debt issue is going to begin to weigh on investors minds and they will begin to wonder how in the world the U.S. is going to pay down that debt.   Keep in mind that as long as the interest rates that the U.S. pays is low, it is a manageable problem.  But, global  investors, as soon as the rest of the world starts to look better in terms of total returns,  are going to start selling bonds and moving toward more attractive alternatives that have inherently less risk.   When that happens, rates start to climb,  the U.S. Bonds begin to loose value and then all hell breaks loose because all the Retirees that are holding those bonds mutual funds are not expecting to loose their principal and will start reading their quarterly statements and those losses will begin to register.  As long as the interest rates are on a par with the GDP growth rates ( 3%-4% vs 4%-5%)  running up a national debt can work.  When those ratios get out of whack, watch out.  That’s when you want acreage, ammo, and isolation.

      In the context of a market that is fairly or fully valued, the above points can only have a negative impact on the market.  We are 800 points into the 1,000 to 1,500 point drop I wrote about on Jan. 22nd and not far from a DOW 9,000 to 9,500 level which will be the 15% correction I wrote about.  The market mentality has changed from one of bullish euphoria to doubt and concern.  Any good news is now looked at with scepticism.  Any bad news is emphasized such that the pundits start to referr to a possible end to a bull market that never really was.  We simply recovered from a major panic in the markets and it took on a life of it’s own.  We witnessed an overreaction to the upside.  It is entirely possible that we may witness another overreaction to the down side.  But, don’t count on it.  There are way too many anxious money managers chomping at the bit to jump at what may look like another leg up.  

       Just consider that if you followed my opinion and went to cash, you avoided a nice slide.  Don’t worry about whether the market will keep going down after you get back in.  Rest assured it will.  It just won’t be as painful as it could have been.  And wait for the next oscillation in the market.