I am not yet willing to admit that I’m wrong

by JDH on July 10, 2010

Well, I guess I called that one wrong, eh? Or did I? Last week I wrote about the Start of our Summer of Discontent, and I made the point that a stock market correction or crash was looking to be an apparently inevitable event at some point this summer. My reasoning:

  • No jobs;
  • The Baltic Dry Index is tanking;
  • Government deficits continue to increase;
  • Oil continues to explode into the Gulf;
  • Real estate prices are plummeting;
  • An Israel-Iran war looks inevitable, perhaps around the July 11 time period; and
  • Gold continues to make new highs, revealing investor’s flight to quality.

On that basis, I lightened up the stocks in my portfolio, moved more into cash, and bought some August put options as insurance.

So, against that backdrop, as I was not happy to read the headline in the Wall Street Journal: US Stocks Rise, Capping Best Week Since July 2009. Yes, it’s true. The Dow was up5.28% this week, for its biggest weekly gain since the week ended July 17, 2009.

What gives? Well, obviously, the 9,500 level provided support, and the Dow bounced off it. But, as you can clearly see from the chart (and if it isn’t clear, click to enlarge it), since the high in April we have had a series of lower lows, and the Dow is still clearly in a down trend. The Big Boys can put on a short squeeze and drive the market up, as they have obviously done, but that doesn’t mean all is right with the world. It just means they squeezed the shorts this week.

Fine. We had a technical bounce from oversold conditions. This is not a new bull market. Not even close. Big moves by program traders in the last half hour of trading are not indicative of the retail investor returning to the market.

Canadian Unemployment Numbers

Now, a word to my fellow Canadians.

On Friday we got to read the good news that Canada churns out 93,000 new jobs; great! That’s over 300,000 net new jobs so far this year, so it would appear that the recession is over in Canada, which is more than you can say for the U.S., since the USA is losing jobs.

I take these numbers with a grain of salt, for two reasons:

First, average hourly earnings fell by 0.6% this month, and average hourly pay is now at it’s lowest level in nine months. So, while there are more jobs, they are lower paying jobs, which isn’t great fuel for an economic recovery.

Second, on July 1 Ontario and British Columbia, two very large provinces, combined their provincial Retail Sales Tax and the Federal Goods & Services Tax into one new combined tax, the Harmonized Sales Tax. In Ontario the 8% provincial sales tax and the 5% federal GST are now the 13% HST. This may not seem like a big deal, since on most items the combined tax remains at 13%.

However, there are many services that were previously exempt from the PST, but now include the HST. Everything from haircuts to landscaping and home renovations have increased in cost to the end consumer. As a result, to beat the HST, many residents of Ontario and British Columbia built new decks, had their driveways paved, did some landscaping, or renovated their basement in the months prior to July 1. That may be a significant contributing factor to the higher employment numbers. I suspect that now that the higher taxes are here, many of those jobs will be lost, and the employment picture will dim.

So, I plan to stay the course, stay in cash, and hold my puts.

Thanks for reading, and have a good week.

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