The Broken Record

by JDH on July 31, 2010

I will keep my comments brief today, for two reasons. First, Monday is a Civic Holiday in Ontario, and most provinces in Canada, so the markets will be closed, so not much will be happening for the next few days. The weather is great, and I plan to spend my time outside, not in front of a computer. Second, nothing has changed.

Nothing.

The market’s are still in a bubble like state of euphoria, pumped up by massive stimulus spending.

It’s possible that we will look back on the 10,600 level on the Dow as a near term top. On June 21 the Dow peaked, intra day, at 10,627 (and closed the day about 200 points lower). The Dow then spiked up to 10,632, intra day, on July 27, and then spiked again to 10,609 on July 29. Will we see 10,600 again? Perhaps. But the Dow is at 10,465 now, and there’s lots of resistance between here and 11,200, so this cannot be called a bull market, by any stretch of the imagination.

I know I sound like a broken record, but I still be believe we are headed for a fall. (For those of you under the age of 30, a record is a plastic disk used to play music; a needle traced grooves in the record to amplify the sound. If a groove was damaged the record would continue to play the same sound over and over again. Like me. But I digress).

You can get away with something for a while, but not for forever. You can drive faster than the speed limit for day, months, even years and never get caught. But then, one day, you get nabbed. That’s how it is.

I’ve been wrong about market strength. I under-estimated the power of unlimited government spending. However, there are lots of signs of weakness, if you care to look.

GDP growth may look good, but it isn’t. At this stage in a recovery we should be at 5% growth or more, not 2.4%. Take out the tax credits and other stimulus, and we are in a deflationary environment.

Consumers are cutting back, and actually saving money, which doesn’t stimulate demand.

The record player might be broken, but so be it; I’ll keep playing it.

I’m off to enjoy the good weather; let’s see what tune I’m singing next week.

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