If we look at S&P 500 data we find that we have entered into a new era:

The above chart highlights milestones for the S&P 500 dating back to 1968.  For the S&P 500 to double from 100 to 200, it took a slow 17 years.  From 200 to 400 it took 6 years, an incredibly quick jump.  Another 6 years after that and the S&P 500 was riding high at 800.  From 1997 to 2007 the S&P 500 went from 800 to 1,576 in the intraday high that is now far in the past.  It almost doubled yet again in a 10 year horizon.  Yet that trend has been broken.  The S&P 500 is now back to 1,041 and has pulled back to levels seen in 1998.  Does anyone really see the S&P 500 going to 2,000 any time soon?

“The stock market needs to reflect the underlying health and productivity of the overall economy and not simply the gambling penchant of Wall Street banks.”

Most of America is dealing with the new austerity that is being thrust on them from an unforgiving economy and a government that seems to be preoccupied with helping out the financial industry before setting things right with the average worker.  In other words, the middle class is being thrown to the wolves in this crisis.  The government is serving the interest of big money at the detriment of the middle class.

If we look at the volatility of the S&P 500 over the past 22 years we’ll notice two different stories.  From 1988 to 2000, the stock market enjoyed a once in a lifetime bull run.  There were virtually no negative years and some incredible year over year gains.  Keep in mind that we are looking at a 12 year timeframe on a tiny chart but this is over a decade of mental conditioning here.  If we look from 2000 to our present day, the massive amount of volatility has sent the S&P 500 to levels seen in 1998:

2008 was the worst stock market year since the Great Depression.  That is how bad that one year turned out for investors.  This large amount of volatility simply reflects a weak real economy and the recent stock market run to the peak of the mountain was super charged by taxpayer money going into large investment banks who in return went into the stock market and gambled your hard earned money.  Clearly it hasn’t done much for consumer confidence, aiding in the foreclosure crisis, or bringing jobs back.  What then did all this money really accomplish?

If we look at the VIX which looks at option trading volume and is a good sign of volatility we also see this recent stock market reshuffling:

What we can gather from all this volatility is a new paradigm has arrived.  Most popular financial books that hype compound interest always focus on a convenient 7 to 10 percent annualized gain in the stock market.  That may have been the case from 1968 to 2000 but that isn’t the case anymore.  What are you going to invest in when U.S. Treasuries are barely offering any interest and bank accounts are offering rates of 0.01 percent on savings accounts?  Your mattress would rival some of these rates.

The stock market right now is one large casino.  No real reform has taken place and that is why we see no real changes in the economy yet trillions of dollars funneled into a financial abyss.  Someone got this money but clearly it wasn’t the middle class.  The public was told that money was going to go to shore up the housing market (didn’t happen) and to keep lending to the public going (didn’t happen).  So what did happen was that big investment banks used taxpayer money and gambled to bolster their own profits.  That was basically the smoke and mirrors campaign that we have gone through.

The middle class is largely a casualty of this all.  9 out of the top 10 jobs in this country are in low paying service sector work.  We hear this rhetoric about a double dip but the middle and working class never got out of the first dip to begin with.  Who is this double dip for?  Wall Street gamblers who have funneled taxpayer money into the casino?  Must be nice for their 53 percent rally but sadly none of that is reflected in the real economy.  If we want to be happy about gambling why not talk about the person who just won the lottery last night.   Wall Street certainly won the lottery here at the expense of the taxpayers.  The collapse of consumer confidence is merely a reflection of what most of us already know.  The real economy has never recovered.

This is the end of a generational bull run just like the 1920s came crashing down with the Great Depression.  Unlike that time, we have allowed the banks and Wall Street to continue to pollute our real economy with their gambling schemes.  Can you believe that no real reform has taken place?  No wonder why average Americans are displeased with both political parties and are furious at Wall Street.

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It is fitting that on the same week of the 80 percent rally point, we find out that last month the U.S. saw the largest number of foreclosure filings on record.  We also had many states, including the largest with California announcing a new record unemployment rate of 12.6 percent.  Do we need more evidence that the stock market does not reflect the health of Main Street?  And people act shocked.  This is what happens when you inject $13 trillion into the financial sector on the backs of the American public.

Take a look at the power of this stock market rally:

Source:  Chart of the Day

The 1932 stock market rally came after an 89 percent stock market collapse during the bottom of the depression.  The 1942 rally came because Europe was bombed into oblivion during World War II and we were producing war goods like crazy.  Those models don’t seem to apply today.  The NASDAQ collapse is similar to the 1932 chart in that it fell approximately 80 percent from the peak.  Today, the stock market is only off by 24 percent from the massive bubble peak achieved in 2007.  Yet what has changed?  Not much actually in terms of the real economy.  Unemployment is still near the peak.  We have 40,000,000 Americans on food stamps.  Another 15 million are unemployed and another 9 million are working part-time but would like full-time work.  This is not a recovery but a clandestine embezzlement of wealth from the overall public, to a select few that are directly linked to Wall Street.

The above information only adds fuel to why 13 percent of the population thinks the economy is doing well:

Let us examine three ways the rich are enjoying the stock market rally while the overall economy is still mired in the pangs of recession.

Top 1 Percent Control 40 Percent of Financial Wealth

The first obvious reason for why the public is not feeling the enjoyment of the stock market rally is most Americans don’t derive most of their income from stocks:

Source:  William Domhoff

We have been bamboozled into believing that wealth is the person who has the most cars or the biggest homes.  But that is not necessarily true.  Many Americans bought homes that were too big with even bigger mortgages and many have lost those homes.  Many have been deceived that wealth is the person that drives the nicest car even if they live in a tiny 500 square foot apartment to pay that enormous lease.  True wealth is the actual power base of any economy and that comes from savings (i.e., capital stock, bonds, cash, etc).  And financial wealth is the absolute nucleus of power.  In the U.S. the top 1 percent control 42 percent of all financial wealth.  In other words, this 80 percent stock market rally only applies to the absolute tiniest segment of our population.

That is why even after a near 80 percent stock market rally, the vast majority of Americans have no faith in the economy.  Why should they?  Most of those profits were brought by firing workers or squeezing productivity of those currently working while wages remain stagnant.  Yet this is somehow a recovery?  It isn’t and the fact that only 13 percent think things are good is a reflection of this new darker economic reality.

This notion of wealth by getting into debt was followed by many:

So you might say that those that took on too much debt should get their comeuppance.  Many are through foreclosure and bankruptcy.  Yet that top 1 percent isn’t because they have political connections with the corporatocracy and have managed to swindle trillions of dollars from the public to backup their terrible bets.  You pay on both ends.  The top 1 percent gets away on both ends.

The reason this problem keeps on going unresolved is that Americans are sold the notion that you too can be the next Horatio Alger.  Just pull yourself up from your bootstraps.  Good companies strive and bad ones fail is the myth.  Yet we all know that isn’t true.  Most of the banks would be gone today because what they did was in fact financially stupid.  Yet we bailed them out.  It is a hypocritical version of capitalism.  Adam Smith would be turning in his grave if he saw what was going on today.

Housing Tax Breaks Benefit the Wealthy Disproportionately

Many don’t want to say this but we have subsidized housing enough.  Housing is the most heavily subsidized industry in this country:

Source:  CNN Money

We give more tax breaks with interest deductions on mortgage interest than any other item.  Now this sounds good because many people own homes.  Yet people fail to even examine the nuts and bolts of their taxes.  People forget that we have standard deductions and the actual housing deduction does not add much when all things are said and done.   Plus we have hidden costs that don’t show up immediately through higher taxes and horrible bailouts. Most Americans get a tiny benefit because most live with modest mortgages.  Yet the bulk of this benefit once again goes to the wealthiest in this country.  If you are paying $20,000 a month in interest on your mortgage do you think you can write more off than say someone who is writing off $800 a month?  Who do you think wins here?  Do the math.  If you think the rich pay just look at this list released by the California Franchise Tax Board of the 250 folks who have actually not paid their taxes.

Yet this is the way things get done by brainwashing the public with crumbs while the rich corrupt the system with gimmicks that are bankrupting our country.  It is actually irresponsible to continue giving maximum tax breaks while the country is massively in debt.  Why not cap the deduction to the median home price nationwide?  That would be fair.  Or even cap it at $300,000.  Either way, the current structure is merely a way of enriching the top 1 percent by allowing them to write-off giant mortgage interest from their income that many garner from gaming the Wall Street casino.

Going After Food Stamps and Unemployment Insurance

I’ve noticed this absurd trend that started in the last few weeks of going after food stamps and unemployment insurance.  This is blatantly absurd and frankly, a disgrace.  We spent $53 billion last year for food assistance to 40,000,000 American families.  This works out to $1,325 per family for an entire year.  We spent that much in one month with the Federal Reserve propping up the mortgage market.  Unemployment insurance is keeping this recession from becoming the next depression and leading to a full blown revolution.  Yet some people in the media have the gall behind their teleprompter and their comfy corporate media gig to try to eliminate these programs and talk them down.

They argue that food stamps and unemployment insurance keep people unmotivated from looking for work.  Do they even realize that we have 6 people for every 1 job opening out there?  The vast majority of Americans want to work but can’t find any work (i.e., look at Wall Street profits by slashing and burning American jobs).  Yet they talk and talk while their corporate advertisers keep them on the air so they can keep their makeup straight and help them enjoy monthly botox injections.  They really have no idea what is out there in the actual economy or the life that many average Americans are living.

Wall Street has polluted the current economy.  Most Americans don’t buy the propaganda because all they need to do is look at their monthly paycheck.  Or all they need to do is talk with their family and neighbors.  Or all they need to do is look at their own retirement plans.  We better wake up and do it fast because the wealth is being transferred quick and with no mercy.

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Let us first look at the S&P 500 price to earnings ratio (adjusted for inflation):

Source:  Robert Shiller, www.multpl.com

130 years of data and each major financial crisis has sent the PE ratio falling between the 5 and 10 range.  This crisis has kept PE ratios elevated to the point that the S&P 500 is still valued at twice of what it should be if we use moderate historical valuations.  And if we measure the bubble via earnings, valuations during this bubble got even more out of line compared to those prior to the Great Depression.  Yet in this crisis, valuations never made it down to a more realistic level.  This is endemic of our current financial system where market alchemy is suddenly supplanting any rational analysis of earnings and actual potential growth.

Take a look at inflation adjusted earnings:

Earnings have collapsed during this market turmoil yet the market is up some 63 percent.  What is the rally based on?  A lot of the rally is based on easy money flowing into financial institutions that are using their black box to make trades and maneuver around accounting rules to make out with billions in profits while the real economy is mired in real fundamental problems.  And this is easy to see since all you need to do is look at how consumer credit has contracted over the crisis:

Now ask yourself the following question; if we are a consumption based society and a large part of our consumption is fueled by debt, doesn’t a massively contracting credit market mean people are spending less?  Of course.  The above chart merely reflects what average Americans are dealing with.  They are adjusting their household budgets to reflect stagnant wages or lost jobs.  They are battling with the reality that their homes are not worth what they once were during the halcyon days of the bubble.  Yet the stock market has rallied as if we are back to the heyday of 2007.

This rally is really something to behold:

The only other time we saw such a sharp drop and rally was during the Great Depression.  Yet the depression dragged on for over a decade and here we are less than one year from the bottom of this market correction and all of a sudden we expect the market to be valued at these levels with no justification from actual earnings?  It just doesn’t make any financial sense.  We are back to seeing bubble like behavior.

Middle class Americans are largely not participating in this rally.  Clearly banks aren’t lending anymore even though they clamored for additional funds to provide credit to Americans.  The home loans banks are making are all backed by the U.S. government which only adds further fuel to the flame.  If you really want to see what sector by and large has benefitted the most from this rally, just look at the financial sector:

While the S&P 500 is up 63 percent and that in itself is stunning, the financial sector index is up a stunning 173 percent in this same period.  Have the banks really gotten that much better?  Is credit really flowing from their doors?  Not really but banks have managed to take taxpayer money and funnel it back into the stock market that is largely becoming more and more like a casino.  The structure is setup for quick profits even if it means long-term destruction for our economy.  Why try giving a boring 30 year fixed mortgage and earn a modest fee, even though the client will be better off in the long run when you can dish out a toxic mortgage with a high commission but will eventually lead the borrower to ruin?  That is the structure of our current financial system and nothing has really changed even though we have seen the most volatility since the Great Depression.

The current stock market valuation tells us that the stock market will hit another correction.  Short of incomes going sky high or earnings doubling each subsequent quarter, at a certain point valuations need to come back down to Earth.  Ironically the low reached in March of 2009 actually reflected a more sensible valuation of the economy.  Right now the S&P 500 is betting that things are back to the good old days but clearly this is not the case.  We should now be absolutely cautious when people try to value stocks or assets on potential values and not what reality is currently reflecting.

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In fact, the S&P 500 70 percent rally comes parallel to us losing jobs for 25 straight months:

We have lost over 7.2 million jobs officially (8 million once the February revision is put in) and yet the market keeps moving up.  Why?  Because the banking system is using every ill gotten penny to gamble in futures, derivatives, and every other financially toxic product while the average American continues to bailout their gambling ways.  Andrew Carnegie at least left us with steel and a solid infrastructure for economic growth when he amassed his wealth.  What has the banking sector with financial innovation left us over the last few decades?  It has left this country with the destruction of the U.S. dollar, a lost decade in jobs, an imploded housing bubble, and double-digit unemployment.  Isn’t the verdict clear?  The banking sector has been an abject failure.  The symbiotic bond between our government and Wall Street is so tightly woven, that people go in and out of Wall Street and public sector jobs as if it were a revolving door.  This is our new form of government and at the core is the corporatocracy.  A government bought by Wall Street and for Wall Street.  The interest of the people only comes into question if there is money left over after bonuses.

It is amazing the anger people have at banks and the impotence our political leaders have.  In a few interviews I have heard politicians say, “but the banks are so powerful.  What can we do?”  Then why do we have politicians?  Are they only there to be spectators to our legalized bank robbery and report back on what we already know?  The data being pumped out is so obvious of how wasteful and how quickly our economy is being diluted by the corporatocracy.  Take for example consumer lending.  Remember this was touted as the “life blood” of our economy.  You would think that banks would make loans to struggling U.S. consumers at least as courtesy for being bailed out.  You would be wrong:

Consumer lending is contracting at an incredibly rapid pace.  So one has to ask where did all those trillions go?  It certainly didn’t go into hiring unemployed Americans.  It didn’t go into lending.  Yet banks have been making record profits because instead of lending that “life blood” to the economy they have gone back to Wall Street to play the American slot machine:

It really makes you wonder what in the world is going on.  Yet many Americans are so ingrained in believing that the stock market is a reflection of the actual economy that they have bought into the corporatocracy propaganda.  If you listen to the financial television shows you keep hearing these bank analyst saying, “companies are running leaner and profits are now much more healthy.”  In other words, we fired people left and right and now we have more money for our corporate executives.  This is always good for a short-term profit but what does this do to your longer term profits when you are destroying your future customer base?  Even Henry Ford realized people needed to be able to buy the items they were building.  And the banking sector is merely making outsized profits on producing no discernable good to the public.  Some will say that we now have loans for homes and places to keep our money.  Fine, break the banks up and let them become like utilities.  Those that want to gamble do it on their own dime.

You want to know how corrupt the system is?  Goldman Sachs, the paradigm and head corporatocracy leader paid an effective tax rate of 1 percent in December of 2008, right in the midst of the crisis:

“Dec. 16 (Bloomberg) — Goldman Sachs Group Inc., which got $10 billion and debt guarantees from the U.S. government in October, expects to pay $14 million in taxes worldwide for 2008 compared with $6 billion in 2007.

The company’s effective income tax rate dropped to 1 percent from 34.1 percent, New York-based Goldman Sachs said today in a statement. The firm reported a $2.3 billion profit for the year after paying $10.9 billion in employee compensation and benefits.

Goldman Sachs, which today reported its first quarterly loss since going public in 1999, lowered its rate with more tax credits as a percentage of earnings and because of “changes in geographic earnings mix,” the company said.

The rate decline looks “a little extreme,” said Robert Willens, president and chief executive officer of tax and accounting advisory firm Robert Willens LLC.”

This while they were receiving billions in bailouts.  Even lottery winners have to pay close to fifty percent of their winnings to the government.  Not the banking elite.  See, they know how to game the entire system.  But you might be saying, well this rate only applied because of their massive quarterly loss.  Surely they must pay more?  Not at all.  Those wonderful hedge funds that nearly blew up the system pay a tax rate of 15 percent:

“(Economic Policy Institute) In addition to being unregulated, these financial institutions also reap substantial benefits from special tax provisions that, like the regulatory framework, are no longer appropriate. The professional fund managers of these hedge funds and private equity firms are allowed to treat a substantial portion of their compensation as capital gains, meaning they are most likely taxed at 15% rather than the 35% rate that applies to ordinary income such as wages and salary. Such an exemption, however, makes little sense: in economic terms, the fund managers (also known as investment advisors) perform a professional service, much like lawyers or doctors, and receive remuneration for their labor.

These investment advisors and hedge fund managers can take advantage of this tax structure because they are often compensated through a scheme that, in part, pays them according to the returns on the fund. The industry standard for hedge fund managers is “two and twenty,” which is shorthand for an “overhead” fee of 2% of capital under management plus carried interest (often called a “carry”) of 20% of the returns on the fund. Thus a $100 million fund earning 20% would pay its fund manager $2 million for overhead and $4 million in carry. The carry portion of their compensation is treated under the tax code as capital gains for the fund manager and is taxable at the much lower capital gains tax rate of 15%.”

Interesting that the above article was posted on July 2007 before the entire system went into meltdown mode.  So much for people not seeing this crisis coming like the corporatocracy would like you to believe.  Over and over we hear the “no one saw this coming” from the head cheerleaders of Wall Street but people did see it coming it’s just that their echo chamber doesn’t allow outside thought to enter.  Now why is this important?  Because the vast majority of Americans actually work to earn their living, not gamble in some casino.  The amount of wealth has concentrated in fewer and fewer hands:

Share of capital income earned by top 1% and bottom 80%, 1979-2003 (From Shapiro & Friedman, 2006.)

This has only gotten worse in this crisis.  The above chart doesn’t show the average American wealth destruction that happened since the bust.  So while you pay federal, state, Social Security, and Medicare taxes these big banks and hedge funds only get charged 15 percent in taxes as capital gains.  Plus, Social Security only goes up to roughly $100,000 so the average American gets saddled with more debt because of this corrupt banking sector.

The current system cannot stay.  It is no longer working.  We are heading into another big crisis if something isn’t done to radically change the system.  Wall Street will try to scare the public into believing that the stock market is a reflection of what is happening in the economy.  Just look at the above data and ask yourself if this is true.  We are near peak foreclosures, we have yet to have a solid month of job gains, and Americans are wondering where their lost decade went.  Yet somehow banks are dishing out record bonuses.  Just follow the money.  Time to break up these banks and release the hold Wall Street has on our political system.

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Many Americans are still struggling at the depths of this recession.  We have 37 million Americans on food stamps and many wait until midnight of the last day of the month so checks can clear to buy food at Wal-Mart.  Do you think these people are starring at the stock market?  The overall data is much worse:

Source:  William Domhoff

If we break the data down further we will find that 93 percent of all financial wealth is controlled by the top 10 percent of the country.  That is why these people are cheering their one cent share increase while layoffs keep on improving the bottom line.  But what bottom line are we talking about here?  The Wall Street crowd would like you to believe that all is now good that the stock market has rallied 60+ percent.  Of course they are happy because they control most of this wealth.  Yet the typical American still has negative views on the economy because they actually have to work to earn a living:

The above daily poll asks Americans about their view on the health of the economy.  Only 13 percent believe the economy is good or excellent.  Funny how that correlates with the top 10 percent who control 93 percent of wealth.  Many Americans were sold the illusion of the bubble.  They were sold on the idea that their homes were worth so much more than they really were.  And many used this phony wealth effect to go out and spend beyond their means.  They started spending as if they were part of this elite 10 percent crowd.  But once the tide rolled out, it was clear they were not.  And the horribly built bailouts demonstrate who is controlling our political system.  This was not the rule of a capitalist system but a corporate run government.

Just think about the bailouts and which companies were saved.  We ended up bailing out the worst performing and troubled companies thus keeping alive companies that should have completely failed.  Did we bail out Google?  Proctor and Gamble?  Of course not.  These companies actually produce something that people want.  Banks and especially the Wall Street kind merely keep that 42 percent happy by making sure their stock values stay high so they can keep on making money while the average Americans is sold up the river.

Yet many were brought into the easy money fold by going into massive amounts of debt.  And who has most of the debt?  That is right, the average American:

The bottom 90 percent have been saddled with 73 percent of all debt.  In other words much of their so-called wealth is connected to debt.  Debt is slavery for many especially with egregious credit card companies taking people out with absurd credit card tricks and scams.  Yet the corporate propaganda machine is strong and mighty.  Have you ever received an inheritance?  A large one?  Probably not because only 1.6% of all Americans receive an inheritance larger than $100,000.  If this is the case, why in the world do politicians worry so much about the tax impacts of this?  Because they want to keep the corporatocracy alive and well so their spawn can get a piece of their pie.  They give the illusion to average Americans that if you only work hard enough you too can join this elusive club of cronies.  The data shows otherwise.

But if we start looking at investment assets, the true wealth in the country, we start realizing why Wall Street is all giddy about the recent stock market government induced rally:

Of investment assets 90 percent of Americans own 12.2 percent.  The rest goes to the top 10 percent.  Welcome to the new serfdom.  The bailouts that went out to the filthy rich were more about protecting their tiny corner of the world than actually making the economy better.  That is why it is interesting to see companies fire people and Wall Street cheer for the increase in earnings per share.  Good for the few at the expense of the many.  Yet the propaganda out of Wall Street and our government is what is good for Wall Street is good for you.  Just like that 1.6% inheritance issue, the vast majority of Americans won’t deal with that and their primary concern is simply a job.  A job that has provided stagnant wages for a decade while the ultra wealth get richer and richer in a phony form of corporate socialism.

If you break down the data you realize that most Americans don’t have time to speculate in stock markets:

Only 34% of U.S. households make more than $65,000 per year.  What is that after taxes?  Let us use a state like California for example:

Now if we breakdown this data further you will realize that most of the money is consumed by cost of living necessities, not Wall Street speculation.  Just to show this example let us look at a family budget for someone in California making $100,000:

Notice after running the budget we are in the hole for $1,000?  That is because of many costs that typical families have.  We can debate the merits of where they are spending money but the point is this; are these people really making beaucoup money from the stock market?  They are putting away $12,000 a year into their 401k.  As we have now found out, 8 percent a year is never guaranteed in the stock market although the corporate powers would like you to believe that so they can have other suckers to unload stocks onto.

“Yet the median household income in the U.S. is $50,000 and not $100,000.  They have even less to invest.”

They are more concerned on working to have a paycheck to pay for necessities.  They are more concerned about paying their house off by the time they retire and hopefully, have a little bit of retirement funds coming in.  The sad fact is most Americans rely on Social Security when they retire.  All those ads of unlimited golf and daily trips to Tahiti are propaganda of how Wall Street lives and they want to sell you the sizzle, and clearly not the steak.  They live their lives paper pushing and sucking the life out of the productive part of our economy.  The average American should now realize this since this financial crisis was primarily caused by them.  They are now on a massive campaign to blame Americans for this.  This is hypocrisy to the next level.  Many Americans have paid for their mistake by losing their home through foreclosure.  We have 300,000 foreclosure filings a month.  Many have taken a hit to their overall stock portfolio (if they have one).  Yet the corporate cronies have protected their horrible economy crushing debts at the taxpayer expense.  Unlike you, many hold bonds on the companies and not common stock like many Americans.  Bondholders have been protected at all costs during this crisis.  Goldman Sachs through AIG received 100 cents on the dollar for their horrible bets.  The banks have unlimited back stops thanks to taxpayers.  This is how the top 1 percent rule the new feudal state.

Welcome to the 2010 serfdom.  Time to wake up and restructure the system.  Many people are starting to wake up to this massive scam.

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Let us first take a look at the biggest down days for the Dow since the rally started in early March:

This was the biggest drop since April of 2009.  That is significant.  It took us nearly six months to have a down day of over 249 points.  And if you really think about it, the news wasn’t all that bad.  In fact, the GDP numbers should have kept things going.  But again, the reality is setting in that there will be no V-shaped recovery and 27 million unemployed and underemployed Americans benefit little from the current stock market rally. Most don’t get their monthly money from the stock market but an actual W-2 job.

This rally has also seen a significant number of up days:

Since the rally, we have yet to see a 300 point down day.  We have seen a nearly 500 point gain right after the low point was reached in early March and a 379 point rally the next day.  So nearly 900 points were made up in two days off the low bounce.

The Dow peaked in this rally at 10,081 and we currently stand at 9,712.  It will be interesting to see what happens next week with the BLS job report coming out.  The market expects a 9.9 percent official rate but there is a strong possibility of going over 10 percent.  You can expect a 10 percent unemployment rate to psychologically change the feel of the market.  Hard to believe in a rally when the unemployment rate (official) is at 10 percent.  Yet even now, we hear more and more people using the U-6 rate in official figures and that is already at 17 percent.

What we saw on Friday is a real true test of this rally.  Is this for real or simply a juicing of the markets by Wall Street and the government?  The figures coming out on Friday are starting to believe this rally is simply based on fumes.  An adrenaline shot from the government and Wall Street won’t sustain an economy since many average Americans are already tapped out on spending.

Notice how you are receiving less and less of those credit card offers in the mail?  There is a reason for this:

Source:  Paul Kedrosky

Direct mail credit card offers peaked in Q3 of 2006 with approximately 2.1 billion being sent out.  In Q3 of 2009 only 391 million have been sent out.  In other words, credit card companies definitely don’t believe in the recovery and they certainly don’t believe in the American consumer.  On top of this drop, credit card companies are now jacking up fees on good standing customers, adding annual fees for inactivity, and basically acting like your local loan shark.  At times they are even charging 79.99 percent interest rates that would make Tony Soprano blush.  If we really look at the data, the economy is doing anything but recovering.  Actually, it is recovering but for those on Wall Street and the banks.  The average American is merely subsidizing their party.  By the way, the banks are largely the reason for the decade long housing bubble.

If you really want to see how much insiders believe in this rally, let us look at some details from last week.  Insiders for the week with data from Thomson Reuters bought 8.2 million dollars worth of stock during last week.  How much was sold?  184 million dollars.  This pattern has been occurring the entire rally.  Now wouldn’t you think insiders would have a better sense of the true nature of this economic recovery?

Next week will be important and the jobs report number may go over 10 percent because many people hearing this good news, are now back looking for work but very few jobs are out there.  In other words, they will move from the shadows of the 2 million workers that have given up into the actual official pool.

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On the unemployment front, the rally is being bolstered by “slower job losses.”  However, since the rally took off we have lost over 2 million jobs showing up the entire 2001 recession.  In total, we have 26.3 million unemployed and underemployed Americans.  Many of those that are working are seeing wage cuts or stagnant wages.  And on the hiring front, we are at lows that were reached in March:

Source:  Gallup

There is little good news here.  Although job cuts might have come down from the 741,000 in January who really expected cuts to stay at that level?  At that rate, we would have lost nearly 9 million jobs in one year.  That was clearly unsustainable.  But even the current 216,000 job cuts in August put us at a rate of 2.5 million job losses a year.  The market is rallying as if this is good.  It is also ignoring that hiring figure and assuming that somehow jobs will come out of some new field (or maybe from finance and real estate as bulls would hope).  From what industry?  That is the real question.

The P/E ratio based on operating and reported earnings is all fantasy.  Take a look at this chart:

Source:  Chart of the Day

Now this chart is based on the current quarter and most analysts look forward in coming up with an accurate figure.  Bulls on the street are obsessed with operating earnings because this is where you can fudge the data and it is always higher than actual reported earnings.  For example, with the $3.5 trillion commercial real estate bust coming many financial institutions currently have these properties on their balance sheets at peak values!  These companies know full well that an avalanche is heading their way but they’ll milk the accounting as much as possible.  Why else would they be developing clandestine pre-emptive bailout plans if all was well?

If you look at the past 75 years of data, market peaks were hit at a P/E of roughly 20 times reported earnings and troughs occurred at about 10.  With the mania we hit a peak of 40.  The current P/E is off the chart because of the weak quarter.  So think about this for a few minutes.  This is the worst recession since the Great Depression.  You would think that a P/E would reflect this actual fact.  Not the case.  That is why the P/E is blowing right through the chart.

Just run the numbers for Q2 of 2009.  With 99 percent of S&P 500 companies reporting earnings the earnings per share is $13.51.  That would put the current P/E at $77.  That is insanity.  If we were at even the previous bubble averages of a P/E of 20, the current S&P should be at 270.  Now this is merely an observation.  Most market bulls will point to future projected operating earnings which are glossed over with onetime gains and other gimmicks.  If you want to believe in a P/E of 20 then you need to believe that somehow, we are going to get $50+ per share earnings in the next quarter.  And 20 is a historically high P/E ratio.  And these are some of the kinds of earnings folks are projecting even though the consumer (aka the American worker) is losing their consumption power.  Keep in mind that many of the short-term operating earnings are going to be based on these onetime injections.  To expect them going forward is to believe in the reemergence of the bubble economy.

Take a look at the contraction in private inventory:

Now obviously a drop like this reflected an end of the world scenario.  So much of the recent jump in activity is now reflecting this more normal pre-bubble world behavior.  Yet the stock market is reflecting valuations from the bubble coming back.  As usual, a bubble will end bad.  And banks have been juiced to the max:

Source:  NY Times

The biggest banks have regained $700 billion in market cap since the March lows.  How many jobs can you get with $700 billion?  Obviously zero if you’re the average American given the trend.  Either way, the S&P 500 is massively over value and is predicated on the bubble coming back.  That is not the case.  When reality hits and those onetime fixes run out, the rug will be pulled out again.  The media and pundits are claiming we are now officially out of recession.  If that is the case, you can rest assured this will be a double-dip recession.  That is virtually assured given these absurd valuations and putting all the money back in the casino known as Wall Street.

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First, let us look at this insanity on a chart:

Source:  Chart of the Day

I think when people see charts like this they start doubting the source.  This unfortunately is accurate.  Even during the Great Depression, when the market plunged to the depths, the PE ratio never even touched 20 and some of the many mini-rallies after the crash of 1929 involved legitimate looks at low PE ratios.  A PE ratio is important because it factors in the price of a stock to the actual earnings.  This matters.  Even right before the tech bubble burst in 2000 the S&P 500 had a PE ratio over 40 and this was extremely expensive.  In this case, we have 26,000,000 Americans unemployed or underemployed and earnings are simply not there with consumers pulling back.  So what is causing this massive rally if not earnings?  This recent rally is being driven by the “getting less worse” mentality.  Sure, we lost 247,000 official jobs last month but sure beats 700,000!  Okay, earnings are way low but it beats actually losing money!  This kind of thinking is leading many sheep to the slaughter again.

Take a look at some of the official data from S&P itself:

Source:  S&P

At the end of last month, only three weeks ago the S&P 500 data had the PE ratio at 143.  So to currently have it at 129 is a slight improvement.  But with only 3 percent of companies reporting to close out the quarter, we are massively over priced.  We have never seen the entire index suffer a negative earnings quarter that is until recently.  So the crash wasn’t a panic but actually based on declining earnings.  That quarter saw $202 billion in negative earnings (losses) from S&P 500 companies reporting.  Q1 of 2009 saw reported earnings come in at $7.52 per share.  So right now, everything looks good when looking from the ground up.

Yet to show you how off predictions have been and how wrong analyst can have earnings, let us look at the Q3 2009 estimates and how they have evolved over one year:

Now this chart is something.  Back in June of last year, the Q3 2009 estimate was coming in at $27.68.  Keep in mind we were already in recession at that point.  In September of 2008, the EPS didn’t change much for analysts.  After the market crashed and the U.S. Treasury and Federal Reserve had to step in to save the financial world supposedly, they finally revised earnings lower.  The market went lower and lower and now, the latest estimate for Q3 of 2009 earnings is $14.57.  This new revised estimate is a drop of 47 percent from the June 2008 estimate.  Sounds about right with the market.  Yet the market is up 50 percent while earnings estimates are down by 50 percent.  Any value investor will tell you that looking at PE ratios is absolutely crucial.  Some of the top experts avoided the tech stock mania because they were seeing stocks with PE ratios of 100 or even 200 on the prospect of making it big.  Some did survive but the vast majority didn’t.  Even a high flying stock like Google has a PE slightly above 30.

Now assuming the $14.57 EPS for Q3 of 2009.  Is this necessarily good?

1026 (current S&P level) / ($14.57 estimated EPS) = 70 PE ratio

Even with this estimate, the PE ratio would still be at 70!  At record levels.  And keep in mind, a big jump of earnings in these last few quarters involved massive infusions of free money into the banking sector.  Do they not realize that there are still some $3 trillion in toxic commercial real estate debt left?  Of course on the estimates, you can see that the financial sector is having the best expectations.  The industry that brought us the credit and housing bubble is now going to lead us out of this massive recession.  We are in good hands.

Many now agree that this is the worst recession since the Great Depression.  Yet many think things will turn around in a few months.  These kind of market dislocations last years and impact generational thinking.  There is a new austerity out in the market.  In fact, this new spending habit is taking hold so deeply that the government had to entice people to trash their working vehicle for a new car.  People are surprised that the cash for clunkers program worked.  How are they shocked?  Free money for your bucket and a new car?  Who could have ever seen that coming!

Yet even the analyst estimates put the S&P 500 at a PE ratio of 70 for Q3 of 2009.  A more normal average PE ratio even at the high end would be 20.  From the mid-1930s to the 1980s the PE range would peak out in the low 20s.  But then, the technology bubble and housing bubble gave us two decades of wild valuations.  But let us assume a high 20 PE ratio.  What should the stock market be valued at?

(X/ $14.57 Q3 2009 estimate) = 20 PE ratio

291.40

This is the insanity of the current market.  For the PE ratio to come in at 20 for Q3 of 2009 and with estimated earnings of $14.57 per share, the S&P should have a value of 291.40.  This is even less than that the 666 low reached in March.  So why the rally?  Because people believe we’ll be back to peak earnings again.  And insiders seem to have a different opinion.  Last week, insiders had 18 buys for $30 million while on the sell side some 131 sold for over $889 million.  Maybe the insiders know something that the public doesn’t regarding the S&P casino?

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Now many people fail to realize that the best one day gains and the worst one day gains occur during periods of massive distress, not during bull markets.  Let us take a look at the worst and best 5 days on the Dow:

It is rather apparent that maximum fluctuation does not mean things are going well.  In fact, four of the five best days in the Dow occurred during the Great Depression and one of the five days occurred during our current massive recession.  The five worst days include three from the Great Depression and the 1987 stock market crash.  Let us first look at the current rally:

It took 17 months from the peak in 2007 to the “bottom” in March of 2009.  In that time frame, we lost 57 percent in the S&P 500.  A drop only rivaled by the Great Depression.  Yet our current rally is going on 5 months and is flirting with 50 percent.  Never have we seen this unrelenting drive up.  Even after the 1987 crash, it took some time to rally 50 percent and the economy was in much better shape at that time with lower unemployment:

How long did it take?  From October of 1987 to July of 1989.  Not exactly 5 months.  And this rally is happening with tepid earnings, massive unemployment, and the U.S. Treasury gearing up for Plan C to bailout the enormous commercial real estate bubble which will make the subprime debacle look like a walk in the empty subdivision park.  If we look at a 60 year chart of the S&P 500, we will not find a 50 percent rally in the span of 5 months:

The only other time that we saw such a massive rally was during the Great Depression when the market did bottom out.  But that bottom came after an approximately 90 percent drop in stock market value.  So many are betting that March was our Great Depression bottom.  But even then, with the mother of all economic contractions, we did not see a 50 percent rally in 5 months.  The absurd irony of this all is earnings are not good.  Sure, companies revise estimates to beat the street but overall they are not solid.  If you need any more evidence, just look at this chart:

It would be one thing if earnings were flying off the charts and stocks looked cheap.  That is not the case.  Make no mistake.  This is a hope filled rally not guided by the fundamentals.  It is a rally based on the psychology of “well things have to get better just because” and ignoring earnings, employment, and all other indicators.  It would be one thing if the market evened out.  That is understandable.  But to go up 50 percent in 5 months?  This reeks of a bubble.  At a certain point things will pull back and it will get ugly.  The recent GDP report which showed only a 1 percent contraction, better than expected, was only the case because of government spending. The consumer is spending less.  That is why consumers are being egged on to spend more with gimmicks like the cash for clunkers program.

The banks are only walking because of trillions in taxpayer bailouts.  The system is completely relying on the taxpayer crutch.  How long can this go for?  This market volatility with huge unemployment only signifies that this will be a slow recovery.  The market is rallying as if this will be a short and quick recovery.  I think the rally may go on because we are talking about the same infrastructure that made crappy homes double up in the matter of years so anything is possible.  But one thing is certain, if earnings don’t show up and employment doesn’t start picking up we are heading back down and in a fierce way.

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How the investing world quickly forgets.  If we go back into the distant future of March 2009, you would remember that on a panic filled day, the S&P 500 flirted with the 666 low.  Since that day, the S&P 500 has rallied an astonishing 41 percent in only a 3-month period.  Yet as astonishing as this is, the stock market is still down 40 percent from the peak reached in October of 2007.  We are now 2 years into this economic downturn yet the sentiment for many investors has shifted from apocalyptic to outright giddy.  Somehow 26,000,000 unemployed and underemployed Americans does not conjure up visions of a healthy economy.

If we are to carefully look at actual indicators of commerce and fix our gaze away from the banks, we realize that we are nowhere out of the woods just yet.  Take a look at world industrial output:

*Source: Voxeu

Now this chart in itself should put a damper on any notion that we are fully in recovery.  Let us forget about the underemployment measure now being at 16.4 percent and growing.  If we think back to early 2008 part of the idea that this economic recession would not be so deep stemmed from the idea of decoupling.  That is, the world would keep chugging along while the U.S. and other industrialized powers drifted into a recession silo.  This of course has been utterly off base.  This is a global recession:

Many have never witnessed a 40 percent rise in overall stock markets that occurred over  a few weeks.  We have now achieved that accolade.  Yet this is not a sign of a healthy market.  Massive volatility like this especially rapid jumps are signs of a market unsure of itself.  The fact that global stock markets are actually deeper in the red than during the Great Depression tells us that we are still very much in a precarious state.  The bet is that we will have a second half recovery.  This is the second half.

Recent data has pointed to things getting worse more slowly but that is not reason enough to celebrate.  There are deep and structural problems in the system.  Let us look at industrial production at home:

Industrial production is contracting on its fastest pace since the 1950s and the trend is still heading lower.  Unemployment is increasing at a rapid pace as well.  As we have discussed, even the slight gains in employment are occurring in large part by replacing $20 per hour jobs with $10 per hour jobs.  On the surface the decrease in unemployment is good but is it really when we examine which jobs are replacing the old?  If anything, the middle class is being squeezed further and further.  Disposable income has collapsed since the recession hit:

This of course sends ripples through the global system.  Many countries depend on the United States purchasing goods and with less disposable income, many Americans are pulling back and spending less.  This is also occurring in more affluent countries dealing with their own aftermath of the recession.  It is only logical to see contractions in global trade.

Some people are wondering why all the bailouts and quantitative easing have failed to stimulate the economy?  First of all, the multiplier is below 1.0:

This is the first time it has gone below zero since the data series started in the early 1980s.  What this means is that the government printing money has less and less of an impact in the real economy.  How else would you explain that nearly $14 trillion in bailouts and commitments, one year of U.S. GDP mind you, can have so little real world impact on the real economy?  First, much of the money has gone into the repair of the banking syndicate.  That is, money was pumped into the banks and has remained their even though the purpose was for it to be lent to the public.  If you have any doubt, I give you exhibit a:

The contraction in consumer credit is the first one in nearly 20 years.  Something tells me we didn’t make $14 trillion in commitments and bailouts in the early 1990s.  So as the real world tracks the Great Depression in many key aspects, the investing world keeps on believing in the green shoot argument.  The second half is here and the clock is now ticking.

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