CHESSNOID

When I went to college, the finance professors taught us that the stock market is suppose to be an indicator of the future of the economy.  It’s been 20 years since I took that basic finance course.  From what I have observed, there is no truth to that theory.

In practice, I think the stock market is more of a trader’s market than an investor’s market.  People are just trying to bet which direction the stock markets are going vs buying a solid company or an up and coming innovative business start up with potential. The traders don’t care about the long term future of the companies and focus more on if it will be up or down today and tomorrow.

Our overall economy seems no longer to be connected with the stock market performance.  What I observe is an economy getting worse.  I can see it on the streets, watch the news, and read the reports.  It is no secret how bad it is and yet the stock market would indicate this recession should have been over 6 months ago.

Today, the stock markets are rallying although the overall economy is still going in a negative direction.  Bloomberg:

The world’s largest economy has shrunk 3.3 percent since peaking in last year’s second quarter, already making this the second-worst recession since the Great Depression. GDP shrank 3.8 percent during the 1957-58 contraction, according to figures from the Bureau of Economic Analysis.

The median forecast of 71 economists surveyed by Bloomberg News projected GDP, the sum of all goods and services produced, would shrink at a 4.7 percent pace. Estimates ranged from declines of 2.8 percent to 8 percent. Today’s advance report is the first of three estimates on first-quarter growth.

Consumer spending, which accounts for about 70 percent of the economy, climbed at a 2.2 percent annual pace last quarter, the most in two years. Purchases dropped at an average 4.1 percent rate in the last half of 2008, the biggest slide since 1980.

Part of the improvement may be due to government efforts to stem the recession. In its last meeting on March 18, the Fed pledged to double mortgage-debt purchases to $1.45 trillion and buy as much as $300 billion in long-term Treasuries. That’s helped bring down rates on mortgages and auto loans.

The 2 other things continuuing to pummel the economy is unemployment and housing. On the unemployment side, the latest AP report indicates joblessness rose in all the big cities. AP News:

The Labor Department reported Wednesday all 372 metropolitan areas tracked saw jobless rates move higher last month from a year earlier. Elkhart-Goshen’s rate soared to 18.8 percent, a 13 percentage-point increase. That was the fourth-highest jobless rate in the country.

The Indiana region has been hammered by layoffs in the recreational vehicle industry. RV makers Monaco Coach Corp. Keystone RV Co. and Pilgrim International have sliced hundreds of jobs.

The jobless rate jumped to 17 percent in Bend, Ore., a 9.2 percentage-point rise and the second-biggest monthly gainer. Rounding out the top three was North Carolina’s Hickory-Lenoir-Morganton, which saw its unemployment rate rise to 15.4 percent last month, an increase of 9.1 percentage points.

The regions highlight damage inflicted by the recession. Fallout has been especially pronounced in the manufacturing, construction and retail industries, which have suffered heavy layoffs.

El-Centro, Calif., continued to lay claim to the highest unemployment rate — 25.1 percent. The jobless rate there is notoriously high because there are so many unemployed seasonal agriculture workers.

Following close behind were Merced, Calif., with a jobless rate of 20.4 percent, and Yuba, Calif., at 19.5 percent.

The national unemployment rate soared to 8.5 percent, a quarter-century high, in March.

Companies have seen their sales and profits hurt by the recession. They have been laying off workers and taking other cost-cutting steps to survive the downturn, which began in December 2007.

More layoffs were announced this week. Textron Inc. said it will expand layoffs, eliminating 8,300 jobs, or 20 percent, of its global work force as the recession weakens demand for corporate planes. The maker of Cessna planes, Bell helicopters and turf-maintenance equipment earlier this year said it would reduce its work force by 6,200 jobs, or 15 percent, mostly at Wichita, Kansas-based Cessna.

Elsewhere, General Motors Corp. laid out a massive restructuring plan that includes cutting 21,000 U.S. factory jobs by next year. Clear Channel Communications Inc., the largest owner of U.S. radio stations, said it’s cutting 590 jobs in its second round of mass layoffs this year. And bearings and specialty steels maker Timken Co. indicated it will cut about 4,000 more jobs by the end of this year after earlier suggesting about 3,000 jobs already had been targeted

As far as housing, everyone seemed pretty happy that the reports weren’t as bad as they thought it would be. It was still bad but it could have been worse. For some strange reason, experts come out and start calling this the bottom of the housing bust. Most of these people are delusional. CNN.Money:

Is the U.S. housing market approaching bottom? The rate of decline in U.S. house prices moderated in February. Prices fell 2.1%, according to the Case-Shiller composite index of ten cities.

That sounds like great news for housing-hobbled banks. After all, real estate prices are a key factor in the stress tests the biggest banks are undergoing, right? Not so fast.

Better isn’t synonymous with good. The decline is less dramatic than January’s 2.6% fall, but it’s still an awful figure. Prices have fallen 18.8% over the past year, according to the index.

But let’s be optimistic an say the moderation continues, with prices gradually approaching a bottom. The improvement was half of one percent in February (that’s to say a 2.1% decline instead of a 2.6%).

Now assume the rate of decline slows to a quarter of a percent in March and continues this trajectory. At the end of the year, prices would be 19% lower – worse than the baseline case under the stress tests.

And while the idea that price declines are moderating makes sense – prices cannot fall to zero – the evidence they are is feeble.