A Stock Market Rebound?

Gird up your loins, dear reader. Put wax in your ears and lash yourself to the mast. You are about to be tempted.

“Lead us not into temptation,” says the famous prayer. The old timers knew we were weak. They knew we couldn’t resist. They didn’t pray that we would “just say no” to temptation. They knew that wouldn’t happen. Instead, they prayed to God to keep temptation away from us.

There’s nothing like a little temptation to get the juices flowing. A roulette wheel that seems to stop just where you thought it would…a pretty woman who smiles at you on the cross-town bus…a pastry as big as a sombrero and as rich as El Dorado – oh…Heaven forefend!

But the hardest temptation to resist is the temptation of getting something for nothing.

“Investors begin dipping toes back into stocks,” reports a Reuter’s article.

“While economies keep contracting, stocks may have already started pricing in the end of recession and the beginning of a recovery.”

Last week, the stock market showed a little leg. Yes, prices rose 12% over a 4-day period – teasing us with the prospect of a little fun. Finally – a rebound. Maybe.

The Dow rose again on Friday – up 53 points. The index is still down more than 15% for the year…and down more than 50% from its all time high. It is rare to see such big losses without a major rebound. Our guess is that we’re finally ready for one.

On that basis, we have taken down our “Crash Alert” flag. If we’re right, we’re going to see stocks go up 20% to 50%. And we’re going to hear more people talking about the end of the recession…and a new bull market.

GM said it really didn’t need an extra $2 billion last week. Two of America’s biggest banks said they were running in the black again. Even the retail sales figures were not as bad as people expected.

Houses in some communities – such as Riverside, California and Miami, Florida – are selling for only about half of what they brought three years ago. Surely this is the bottom of the housing slump, right? And sales of existing houses – at bargain prices – rose almost 50% in January, from a year before.

Our advice is to listen politely – but don’t take it too seriously. This is a depression. If it follows the form of previous depressions, it will seem for a while that it is not a depression at all…but a recession, and one that is ending.

Many – probably most – people still believe that the crisis is merely a pause in an otherwise healthy economic model. They wait for the bailouts to take effect…and for the U.S. consumer to begin buying again. That is the fondest hope, by the way, of the Chinese government. The Chinese hold $1.4 trillion worth of U.S. dollar assets. They’re worried that their stash of cash may lose value. But, so far, it is the only thing that is NOT losing value.

The poor Chinese began spreading their cash around just before Humpty Dumpty fell off the wall. A number of their high-profile deals went bad:

“China loses billions on equities bets ahead of markets’ collapse,” says an awkward headline in the Financial Times. By the end of June ’08, the Chinese held more than $100 billion worth of U.S. equities. Bad timing. But the collapse of the U.S. stock market makes Beijing’s other dollar holdings look good. The dollar has gone up. So, the lesson the Chinese have learned is this: the safest thing you can do is to continue lending to your biggest deadbeat customer.

It is a dangerous strategy. But the Chinese think that if they extend enough credit to the U.S. consumer, he’ll come back in the shop. And Ben Bernanke, another dreamer, said last week that the recession could end this year.

Stocks will probably rise for a few months. The economic news will be better. The Dow could rise to above 10,000. Then, we will be tempted to think that all the king’s horses and all the king’s men are actually better at putting things back together than their reputation suggests. We’ll be tempted to think that those bailouts and giveaways actually did the job…and that now, rather than turn our backs on temptation…we can safely give in to it.

Be careful, dear reader. Be careful. And keep in mind…no matter how tempting stocks may be looking in the near future, you can make major gains – without having to touch a single stock!

More news from today’s issue of Agora Financial’s 5 Min. Forecast…

“The flailing consumer economy in the United States has caused a nasty decline in the amount of money foreign workers ship back to their families at home,” writes Addison Wiggin. Just take a look at this chart:

“Still,” he writes, “according to the World Bank, ‘remittances’, as those payments are called, exceeded $300 billion in 2008. That money ‘accounts for 45% of GDP in Tajikistan, 38% in Moldova and 24% in Lebanon and Guyana,’ says the Economist.

Addison writes every day for The 5 Min Forecast, an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments—in five minutes or less. It’s a free service available only to subscribers of Agora Financial’s paid publications, such as the Hulbert #1 Performing Investment Letter, Outstanding Investments.

*** The sentiment-du-jour is outrage. AIG has gotten about $160 billion in bailouts from the feds. Much of this money has been paid out to various counterparties. We’re not supposed to know who the counterparties are, but the word on the street is that billions have gone to Merrill Lynch, Goldman Sachs and two French banks, including Societe Generale. Why the taxpayer should be protecting Wall Street and foreign banks from their own errors is a subject for another day…

And now word has gotten to the press that AIG will pay out $165 million in bonuses. Top executives, for example, will get $6.5 million each. The company president defended the bonuses on two grounds.

First, he said, the execs were entitled to their bonuses by contracts made before the feds put in any money. The company couldn’t unilaterally break its contracts.

Second, the firm needed to maintain the quality of its management. Especially, now that it is owned by the government, it needs good people to make sure the taxpayers get a good return on their investments.

The first argument seems to us watertight. He should have stopped there. The second leaks like a Baltimore water main. The easy retort is that given the quality of the top fellows at AIG bad management would be an improvement. But here at The Daily Reckoning we always forgo the cheap shots. Instead, we’ll take a shot from the foul line:

What makes people think that they get better management by paying more money?

In the world at large, the difference in salary levels is shocking. At the top in Japan, the average executive earns only 3 times as much as the average salaryman. In Britain, top executives earn more than 10 times as much as their Japanese counterparts – or 39 times the average guy on the shop floor. And in America, the poor working stiff supports an executive who earns more than 300 times more than he does.

Is the American worth 10 times as much as his British confrere? Is he worth 100 times his Japanese competition? Is his business run better than either of theirs?

Don’t make us laugh, dear reader. The only reason American executives earn so much is that they’ve conned the lumpeninvestoriat into believing that if they are paid more they will produce more. In fact, they’re rarely the person actually responsible for output or innovation…and there is no evidence that we’ve ever seen to suggest that they do better at their jobs when they are paid more.

Until tomorrow,

Bill Bonner
The Daily Reckoning