A question I'm not qualified to answer

While the above is certainly true, the economy as a whole could be improving, as the market suggests, but it is absolutely true that unemployment is a lagging indicator.

Basically, if everyone worldwide decided tomorrow to say "horray, the recession is over", it would still take awhile for unemployment to improve significantly.

The consensus analysis is that the worst is behind us and we are pulling slowly out of the recession.

Right now earnings are fueling the market rise. So far, third quater earnings have been very positive.

The 800 pound gorilla still left in the room is unemployment numbers. Until unemployment turns in a positive direction you will have legitimate questions on whether on not this is a "true" market recovery.

My advice, fwiw, is to tell your friend to diversify her money. If she is near retirement, she should have a significant portion of her nest egg invested outside the stock market. There is no sense in having all or almost all her money in stocks right before retirement. Stocks are still important, but in appropriate amounts.

For something as important as her life savings, the best advice you can give her is to contact a professional such as a CFP, and not rely so much on an LSU/money message board.

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The 800 pound gorilla still left in the room is unemployment numbers. Until unemployment turns in a positive direction you will have legitimate questions on whether on not this is a "true" market recovery.

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Unemployment is a "lagging" economic indicator. Meaning that it will always be behind the general curve. Think about it this way. If a company has laid off 20,000 employees and the current economic state is starting to get better, do you think that company will run out and hire those 20,000 people back immediately? Or do you think they will wait until they absolutely have to hire those employees back?

There's your answer. And as an economics professor (contrary to Jersey's belief) I am qualified to answer the question.

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Basically, if everyone worldwide decided tomorrow to say "horray, the recession is over", it would still take awhile for unemployment to improve significantly.

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Bernanke Says U.S. Recession ‘Very Likely’ Has Ended

Sept. 15 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said the worst U.S. recession since the 1930s has probably ended, while warning that growth may not be strong enough to quickly reduce the unemployment rate.

“Even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time,” Bernanke said today at the Brookings Institution in Washington, responding to questions after a speech.

The remarks are Bernanke’s most explicit statement that the contraction that began in December 2007 is over. They echoed comments yesterday by San Francisco Fed President Janet Yellen and followed a report today showing retail sales rose last month by the most in three years, adding to evidence of a recovery.

“Unemployment will be slow to come down” if growth turns out to be “moderate” and not much more than the economy’s underlying potential, Bernanke said.

Stocks rallied after a report showing U.S. retail sales rose more than forecast reinforced evidence the recession is over. The Standard & Poor’s 500 Index rose 0.3 percent to 1,052.63. Asian shares also gained, with the MSCI Asia Pacific Index up 1.1 percent at 9:50 a.m. in Tokyo. Treasuries were little changed, with 10-year yields at 3.45 percent.

‘Exceptionally Low’

The central bank has kept the benchmark lending rate as low as zero since December and in August said “exceptionally low” rates are likely warranted for “an extended period.”

The policy-setting Federal Open Market Committee also said in its Aug. 12 statement that there were signs that “economic activity is leveling out.” The Fed’s Beige Book report last week said that 11 of its 12 regional banks reported signs of a stable or improving economy in July and August.

Yellen said in a speech yesterday that the U.S. summer “likely marked the end of the recession, and the economy should expand in the second half of this year. A wide array of data supports this view.”

The unemployment rate reached 9.7 percent in August, a quarter-century high, and employers have eliminated almost 7 million jobs since the recession started, the biggest drop in any post-World War II economic downturn. Banks worldwide have recorded more than $1.6 trillion of losses and writedowns since the start of 2007, data compiled by Bloomberg show.

Mortgage Purchases

The central bank in March authorized $1.45 trillion in purchases of mortgage-backed securities and other housing debt this year. Policy makers decided last month to taper off a $300 billion program buying U.S. Treasuries through October, while debating a similar move for MBS purchases. Bernanke convenes the next meeting of Fed policy makers Sept. 22-23 in Washington.

The economy will rebound at a 2.3 percent pace next year, according to the median estimate in a Bloomberg News survey of economists. The growth rate won’t be fast enough to lower the unemployment rate below 9 percent, the economists predict.

“The chairman got it about right,” Glenn Hutchins, co- founder and co-chief executive of Silver Lake, a private investment firm with $13 billion under management, said on a panel following Bernanke’s speech.

“We are experiencing stability both in financial markets and underlying corporate performance,” he said. “But the overwhelming sense of market participants right now is that we are at a very low level of activity.”

NBER Role

Before becoming a central banker, Bernanke, a former Princeton University economics professor, served on the National Bureau of Economic Research’s business-cycle dating committee, the group that determines the dates of U.S. recessions.

Stanford University Professor Robert Hall, the panel’s current chairman, said in August that declaring the recession over may take more than a year because of the risk that recent signs of stabilization will prove short-lived.

Sales at U.S. retailers rose 2.7 percent last month, led by a jump in auto purchases as consumers took advantage of the government’s “cash-for-clunkers” program. The increase exceeded the median forecast of economists surveyed by Bloomberg News and followed a 0.2 percent drop in July, Commerce Department figures showed today in Washington.

Responding to a separate question, Bernanke said he’s “pretty optimistic” on chances for an overhaul of financial regulations given a crisis that was “too big a calamity” to ignore. “I feel quite confident that a comprehensive reform will be forthcoming,” Bernanke said.

Congress is preparing the biggest overhaul of U.S. financial regulations since the 1930s, when the Fed was reorganized. The U.S. Treasury proposes to give the Fed greater authority over the capital, liquidity, and risk-management standards at the largest financial firms. Congressional leaders haven’t supported that proposal and are considering giving broader authority to a council of regulators.

“The problem we had in part was the lack of systemic oversight,” President Barack Obama said in an interview with Bloomberg News yesterday. “We want to have a systemic-risk regulator,” he said, adding that “the Fed is best equipped to do this.”

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right now Bernanke is more politician than economist so take his words with a grain of salt. I am of the opinion that there is more bad to come with the growing bankruptcy and foreclosure numbers being a lagging indicator just like unemployment numbers are.

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I will shift it out at some point in the next 3 months though because I believe the policies are going to lead to another major crisis.

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we don't like sacrifice and we don't like change and a large segment of our population has grown accustomed to "free"

Thousands wait in line to apply for section 8 housing in Tampa

so continuing these give away economic policies can't turn out good in any way, expanding them (healthcare) is only going to make the crisis happen faster

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However, I'm not sure where to shift it, there is no gold fund.

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buy oil futures or euros


I gutted my 401K, paid the penalties and used the remainder to pay off some debt that was costing me interest. The penalties I paid were less than the interest I was paying

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Again referring to Rosenberg, he constantly mentions how the markets (both debt and equity) are currently pricing in de-facto 2.5% GDP growth for the next year. I'm sure we'll exceed that for Q3 and Q4 on the immediate bounceback and stimulus, but as to whether we can sustain that through 2010...

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One minor detail here - Rosie's point is that the debt markets are currently MUCH safer than equity markets as the two appear to be pricing in very different economic outcomes. I think he pegs the equity market as pricing in roughly 4% GDP growth for 2010, while credit markets are pricing in closer to 2% or less. I'm going to add a bunch of data below that takes from Rosenberg's 10/9 piece (so 2 weeks old).

DaGarun, you should take these earnings beats with a huge grain of salt. As kfizzle noted, expectations have been absolutely GUTTED. The bottom-up consensus forward 12 month EPS for the S&P 500 in Oct 2008 was $89.50, and a year later, what's coming in is actually closer to $50! Yet the S&P is at just as high a level as it was coming into October, 2008.

Further, the S&P has never rallied 60% during a period in which we've experienced anything close to the 2.7mm job losses we have since March. Normally at least 2mm jobs have been CREATED to sustain a rally like this one.

Not to inundate you with math, but if you want actual numbers, here are some more stats:

1. Direct quote from Rosenberg - "The S&P 500 is already trading at valuation levels that would ordinarily be consistent with an economic expansion that is five years old a opposed to a recovery that, at best, is in its infancy stages."

2. On an operating basis, the trailing P/E multiple on the S&P 500 has expanded a massive 10 pts from the March lows, to stand at 27.6x. Historically, when the economy is taking the turn away from contraction towards expansion, the trailing P/E multiple is 15x. (Including write-downs, which of course all the bulls will tell you is useless because those are merely one time in nature, the multiple is 140x, or 3x where it was at the height of the tech bubble. So take that for what it's worth.)

Trailing P/Es at ends of recessions:
5/54: 11.1
4/58: 14.8
2/61: 20.5
11/70: 17
3/75: 9.9
7/80: 8.3
11/82: 11
3/81: 17
11/01: 29
Now (assuming recession is over): 28

Note that after the '01 recession end, which is the only comparable P/E, the market didn't bottom for another year - a full 40% lower - perhaps compensating for such a high P/E. Further, while admittedly some of the really low multiples above were in times of really high inflation, one could still use the 54, 58, and 61 recessions which were not high-inflation periods to see that the market has historically offered much safer equity market multiples.

While the fed's interest rate is low now, the real rate experienced by corporations and individuals is not so much. The Real Baa corporate yield (Baa being the average corporate credit rating for all companies) is 8.0% vs a normal 2.5% when the economy turns. Using the same recession-ending dates above, that real yield was: 2.7, 1.1, 3.7, 3.8, 0.2, -0.5, 9.7, 5.2, 5.9, and now 8.

If you don't like trailing earnings because they include depressed recessionary earnings (as if previous recession earnings didn't?), one could use the forward multiple which is 16.2x (based on a ~30% expected rebound in earnings), the highest it's been in nearly 5 years (when the expansion was over 3 years old). Typical recession-ends have a multiple closer to 14. On top of that, what do you think the odds are that analysts are actually right about this massive rebound in earnings they're projecting?

Over the last 60 years, the average total return 1 year after a market has a 25x multiple or higher is -0.3%, with the median at -6%. That return is negative 60% of the time.

The last argument a lot of people make is that liquidity will be our savior this time around and justifies the market run. That's fine if you want to believe it, but the Japanese experience was that two decades of liquidity from '89-'09 has still resulted in a market decline of 75% or so, so be careful if you want to use that metric.

I'll also add that with respect to unemployment being a lagging indicator, that is undoubtedly the case with typical inventory/manufacturing-led recessions. Credit collapses, however, are a far different animal, and no shortage of the upper echelon economists (like Rosenberg here and others who predicted the crisis) and several sharp money managers are proceeding with the view that this time, due to the massive over-indebtedness of the US consumer, unemployment could very well turn into a coincident indicator as job losses lead to spiraling defaults, more write downs, less lending, less economic activity, and even further layoffs down the pipe.

I'll also add that at some point the cost-cutting is going to run out of steam and companies other than the handful like Amazon are going to have to show earnings growth through top-line increases. With continued job losses and more mortgage losses coming down the pipe, it's really difficult to get constructive on the equity markets. The burden of proof is certainly on the bulls.

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One minor detail here - Rosie's point is that the debt markets are currently MUCH safer than equity markets as the two appear to be pricing in very different economic outcomes. I think he pegs the equity market as pricing in roughly 4% GDP growth for 2010, while credit markets are pricing in closer to 2% or less. I'm going to add a bunch of data below that takes from Rosenberg's 10/9 piece (so 2 weeks old).

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You're absolutely right about that, I fricked that up. With that noted, he also mentioned (10/20/09):

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Corporate bond spreads have continued to tighten (even in the face of a massive supply boom, a record $1 trillion of new U.S. issuance has hit the market this year) and the “undervaluation gap” in this once-very-cheap sector has now closed given that it is de facto discounting 2.5% U.S. economic growth in the coming year (equities now are close to 5% — not far off from what they were pricing back at the October 2007 peak).

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FWIW.

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he reason is that people expected even worse than the truth turned out to be.

Not to be too political but at the begining of the year, the adminstration hung their hats on unemployement not reaching 8%. So obviously unemployment is worse that orginally expected.

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Nope, that's just what the administration expected. Investors may not have bought into that so much.

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I will shift it out at some point in the next 3 months though because I believe the policies are going to lead to another major crisis. However, I'm not sure where to shift it, there is no gold fund.

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Sorry, I'm a dedicated index fund guy who tries not to time the market, but if you simply must you could always try GSG for commodities exposure. I have some for diversification purposes.

Can't say that that is the "best" solution but there aren't many good choices in that area to begin with, GSG seems at least okay.