Over the last couple of weeks, I have written a couple of articles telling you why I think 2009 is going to see the market turn around and then the economy is going to turn around.  I received several emails about my If History Repeats Itself, You Will Want To Be In The Market For The Next Six Months and I received several more on my 162 Billion Reasons The Economy Will improve in 2009. 

Both articles were met with praise as well as skepticism, as expected.  Let’s look at the History article emails first.  Jane questions how I can relate the ’74 job market with today without taking into account a growing population.

Hi Rick,

I liked your article but I have a question on the numbers you provided. You say the unemployment number of 1.8 million of 2008 compares to 1974 & 1939.

You don’t mention how this compares to the number of Americans there were at this time. I think it was probably worse in 1939 and 1974 because, as a percentage, the number of unemployed were greater in those days because there were fewer Americans in both those days.

Tell me what you think.

Jane

You’re right Jane, the population is much larger today than it was in ’74.  However, you miss interpreted what I was trying to say.  I wasn’t talking about the total number of jobs lost for the year, I was talking about the jobs lost in one month.  The economy only lost 378,000 jobs for the entire year of 1974, but the job losses continued for the first four months of 1975 and the total lost during this cycle was just over 1.5 million. 

If you look at historical population numbers, there were 213 million people in this country in 1974 (According to the census bureau) and right at 300 million now.  The job losses then amounted to 0.7 percent and the job losses now represent 0.63 percent, but that doesn’t include December’s figures and what may happen in the first few months of 2009.  If the job losses continue for the next few months and another 200,000 jobs are lost, we will eclipse the 0.7 percent mark this time around.  Most experts expect job losses to average more than 300K for the next few months.

Keep in mind that the market usually turns before the economy, and the economy usually turns before employment.  This works on the way up and the way down.

The next email comes from Glenn C. Glenn asks:

Dear Rick,

You’re not the only one I’m reading who thinks the market will soar in the intermediate term. However, others say that after that the final leg of the current bear market will then kick in, and that it will take us to THE bottom, which could be as low as the 3,000 range. Others say the 5,000 range. But they point out that yields are not yet at bear market lows, nor are P/E ratios. What say you to that?

Thanks,

Glenn C.

Well Glenn, I think we have seen the bottom of this cycle already.  I think we move higher next year.  Where we go from there depends on the sentiment.  If the majority of investors start acting like it is the 1990s again, the bullish cycle won’t be as long as we would like.

Moving on to the 162 Billion Reasons article, Harish takes me to task for oversimplifying things.

Dear Rick,

Very good mathematical model you presented but… BUT, don’t you think you made it too simple? What you say is consumers have "decided" to spend a certain amount (like $200) every month for gas and that reduced price means, according to you, that the already troubled and skeptic consumer will go all out to spend the "luckily saved" amount on things that he/she may not require at all.

Now here is my math:

If consumer A was spending USD 100 on gas per month and considering the price has halved, he / she saves USD 50. Now consider A is living in the same America where the average fella is more concerned about his/her future and savings, DO YOU REALLY THINK HE/SHE WILL BE FOOL ENOUGH TO SPEND THAT "HARD GOTTEN" SAVING?

It’s not that simple. The consumer behaviour is more a manifestation of mass psychological waves and NOT A SIMPLE MATH WHICH ANALYSTS LIKE YOU DO ON FINGERTIPS.

Considering this thing, the current market rally (till Friday) had factored in that MATH as it is obvious to many market participants. The trouble is, as I see, IF your math (and the other speculators’) proves wrong, then not only will this rally be over, but an even bigger crash / downside is imminent.

Good luck to your calculations…

Harish D.

You are correct that I am oversimplifying things.  I did that so it was easier to follow along.  Judging by certain things in your email, I am guessing you do not live in the states or you are new to the states.  As a result, I think you are overstating the abilities of the average consumer.  We have had a negative savings rate in this country for a long time.  You talk about psychological waves, and it seems to me that the average consumer would rather take the $50-$100 they are not spending on gas, and spend it on the latest iPhone or GPS system rather than saving it.  Such is the psychological behavior of the U.S. consumer.  If people didn’t think this way, we would not have a negative savings rate and the amount of credit card debt would not be as high as it is today.

I actually made the mistake of doing some shopping this past weekend.  I was in four different stores and every single one of them was packed.  From Wal-Mart to Target, to Best Buy and Toy’s R US.  All of them were zoos.  Just from my amateur observation, retail sales might not be as bad as what people expect this holiday season and I think a lot of that can be attributed to falling gas prices.

Good luck and good trading,

Rick

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