TEAM OBAMA VERSUS THE PRIMARY TREND
by Ghassan Abdallah, Ph.D.
November 5, 2009

To halt the market decline and the collapse of asset prices, Congress and the president have resorted to massive deficit spending. These fiscal policies were strongly supported by Secretary of the Treasury Tim Geithner and White House Economic Advisor Larry Summers. As for the Chairman of the Federal Reserve, Ben Bernanke, he stated, earlier in the year, on CBS News program 60 Minutes, that he wanted to print money, and then followed through on his word by monetizing $1.3 trillion worth of government debt and mortgage backed securities. By unleashing this massive wave of liquidity, the Chairman of the Federal Reserve has made it very clear that he wanted to encourage risk taking and speculation.

The appetite for risk returned to the markets and money began to flow into technology and commodity stocks as well as gold and silver. In the end, however, these actions by the government cannot possibly reverse the primary trend in the stock market and the economy, which remain negative or bearish. Much has been made of the rally in stock prices, since earlier in the year, with some proclaiming it to be the beginning of a new secular Bull market in stocks. However, history and the evidence strongly suggest that the rally is just an upward correction in an ongoing, longer term, secular Bear market decline. A variety of long term charts clearly show the long term trend is down, notwithstanding the recent seven month rally. One sector that is always useful to look at to assess the markets is the semiconductor index.

Below-- 10 year chart of the Semiconductor ETF (SMH). Every rally over the past 10 years in the semis has ended up failing, with the rallies culminating with lower highs.

Money printing by the U.S. Government can delay but cannot stop the compression of stratospheric PE ratios. In the end semiconductor companies will have to be, appropriately, priced lower by the market.

The problems that plague the semis, mainly, lack of sustainable earnings growth and a growing amount of debt, are similar to the problems that plague businesses in other sectors. Those problems are being compounded by a bleak employment picture and falling real estate prices. In his latest commentary Bill Gross, who manages the world's largest bond fund, highlighted the long term problems that face the U.S and global economies in the following way:

"Almost all assets appear to be overvalued on a long term basis………The U.S. and most other G-7 economies have been significantly and artificially influenced by asset price appreciation for decades. Stock and home prices went up-- then consumers liquefied and spent the capital gains either by borrowing against them or selling outright. Growth in other words, was influenced on the upside by leverage, securitization, and the belief that wealth creation was a function of asset appreciation as opposed to the production of goods and services. American and other similarly addicted global citizens long ago learned to focus on markets as opposed to the economic foundation behind them." 
Bill Gross-- Investment Outlook November 2009

The current environment, then, can be appropriately described as one of withdrawal from years of unnaturally elevated asset prices. How long this hangover will last is subject to debate. It remains to be seen whether the recent weakness in the financial markets is of any significance. Many are looking for a toping process or failing rally as a sign of the resumption of the primary bearish trend. Timing market turns is never easy, and therefore it is of no use to speculate on when the markets will go down. What is clear, however, is that the market, at present price levels, offers absolutely no value for long term investors.

© 2009  Ghassan Abdallah, PhD
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Ghassan Abdallah, Ph.D | Adjunct Professor, Univ. of Houston | Email