Not Buying in to the Sucker's Rally

Generally speaking, I think gauging the viability of the recent stock market rally comes down to a few basic indicators. They're not hard to spot for anyone who's willing to look. A few reasons I remain skeptical:

1. Auto sales. Don't let anyone tell you that manufacturing is some sort of a sideline business in America anymore. Industrial production is still a massive part of our economy (about 12% of total GDP as of the end of 2007, per the BEA, with a lot of that tied in to auto production). For the Big Three automakers, sales are down 49% (GM), 46% (Chrysler), and 43% (Ford) year-on-year right now, and 2008 was far from a banner year. Those are cataclysmic numbers, the kinds of numbers no business can survive - particularly a heavily leveraged business like GM. GM is now saying that they're cutting an additional 21,000 people and shuttering 13 plants before the end of 2010. It looks like it's going to continue to get worse, and the ripple effects for the economy will be horrific.

2. Option ARM resets. Most people seem to think that the worst of the foreclosure crisis is behind us. Those people apparently need to take a look at the massive number of ARM loans that are due to reset (ie, jack up homeowners' rates) over 2010 and 2011. It's potentially even worse than the wave we experienced in 2007 and 2008. This is the basic reason why the securitization markets have been all but frozen, and why so many people (Krugman, Stiglitz, et al) are so pessimistic about the Geithner plan to take "toxic assets" off the banks' books (the PPIP plan). Based on the number of ARMs that will be resetting in the next few years, investors can say with a pretty high degree of confidence right now that most of the mortgage-backed securities and troubled straight mortgage loans polluting the banks' balance sheets are going to end up being worthless. It's unfortunately not a matter of injecting liquidity, as Geithner seems to think it is. Again, the impact is going to be enormous.

3. The "other shoe" (consumer credit card debt) has yet to drop. Citi and other major card issuers are reporting growing charge-off rates in their consumer credit operations. In other words, more people are defaulting on their credit card balances. Americans are spending less and saving more these days, but they may not be able to deleverage quickly enough on their credit lines to prevent more big write-downs at the banks.

There are obviously other indicators to look at, such as the prospect of inflation, the value of the dollar, potential increases in interest rates, etc, but the underlying drivers of the economy - and the factors that dictate how long this recession will last - are the ones outlined above.

Have a super day, though!