All the Good Economic News, So Why Am I Bearish for 2011?

Jobless claims in the US decreased to 407,000 last week, according to the Labor Department, the lowest level since July 2008. Take this: The economy is clearly improving. If jobless claims fall, the unemployment rate for November 2010 will fall. (President Obama and Fed Chair Bernanke will delight folks when the November unemployment numbers come out!)

Consumer spending in the US rose in October for the fifth month in a row, according to the Commerce Department. My opinion: I have told my readers to get into retail stocks. Now you see why. US Dow Jones Retail Index chart leads the way in consumer spending.

Also from the Ministry of Commerce, wages had their biggest monthly gain in October since May this year. The US personal saving rate rose in October to 5.7% from 5.6%. Consumers earn more money marginally, retail sales increase and consumers save more; good three-way combination. During the real estate boom that ended in 2006, the saving rate of Americans was negative.

So, with all the good economic news continuing to flow down the pipeline, why am I bearish going into 2011? More specifically, why do I keep calling the market action since March 2009 a bear market rally, as opposed to a new bull market?

The stock market is a leading indicator. With stocks going up so aggressively in 2009, the market is showing positive economic and corporate news for 2010. So, what happened in 2010, with the economy getting better and corporate America returning to profitability, is no big surprise.

But going into 2011, I believe the stock market smells of rats. And the mouse is a higher interest rate. Silently, almost undetected, interest rates are rising. The yield on three months of US T-bills was literally up 30% in a matter of weeks. The yield on the US T-bill five-year bellwether is increasing steadily. Mortgage rates also go up.

The stock market doesn’t like hikes in interest rates. And that’s what I’m worried about going into 2011. While it’s rude to say, as a country, we need to thank European countries like Greece, Ireland, Portugal and Spain for their mismanagement of their fiscal.

If it weren’t for the euro under so much downward pressure, our greenback would have been in a free fall, which would result in interest rates in the US rising even faster than they are currently rising.

Hence, going into 2011, my biggest concern, and what I believe will be the biggest surprise to investors, is higher interest rates … which is a huge negative for the stock market. And that is why we are still in a bear market rally in my opinion.

Michael’s Personal Notes:

The next time you read a popular Internet finance site or business newspaper and see that the stock market is going down because of Europe’s troubles with Ireland, keep the facts in mind:

According to the World Bank, the combined Gross Domestic Product (GDP) of Greece and Ireland for 2009 was $ 556 billion. The GDP of the United States in 2009 was $ 14.256 trillion. Ireland’s debt woes have had very little impact on the US. But I believe the gains that Irish bond shorted bond traders have made have been quite spectacular.

Where the Market Stands; Where it Goes:

Thanksgiving weekend 2010 is behind us. Black Friday is behind us. Back to work. Wall Street opened this morning with the stock market looking to go higher. I am looking for a bear market rally in stocks that started in March 2009 to continue moving upwards into late 2010.

Enjoy the stock price rally as long as it lasts!

What did he say:

“The Dow Jones Industrial Average, S&P 500 and other major stock market indexes finished yesterday with their best two-day show since 2002. I view the past two days of market rallies as a classic stock market bear trap. As the economy gets closer to contraction, 2008 will likely be the year. the most challenging economy for Americans.