"Rising Job Losses Damp Hopes of Recovery"

The title of today's post was the leading article in this weekend's Wall Street Journal. At the beginning of last week, we scripted an article which referred to last Saturday's New York Times' story titled "U.K.'s Recovery Slows Amid Sluggish Spending". We highlighted the fact that the United Kingdom was foreshadowing what was inevitably going to happen in the U.S. It didn't take a week for the weak economic news to hit and for investors to flee stocks as fast as they could.

Thursday's markets dropped 2.6%, oil cratered 3.7% and the unemployment picture was bleak. It shouldn't be much of a surprise to our readers that the green shoots are more likely weeds. Euphoria has struck the markets as the fear to miss the chance to recoup losses hit individual investors as it did many professionals. Stocks had an amazing ride in the great bear rally of spring 2009 but what will the latter half of 2009 look like?

This week 2nd quarter earnings will start to be reported and unless we are completely surprised, companies are likely to report that they continue to cut costs and jobs to help their earnings but the economy remains bleak and sales will not be growing for the rest of the year. Many economists and investors have been banking on an economic recovery in the second half of 2009 but we just don't know from where it will be coming. The stimulus plan will add some positive momentum but it won't be enough to counteract weak consumer spending, a hampered commercial real estate market, and rising consumer defaults.

In a few months it will be apparent to most investors that China was driving demand for commodities as they took the opportunity to hoard raw materials at low prices. China has put in place their own stimulus plan but its true growth has also tempered. China will remain a big driver of industrial demand in years to come and their consumption for copper, steel and other commodities will be strong but not in this global recession. As prices of these commodities rise, China's buying will be curtailed and speculators of such commodities will be in for a big negative shock.

Unemployment will continue to rise, manufacturing will be tame and when back-to-school sales are disappointing the markets will start to focus on the impending disaster for Christmas sales. If investor psychology hasn't turned completely negative in the next few weeks, reality will set in once school is back in session and retailers brace for the weakest sales they have seen in three decades.

We look forward to earnings season and hope our concerns are proven wrong but until then, we will continue to raise cash and hedge our long positions with S&P puts and selling covered calls.