(Source JPMorgan)

In the above chart you will see that there have been 19 times in recent history where we’ve had a single report show more than a 0.5% increase in the unemployment rate.  The subsequent 12 month returns in the stock market are amazing - ranging from 17.6% to 45%. 

Notice the similar trend with consumer sentiment. 

The first of the two charts above shows that the recent level of volatility in the stock market has been very uncommon.  The second chart shows the average daily move in the S&P 500 since 1993 has been 0.77%.  In the month of October, the average daily move was 3.71%. 

That means in intraday trading, the market is valuing companies at an incredible variance.  Historically, it doesn’t last very long, and it does point toward market bottoms. 

Are we close to a bottom?  Yes.

Can it go lower?  Always.

Unfortunately my crystal ball broke the first time I tried using it.  What I do know is that stocks are cheap now.  Don’t sell, and if possible, buy!  But I think I can say with confidence that five years from now today’s prices will have been a dream to buy. 

It’s amazing how much the media focused on oil as prices were going up this past summer and people were exchanging their SUVs for smaller vehicles.  The fall in oil is another stimulus to the economy as it keeps more money in your pocket but yet it hardly gets any attention. 

Check out this fascinating video of a new Ford plant in Brazil from DetNews.com. 

Now you will see why auto manufacturers want to get out of the U.S. and away from the UAW.  What are the chances union leaders would allow such a plant built here in the States?  Without a dramatic overhaul to their operations, my guess is zero. 

If you had missed the best 90 days of the S&P 500 over a 15 year period (1993-2007) your average annual return would have been a negative 7%.  If instead you bought the market and held onto it, that same return would have been greater than 10%. 

Last week’s economic data shows that “risk aversion hysteria” has a major impact on economic activity in the United States.

The total number of people receiving unemployment benefits (a.k.a. continuing claims) increased to almost 3.9 million in late October.  As a share of the workforce, continuing claims are now back to the peak hit in the aftermath of the 2001 recession.  Meanwhile, retail sales plummeted in October and are down 4.1% versus a year ago, the worst one-year comparison on record.

September’s international trade data showed a smaller trade deficit, but the underlying figures reported record declines for both imports and exports.

All of these figures are consistent with our view that the US has been experiencing a once-in-a-multiple-generation negative shock to monetary velocity, the speed with which money its way through the economy, as both business and consumers pull back from economic activity.

As a result, we are forecasting that real GDP shrinks at a 4% annual rate in the current quarter, the largest decline since 1982.  However, we believe the economy will stabilize in the first quarter of 2009, grow at a 2% annual rate in Q2 and then expand at a 3% rate in the second half of next year.

An economic recovery does not require monetary velocity to reaccelerate.  As long as velocity simply stops falling, a recovery can take hold. 

Loan data for October suggest this may already be starting to happen.  In October alone, banks increased commercial and industrial lending by 4.2%, real estate loans by 3.4%, and consumer loans by 2%.  While securitized non-bank lending remains locked-up, other lending continues.

In addition, the Federal Reserve has rapidly expanded its balance sheet to offset the drop in velocity.  Inventory ratios remain very low.  In other words, this is not the kind of environment that creates an endless downward spiral.

~ From First Trust

I’ve been a follower of economics since I had the opportunity to try to understand America.  I immigrated from Italy as a 10 year old, and everything was “new” to me.  In school I strived to understand cause and effect.  Having studied economics for almost 50 years, this article best describes how I feel about it all.  Enjoy!

Today’s Wall Street Journal has an interesting editorial about Washington’s potential plan for your 401(k) assets.

In light of those who foresee the current bear market bringing about the death of stocks, here are 10 Market Rules to Remember from long time strategist Bob Farrell:

(Photo:  azrainman)

1)  Markets tend to return to the mean over time.

2)  Excesses in one direction will lead to an opposite excess in the other direction.

3)  There are no new eras - excesses are never permanent.

4)  Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.

5)  The public buys the most at the top and the least at the bottom.

6)  Fear and greed are stronger than long-term resolve.

7)  Markets are strongest when they are broad and weakest when they narrow to a handful of blue chip names.

8)  Bear markets have three stages - sharp down - reflexive rebound - a drawn-out fundamental downtrend.

9)  When all the experts and forecasts agree - something else is going to happen.

10)  Bull markets are more fun than bear markets.

Hat Tip:  Carpe Diem blog