As the market soars, the bears stick to their position. Joining this week’s fray: TrimTabs’ Charles Biderman, JPMorgan’s David Kelly, Clearbrook’s Tom Sowanick, BlackRock’s Bob Doll and Curtis Arledge, GMO’s Jeremy Grantham. Plus: the week’s most important reports

WHERE’S THE CASH? From Charles Biderman, CEO, TrimTabs
We would love to subscribe to the widespread notion that the worst has passed for the U.S. economy.  Unfortunately, real-time data indicates that incomes and savings are still plunging.  Adjusting for the “Making Work Pay” tax credit, income tax withholdings dropped 5.8% y-o-y in the past three weeks and 5.3% y-o-y in the past five weeks.  More broadly, net take-home pay—which consists of after-tax wages as well as tax refunds, tax credits, and tax rebates—plunged 13.8% y-o-y in May.  Savings are collapsing as consumers struggle to pay their bills.  M2 savings—bank savings, small certificates of deposit, and retail money market funds—fell $49.5 billion in the past eight weeks.  Meanwhile, the labor market is in horrible shape.  The TrimTabs Online Job Postings Index dropped 1.7% in the past two weeks to a fresh cycle low, and weekly unemployment claims topped 600,000 in each of the past 17 weeks.

Supply and demand rule the markets, yet market participants love to think they know better, particularly after a big move higher. We are amazed at how many market strategists believe there is a ton of cash on the sidelines waiting to buy stocks even after an almost uninterrupted 2 1/2 month rally. The reality is that investors are running out of cash. As we explained last week, we estimate that pension funds, hedge funds, and mutual funds pumped roughly $240 billion into equities in the past couple of months.
More recently, however, money has been flying out the door. As stock prices have soared, corporate America has been unloading as many new shares as possible. Since the start of April, new offerings have skyrocketed to $87.7 billion—including $56.1 billion in the past three weeks—while new cash takeovers and new stock buybacks amounted to only $22.2 billion.

If incomes and savings are plunging, institutional investors have mostly shot their sideline cash wads, and companies are massive net sellers, where is the money going to come from to buy the tens of billions in new shares companies are probably planning to sell in June? The supply of shares is going to overwhelm demand, and stock prices are going to tumble.


CRUCIAL: CONCRETE EVIDENCE OF A TURNAROUND, From David Kelly, chief market strategist, JPMorgan Funds

After two quarters of bruising economic declines, markets are hungry for more concrete evidence of a turnaround. This week’s economic numbers, which provide the earliest evidence of activity in May, will be examined closely.

Monday’s data on consumer spending and income in April are a little dated but the May ISM manufacturing index will be looked at as being more important.

Wednesday sees the release of the ISM non-manufacturing survey which could show a small gain.  More importantly, Fed Chairman Ben Bernanke will testify to the House Budget Committee on the state of the economy. A crucial question concerns the Fed’s purchases of Treasuries.  Long-term Treasury rates have backed up considerably since March 18th when the Fed announced a plan to buy $300 billion of them in an effort to try to hold them down. If he signals that the Fed has no intention of expanding its current program, long-term Treasury yields may back up, but the dollar would presumably rally on signs of a more hawkish stance.  But if he indicates that the Fed will expand its purchases, foreign investors may get more nervous that this will all end badly, putting downward pressure on the dollar.

Unemployment claims on Thursday will be examined for any evidence that the labor market is improving.  While some commentators have noted that claims appear to have peaked in late March at 674,000, claims remain almost 300,000 above levels consistent with a steady unemployment rate. May chain store sales numbers will also be released during the morning, giving an important read on activity in the retail sector.

Friday’s jobs report will cap a week of key economic reports. With a bit of luck, payroll job losses will be below 600,000 for the second month in a row.  But the fact that over half a million job lost would be seen as encouraging only emphasizes the depth of the recession.

Signs Are Pointing in the Right Direction, from Tom Sowanick, chief investment strategist, Clearbrook Financial (www.clearbrookfinancial.com)
 
Stocks have now mustered three consecutive up months, with gains of around 23.6% for the S&P 500. Oil prices have also jumped sharply and have now posted four consecutive up months for a cumulative price increase of 58.2%. Treasury bond yields have risen now for three consecutive months—from 2.66% at the end of March to a current level of 3.60%. Strong gains for financial assets during May have been well anchored with stable to firming economic data; both existing home sales and new homes sales posted modest gains for the month. Durable goods orders also advanced with a gain of 1.9% and initial unemployment claims continued to moderate rate during the month.