The Big Picture for the Week of May 2, 2010

A point I have been trying to make for many months now is that there will be more shoes to drop. Put another way, it does not make sense to expect the worst financial whatever to wrap up like a normal cyclical event in just one year or even two.

The stock market has clearly had a heroic rally in the last 13+ months, the panic has long since subsided and there are data points that support the bull case but keep in mind the bull case won't hurt your portfolio or put you in a position where you might panic-sell.

The latest Goldman Sachs (GS) news is getting some blame for the market's decline yesterday and while I do not know if that explains yesterday's 20 point drop in the S&P 500 it probably explains the 9.4% drop in the price GS.

I don't know whether GS did anything illegal but as I mentioned the other day it is likely that they, like other firms, did do things that intuitively seem to be unethical. If it turns out that GS did illegal things I don't think anyone will be surprised.

The bigger macro is that whatever GS did it is extremely unlikely that they were the only firm doing whatever it is that the SEC and anyone else thinks they did. And while I am not privy to any information we could see news like this continue to drip out for quite a while. If this makes sense to you then the financial sector, specifically US banks, European banks and (what used to be) US investment banks will continue to be very risky holds (note I am saying risky not volatile). In that light I still want no exposure to this part of the sector. I am convinced, as I have been, that there will be fallout for a while to come.

With regard to data points you may know that yesterday the GDP printed for Q1 at a positive 3.2%. I think I read four articles explaining why this was less than met the eye, maybe you did some similar reading too? If you did not read any such article you should take the time but a slightly bigger picture point to understand is that at this point (this point being where there are signs that a recovery has started) GDP should be printing with a much bigger number like with a seven handle not a three handle or even a five handle. Maybe this is a contributing factor to why NABE has not sounded the all-clear but either way the GDP numbers we have been getting are not normal when past cycles are considered.

Obviously we have an employment problem as well. The massive month to month job loss is clearly behind us other than what could be a couple of bad months when the census gig is up but I'm sure you all know the Mauldin Math on getting the unemployment rate down close to where it was which is that we need to hire back the 8 million jobs that were lost and add 120,000-150,000 just to run in place. People who are unemployed or underemployed obviously have problems at home of varying magnitudes but it also means that every entity that relies on revenue from tax collection (sales, income and anything else) are collecting less taxes; their revenue is down.

These are all big pillars of the bear case. These all existed a year ago and of course the market went up anyway and might keep going up but these factors still exist and I think are legitimate fundamental obstacles. My longstanding belief of a scare the hell out of them decline has either been wrong or early but never an Armageddon result should it happen. I have not changed my mind on this coming (at some point I will simply conclude I was wrong) but more important is that I think the round trip to nowhere (volatile or otherwise) will continue for domestic equities for a while to come which means, repeat theme coming, more foreign investing.