Maybe the markets felt directionless for most of Friday ahead of earnings season, but the trading action of this week might make some wonder if a Double-Dip Recession is less likely.  The economic recovery has faltered and there is still more concern about what lies ahead in late-2010 and 2011.  Still, this week brought about the return of “the risk trade.”  At a minimum, the fears about a double-dip recession seem to be wearing off compared to June.    If you have watched the trading tape of stocks, bonds, and commodities, the outright panic trade bracing for a second market meltdown seems to be less prevalent than even a week ago.  It is time to reconsider the notion that the world is about to roll back over into oblivion.

The new notion after this week is that the Double-Dip Recession may not come, or if it does that it won’t be a repeat of The Great Recession.  Several things have changed to offer you at least some safety, and several things have remained unfavorable.

15 Things That Have Changed…

The Dollar peaked against the Euro at $1.20 in June and is now back above $1.26.  The markets needed the Euro to stabilize so that U.S., China, and other countries could still compete when it comes to selling products in Europe.  That same stabilization is tied to the notion that perhaps Europe is not to implode and that the Europeans were going to be out of the world economy for a while.  The PIIGS may still get slaughtered, or maybe not.  The good news about the Euro’s pre-June slide is that now Europe can export competitively again.

As far as currencies, the de-pegging of the yuan against the U.S. Dollar was part of the problem.  There may have been a mountain made of a molehill from the promises for a more market-based currency out of China.  It did not take too long for markets to figure out that China’s promise is merely a slightly new target range and its currency is not really going to allow the market to be the judge like the euro or yen.  Will this rise add to manufacturing costs out of China? Yes.  Will those costs escalate to the point that inflation gets out of hand immediately?  No, or at least there is less of a thought on that line.  As far as relations not getting too bad, China has even renewed the license for Google Inc. (NASDAQ: GOOG) to operate in the country despite the company-government fight.

Spain and Portugal sold bonds.  Bloomberg showed on July 1 that Russian banks had some $2.5 billion in various bond sales, the most since 2008.  Other bond sales from Eastern Europe have gone off rather well in the last two weeks when you consider the flow of headlines over the last six weeks.  To show how some recovery has come in some PIIGS bank ADRs, National Bank of Greece SA (NYSE: NBG) has recovered 15% from its absolute lows and The Bank of Ireland (NYSE: IRE) is up 23% from its absolute lows.  Jean-Claude Trichet, president of the European Central Bank, is arguing against the double-dip recession argument.

Longer-dated Treasuries are not signaling the next wave of the Great Recession all over again as the yields are now back over the 3% and 4% hurdles.  By late-June, the 10 and 30 broke back under the 3% and 4% hurdles for the first time since Sept/Oct-2009.  The 10-Year is yielding 3.04% and 30-Year 4.03%, not bad considering that the 10-year low yield seen was 2.88% and the 30-year low yield seen over the last week or so was 3.83%.  The stock market sell-off and added fears along with more and more waves of global concerns that government deficit targets would limit global economic recovery and growth all played into the fears. At least for now, the yields are back above those.  The Barclays 20+ Year Treasury Bond Fund (NYSE: TLT) has sold off more than 2% from peak to trough in just the last three trading sessions.

On stocks, the S&P 500 held above 1,000 and DJIA is now back over 10,000.  The SPDRs (NYSE: SPY) reached ‘only’ a low of $101.13 and the DIAMONDs (NYSE: DIA) is back over $101.00 after hitting a low of $96.17 in the final week of June.  Maybe you can count it on a post-quarter-end rally and the notion that funds can now invest in what they want to again, or maybe it is on a general easing of fears.  All of the chartists calling the gloom and doom and the return to 6,000 DJIA (or far worse) came at the peak of selling and those charts have for now at least not rolled over further.  For now, this is still an issue that could go either way.  The good news is that the most recent market recovery is a help.

The implosion of big oil (and oil prices) might not be quite as dire as many feared.  BP plc (NYSE: BP) has at least somewhat stabilized.  There has been talk for the company raising capital, and there has been refuting of its need to do so to help fund that $20 billion commitment.  Yes, their problems are likely to continue for years, but a stabilization there will keep the rest of the major integrated oil companies (which are large DJIA and S&P 500 components) from sliding endlessly.  In the last 60-day period or so, Exxon Mobil Corp. (NYSE: XOM) slid more than $10 from peak to trough and shares are closer to $58.50 and more than $2.00 off the lows.  Chevron Corp. (NYSE: CVX) slid about $15 from peak to trough in the same period and above $71.00 gives it a gain of almost $4.50 from lows in recent days.  Oil also bounced and did not go well under $70.00 in a sign that demand was going to dry up all over again.

Central banks were net sellers of gold (maybe), taking advantage of high prices and likely to send a signal that banks do not want the shiny yellow stuff from making too much inflation… This is up for debate, and some may even consider it inaccurate.  Stories have been out that this was the Bank for International Settlements, and there have been pros and cons speculated on this.  It may not be a total win for keeping gold from screaming endlessly.  Still, gold became too expensive and slid.  The SPDR Gold Shares (NYSE: GLD) had reached briefly above $123.56 by June 28, yet this went as low as $116.10 on Thursday before coming back above $118 on Friday.

As a counter to the pro or con against and for other commodities and gold, some of “the risk trade” was put back on this week.  Commodities and transports rose.  Machinery and basic materials rose, partly in hope and from reports that Australia won’t go after such a strict target on profit taxes and in part on the hope of continued global demand from many emerging markets.  Even fertilizer gained.  Caterpillar Inc. (NYSE: CAT) is up over 10% Potash Corp. of Saskatchewan, Inc. (NYSE: POT) is up over 10% from trough to peak this week.

IPOs are resuming, slowly, with a mixed fanfare.  Using IPOs as a market barometer is never easy, nor is it entirely accurate.  But a market with no IPO activity is rarely considered a strong market.  The huge AgBank IPO came off in China, and Tesla Motors, Inc. (NASDAQ: TSLA) has at least managed to recover enough from the selling that at least for now it is no longer a busted IPO.

Mergers and acquisitions are not dead.  The pace seen in M&A is not as robust and many deals may have had to be put on hold due to price.  But small deals are still being announced, and there is still hope that M&A can resume in the late-Summer and into the latter part of 2010.  With cash at record levels, any signs that stability will remain will bring about more cash deals.

The dividend taxes in 2011 might be kept somewhat lower than feared due to the election this November, and may be partly due to some reality checks.  Many companies raised their dividends starting late in 2009 and throughout the first months of 2010 after a long pause.  The rate of 15% tax on dividends is going to be gone for many, although that rate or a still-acceptable rate might be kept on the table for those individuals making under $200,000 or families under $250,000… This is still more of a wild card than a win and could still go the other way, but hope and possibilities are often enough to drive stability.

Transportation and tourism is still soft in many markets, but have you flown or rented a car or booked a hotel room lately?  The planes are packed in major routes, and cars and room rates and availability are far less favorable for the consumer compared to any time on 2009.  The deals on flights are long-gone.  Ditto for hotels and cars, at least outside of the Gulf Coast oil spill area.  Even casinos and resorts have visitors.

We entered the third quarter with far fewer companies issuing earnings warnings than some might have expected.  Analyst estimates and targets may be coming down some, but the large companies that did warn about net results did so more on currency effects and on issues from taxes and even healthcare costs rather than an outright implosion of demand for their products.  Many of the major companies have record cash on the books, and Blue Chip stocks are back close to very low multiples.

The fears that instant rate hikes are coming have dwindled.  Our own poll of results so far had the largest percentage by far, of 49%, answer that rate hikes are more than a year away.  If stability comes, and if we se more than just India, South Korea, and Malaysia raise rates the rate hike game could be afoot again.  Inflation has been kept low and the rapid recovery is turning into a more muted recovery that has less and less stimulus and rescue money adding fuel to the fire.  There is still a risk that this means no real growth.  That has of course added fuel to the double-dip recession, but even the bulk of the double-dip recession camp is not looking for repeat of the panic seen from the end of 2008 into the first quarter of 2009.

The fears and building pressure points going into the 2007 and 2008 period before the meltdown had far more fluff and far more inflated asset prices with far easier credit than today.  The DJIA Peaked over 14,000 in the peak of 2007, but went to under 7,000 at the peak of panic selling in early 2009.  This last recovery in the market took us from under 7,000 to 11,000 before the 2010 selling took us to back under 10,000 last week.

What Remains Negative…

The jobs market is still atrocious.  While jobs reports are no longer heading off the cliff, this remains a jobless economy.  Recovery or not, the only great hiring agent so far was the Census Bureau.  That is now gone. This continued weak jobs market has led to lower confidence from consumers of late.  The unemployment figure itself has arguably been misleading along with an unofficial unemployment rate.  The weekly jobless claims are still coming in well above the 400,000 per week threshold, which is more than 100,000 higher than where it needs to be for unemployment to really improve.

Investor pessimism has been weak and is still weak.  This week’s gains may change that in next week’s surveys and polls.  Some argue that large investor pessimism is the biggest bullish indicator.

Whatever the tax code and tax brackets for those who can afford to buy things will be, it is an unknown and the verdict will possibly have an impact on the economy for years.  The attack on wealth is still there.  Cheered by many, hated by many of those with income being targeted.  The argument that taxes are only going back to where they were under Clinton can easily be countered by the reality that the growth rates and opportunities that lie ahead are far less in America compared to the 1990’s.

Europe and some emerging markets are still likely to see much spotted trouble or some outright trouble continuing.  The banks (including the U.S.) remain under pressure via taxation, regulation, reserve requirements, awful demand for loans, and on and on.  Many savvy investors still expect the implosion of governments over the debt levels.

There has now been close to a two-year decline in consumer credit.  Families are borrowing less.  Some is by choice, and some is of course from families continuing to lose credit.  This is not expected to change.  If it does, it is not expected to be a return to anything major.  It is also easy to argue that credit needs to keep coming down.

Housing remains more of a wild card than a win today.  That is why housing was not mentioned above in the what has changed for the better.  Housing prices are not really rising, and all of that tax-benefit buying has stalled even if the extension may help some.  The days that the public get to use their homes as a piggy bank to buy more toys and second houses is gone and won’t be back for years.  Mortgages are at all-time or near all-time lows, yet getting that mortgage remains elusive or next to impossible for much of the country.  There is a backlog of foreclosures that have not been seen and there is still a huge shadow-inventory of housing and property being held by banks in front of that.  Reports on the commercial real estate market keep coming out against any suddenly great business climate.

The trillions of dollars that have been committed for stimulus and ongoing bailouts are still out there, somewhere.  Many still fear that will ultimately bring about hyperinflation.  All that deficit spending from governments to save the system could ultimately lead to a no-way-out scenario where those countries that have the right to print money will pay back their debt in the same manner Germany tried to before World War II.

Economic growth is not likely to return in a sudden and massive way.  The “New Normal” is viewed as an economy of much tighter regulation, much higher taxes for the wealthy and for corporations, higher government spending, and consumers living with less and enjoying far less opulence than in prior years.  It is even arguable that the recovery was merely a stimulus and stability recovery matched merely by an inventory replacement cycle with no follow-on gains.

The rules of the game are being changed without consideration of precedent and without consideration for what it means in the future.  Sudden bans on offshore drilling, sudden retroactive damage caps, sudden big-bank taxes ahead, the ultimate destination of Fin-Reg, unknown expenses for carbon taxes, ongoing healthcare changes, and on and on.  This is cheered by some, hated by some, and is doubtlessly a corporate planner’s challenge for some time.

Earnings season remains a risk.  While many companies will talk about currency and healthcare and other charges impacting the net this year, it is the top-line and the stability of revenues and spending that are likely to take precedent.  Many sectors are already down 10% to 20% since the start of the last earnings season.  The stocks in the consumer sector and the oil sector have been pounded, giving a buffer against most news that is not back toward the levels and concerns seen during the Great Recession.

There are still risks in stocks.  This week’s recovery rally does not offer any insurance against lower share prices in the days or weeks ahead.  Stocks are a benchmark and driven by the supply and demand for them.  Nothing, besides put options or keeping all assets in cash, can protect an investor from falling stock prices.

The markets are still jittery to headlines.  That is not likely to change.  Credit ratings agencies are still more likely to be cautious against sovereign nations.  That may be ignored or it may create more panic.  Former Fed-head Alan Greenspan recently added fuel to the fire, but the markets have so far recovered.

And Finally…

Admittedly, much has been brushed over here.  There is no way to hit every single data point.  If you ask someone else to draw their own independent pro-con argument, the result will depend on where they are a “glass half-full” or a “glass half-empty” person.  It might even still be determined by their geography as many sections of the country remain very challenged.  Autos and manufacturing have been merely skimmed over, and Ford Motor Co. (NYSE: F) is still the only auto company that got through the recession without Uncle Sam’s bailout.  Issues like Afghanistan and Iran remain with no real resolution seen.  The fall elections are all still up for grabs.  The ultimate path of government and regulation is about as murky as vast parts of the Gulf of Mexico.  Taxes remain a huge wild card in 2011 and beyond.

From every recession comes growth.  Growth may be just a bounce from a lower level, and “The New Normal” was a promise of that being the case.  But every recovery period is also followed by immediate warnings of an impending double-dip recession right around the corner.  The argument is also always that “this time is different.”  This time does feel different, but it also needs to be noted that almost all double-dip predictions turn out to have been missed opportunities.

You can see the conundrum that exists here.  You could draw up a Ben Franklin T-Chart and come to opposite conclusions based upon the exact same data.  Half would say, “See, you sell.”  The other half will say, “See, you buy.”  Either way, go look at the tone of Warren Buffett’s outlook from the Berkshire Hathaway Inc. (NYSE: BRK-A) 2010 annual meeting of holders versus the same in 2009.  Almost night and day, despite continued caution.  Slower growth, but no return to The Great Recession.

The last thing to consider is this: even if there is a double-dip recession, getting back to the peak panic of The Great Recession is extremely difficult to justify.  Take yourself back to late-January and early February of 2009.  We had lost Lehman and Bear Stearns and the mentality of the public at that time was that all major banks were then at-risk institutions.  The markets were in free-fall, and the return of The Great Depression was a fear held by many.  There was talk of the banks no longer functioning and people were buying guns and physical assets that could get them through a long-term barter economy.  Literally.  There was even fear that unemployment, the government’s official headline unemployment that is, would read 15% or far worse.  There was a brief period of an implied risk that General Electric Co. (NYSE: GE) was not going to survive along with dozens and dozens of other key institutions that make up the economy.  GE’s stock went from north of $40 to under $6 in less than 18 months.    After everything we have seen so far in the economy of late, even if a double-dip does come, it seems that it might be dubbed “The Mini-Recession” rather than “The Great Recession, Part II.”  The other, and unfortunate, side of the coin is that robust growth is on very few radars right now.

At the end of the day, the ticker tape is what will be the winning factor and the final judge of how things went.  It is at least the most easy yardstick for measurement.  At least for now, the read of this week going into earnings season is that a repeat of The Great Recession is not as likely as many worried as recently as the end of June.

JON C. OGG

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