Are you kidding me.

Congress implemented the cash for clunkers program. This one billion-dollar bailout of the already bailed out auto industry has been a stunning success with the entire amount being depleted in only six days. The auto industry continues to be on life support, while Congress is debating doubling the cash for clunkers program to a stunning $2 billion, all on the backs of taxpayers. This is the nature of stimulus, and we can all rest assured that more money will be spent to bail out broken industries, failed business models, and the systematic rewarding of the least productive members of our society.

The unemployment rate in the state of Rhode Island is estimated to be around 12%, which is the second highest in the nation. It is suprising to me how full restaurants are, given these astounding rates. The restaurant owners that I have talked to say business is down well over 30% on a year over year basis. Although the same people are going to the same restaurants, their eating habits apparently have changed. They are ordering less food, skipping desserts, not ordering the same wines or keeping their selection to a minimum. This dynamic will have a deflationary effect on local businesses as these businesses begin to compete on price rather than value. Competing over price instead of value never works out in the end for any business. We have seen examples of this in the financial service industry right after the Internet penetrated the vast majority of our population. There was a time, for example, that a person would go to their stockbroker to buy their stocks. Buying stocks at the time before the Internet age was in fact a monopoly of the large firms that are mostly gone today. But the Internet changed all that, and discount brokerage firms started popping up and offering customers of these former large mostly bankrupt firms, an alternative to purchasing these stocks at a significantly lower cost. The competition then began to be about price, rather than the overall value. The net result of this dynamic as we have recently witnessed, has been the destruction of that industry. This was the first shoe to fall that put these firms down the path of bad behavior. This was a perfect example of a failed business model that should not be bailed out.

As prices for goods and services continue to fall in the short-term, this dynamic should improve consumer sentiment, and result as a net positive for the stock markets.

There is no question that we have seen inventory liquidation taking place in America. The magnitude of sales promotion programs at the retail level have been massive. The problem is sales have fallen at about the same pace as inventories have declined. The inventory to sales ratio is almost unchanged over the past year. For an inventory replacement cycle to take place, inventories must be depleted and there has to be an incentive to restock the inventories. Businesses need to see a light at the end of the tunnel, otherwise they will not or cannot restock depleted inventories.

Either sales must rise or inventories must fall further in order for the economy to find its equilibrium. If sales rise, then GDP is going to improve. If inventories fall, further deflationary effects will be felt, and the stage might be set for a genuine rebound in manufacturing, as lower prices increase demand. What worries me most is how small and medium size businesses will continue to cut costs. Once the fat is cut out of a business, the only thing left is further layoffs of the workforce. The unemployment rates will get worse before they start to improve.

We are already hearing chatter about the recession being over. In technical terms, these predictions could be correct, but the reality of this recession is the massive overreaction of the federal government and the Fed. The overreaching regulation and massive bailouts by the government of failed banks and industries will result in numerous unintended consequences. For example, I believe we have entered a long-term bear market for bonds. The government's massive borrowing will crowd out the private sector, and raise interest rates for decades to come.

We should see markets rising in the short-term, because of government bailouts and interference in the free markets by the Fed. None of these policies are sustainable, and they will not stimulate entrepreneurship and ultimately job growth in the private sector. Look for a double dip recession late in 2010.

Tell me what you think?

Interesting times.

The S&P 500 is now up nearly 100 points or 11% in a matter of nine trading sessions. Short-term, the market may be getting ahead of itself as bullish sentiment are just as high today as the Bears were confident a few weeks ago. This market has been notable for its head fakes, so it will be interesting to see if the indices can hold on to their gains.

Better than expected second-quarter earnings numbers have consistently been a product of lowered expectations and sharp cost cutting, i.e. job cuts. Generally, cost-cutting has successfully improved bottom-line results. Despite shrinking topline sales. The bad top-line/good bottom-line theme has been very consistent in the second quarter reporting period. While the headlines have been bullish, there are still plenty of question marks for the economy moving forward. The biggest question mark for the stock market is whether Corporate America can still grow its bottom line in a weak economy without resorting to further cost-cutting measures, job cuts etc. Or, will topline continue to shrink along with the economy and lead to disappointed investors in the future quarters?

Given the way second-quarter earnings have played out, my focus going forward will be on the health of the US economy. It doesn't take a rocket scientist to know that stocks will not do well if we continue to have higher unemployment rates, slowing business activity, and rising costs a.k.a. government spending and tax hikes. It will become obvious if we are in the second leg of a new bull market, or if we simply had an unmistakable head fake where we will go to new lows in the markets.

Tell me what you think?