Weekend Reading: Assessing the Bounce

Welcome to another edition of Weekend Reading. First, a look back at the week that just finished, then a look forward to the week ahead and, lastly, a summary of some articles and papers worth reading.

Last Sunday I wrote that the markets were poised for a bounce higher, but I didn't mean it would occur this week, or that a large bounce would take place all at once. Nevertheless, a big, concentrated rebound is what we got this week, with the Dow and S&P 500 rising 11.4% and 10.5%, respectively, while the Nasdaq gained "only" 10.9%. Staggering stuff.

It was the best week on the Dow since 1974, and one of the top ten weeks of all time. Of course, other than '74, the rest of the better-performing weeks were during the Great Depression, which should tell you something. Nevertheless, investors are petrified that a bottom is in, and that, combined with the number of bears and strategists newly turned bullish, had investors chasing stocks around the block last week.

Does that means we can now begin looking forward to the economic recovery? Yes and no. The right focus remains the length and severity of this downturn, as I've written here before. My concern, however, is that investors are badly underestimating two things. First, this is likely to be a longer and deeper downturn than the current consensus believes. Second, when we come raging out the other side we are likely to see massive shortages and commodity inflation.

It's also worth pointing out there is an election in the U.S. this coming week. Whoever wins is likely to wish he hadn't, and if the polls are to be believed it will be Democratic candidate Barack Obama. He will have the unpleasant task of presiding over the U.S. as it goes from the current economic crisis, to underfunded Social Security liabilities, to predictable environmental issues, to an energy transition, all over the next four to six years. The next U.S. president is going to wonder why he wanted the job so badly.

Turning to economic indicators, next week will be a busy one, with the focus being on the October U.S. employment report, which is due out Friday. It's expected to show 200,000 in nonfarm payroll losses in October, which will take national unemployment up to 6.3%. Some other reports worth watching include the Institute for Supply Management (ISM) report on manufacturing, due Monday, and the ISM services report, due Wednesday. If both don't show contractions in October I will eat my keyboard.

Turning to earnings, next week will see oodles more crummy third-quarter reports, including results from Anadarko Petroleum(APC Quote), MasterCard(MA Quote), Cisco(CSCO Quote) and Sprint Nextel(S Quote). (The Mastercard and Cisco reports will be watched particularly closely, albeit for different reasons.) Reuters notes that 59% of S&P 500 companies have reported, and, on average, their earnings declined 23.8% for the quarter.

Finally, here are some articles and papers worth reading:

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• Capital-spending cuts delay oil sands projects. (Oil & Gas Journal)
• Barron's touts surprisingly bullish fund manager poll, and picks Fifth Third(FITB Quote), KeyCorp(KEY Quote) and Molson Coors(TAP Quote). (Barron's)
• Salesforce.com(CRM Quote) CEO Marc Benioff still being bullish in interview. (San Francisco Chronicle)
• Britons are far better at frugality than conspicuous consumption. (Telegraph)
• Robert Shiller on why economists missed the crisis en masse. (The New York Times)
• Time-varying risk of rare disasters. (Wharton)
• 10 Questions for T. Boone Pickens. (Time)
• Questions for James K. Galbraith (The New York Times)
• What is the U.S.'s real dependence on foreign oil? (EIA)
• Nonprime MBS Issuance Hits Record Low in Third Quarter of 2008: Zero. (International Monetary Fund)
• Upcoming financial summit with world leaders is likely to disappoint. (The WashingtonPost)
• Fear of Deflation Lurks as Global Demand Drops. (The New York Times)
• Series of explosions disrupting Canadian natural gas pipelines has regional source. (Globe and Mail)
• First Solar's(FSLR Quote) peek at 2009 surprisingly positive. (Fortune)
• The looming super-subprime crisis: Social Security plus Medicare. (Fortune)
• Are you a high earner but not rich yet? Higher taxes ahead. (Fortune)
• IPO market showing a teensy amount of life. (IDD)
• How Goldman Sachs(GS Quote) is trying to survive in a new financial world for which it is ill-adapted. (Bloomberg Markets)
• How Las Vegas came crashing down in a frenzy of "liar loans" and fraud. (Bloomberg Markets)
• JPMorgan Chase's(JPM Quote) muni bond problem. (Bloomberg Markets)
• Does Asia harbor an Iceland? (Bloomberg)
• Electric-car race could strain lithium supply. (CNET)
• The Economist endorses Barack Obama. (The Economist)
• The myth of diversification. (The Economist)
• How the housing bust is hitting Canada. (Globe and Mail)
• Emerging markets face financing crunch. (Globe and Mail/Reuters)
• Fund managers learning all sorts of new ways to say "Whoops." (The Washington Post)
• Munis, Notes, Maturity: A Bond Primer. (The Washington Post)
• How the financial crisis spread from the U.S. outward, and then back again. (The New York Times)
• Fooling Some of the People All of the Time: The Inefficient Performance and Persistence of Commodity Trading Advisors. (NBER)
• Can a Lender of Last Resort Stabilize Financial Markets? Lessons from the Founding of the Fed. (NBER)
• Future Rent-Seeking and Current Public Savings (NBER)
• BT(BT Quote) forced into radical pension fund shake-up. (Times of London)
• Panic in eastern Europe as banks cut loans. (Bloomberg)
• Juan Enriquez on the credit crisis and path forward. (Infectious Greed)

1 What would best describe your stance heading into the coming week of trading? Bullish Bearish Neutral 2 Which of these sectors do you think is set to move up in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities 3 Which of these sectors do you think is set to move down in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities View the results without voting