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Ten Signs That This Is Not an Economic Recovery

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We're still 40% off the highs, with further to fall.

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By nature, I'm an extremely optimistic person. One of the challenges of being in the investment business is managing your own biases, as well as juxtaposing them with the onslaught of biases produced daily by Mr. Market. It's in this fashion that folks who were bearish at S&P 700 are now bullish 900.

As a manager of a long-based investment partnership, and for that matter, an interested American citizen, I certainly hope this recovery is the real McCoy. But there are many reasons to be cautious, and they are as follows:

1. Company share prices are moving more on macro news as opposed to company-specific news. It's one thing for comments by Bernanke to drive share prices. It's quite another for a company to deliver good, old-fashioned earnings growth. Right now our firm is long on the former and short on the latter.

2. Poorer-quality stocks are rallying. Take a look at the highly leveraged companies -- real estate investment trusts (REITS), financials, commodity companies, retailers -- and your head will spin at the number of companies whose share prices have tripled in the past 2 months. This suggests they were priced as if they were going out of business, and the idea that they'll survive has provoked a massive buying spree. For sure, there have been many shorts decimated in this furious rally, which has helped fuel the fire. But after the frenzy is over, companies will ultimately trade for a fair multiple of the cash they produce. In too many instances, the growth in earnings needed to justify current multiples seems impossible to achieve any time soon.

3. Companies have too much debt. The deleveraging cycle is in full force, and my fear is it will take meaningfully longer than most people expect.

4. The government is propping up the system. Where would we be if the government wasn't backstopping the banks, auto companies, and commercial paper market?

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No positions in stocks mentioned.

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