Did you fall for 2009's biggest Wall Street lies?

Investors were repeatedly lied to, deceived and, as we can see from the unwarranted rally, duped. Here are the biggest lies of 2009.

By InvestorPlace Dec 16, 2009 2:15PM

InvestorPlaceBy Michael Shulman, InvestorPlace.com


The market staged an impressive rally this year, but it was predicated on some very big lies, as opposed to solid fundamentals or the beginnings of a real recovery in the U.S. economy.


The biggest lie investors were fed? That, statistically, the recession "officially" ended in Q3 when we saw 3.5% GDP growth. Sure the Bureau of Economic Analysis revised their number substantially in November, saying we only saw 2.8% growth, but this was growth nonetheless -- according to the statistics.


In the face of Depression-level unemployment, a worsening housing market and weak consumer spending, statistics don't mean much. What, you heard that unemployment bottomed at 10%, the housing market was recovering and consumer spending was picking up again? More lies. In fact, here are five of the biggest lies from 2009.


10 Reasons the Economy Will NOT Recover in 2010


The recession is not over, and once you know the other Wall Street lies, it should be clear that you should expect nothing more than a flat recovery in the second half of next year. And that's the best-case scenario. It's very likely we may, in fact, see a double-dip recession.


It seems that Wall Street has yet to catch on to this fact. But when that happens, look out. Chances are that when they sit up and take notice, they will head for the exits (or a place to cash their bonus checks before they bounce). Don't get left in the wake -- take note of these lies and, more importantly, how you can profit from them once the wool has been removed from your eyes.


Lie #1 -- Unemployment will bottom around 10%.


Sure the unemployment rate fell from 10.2% in October to 10% in November, but the November data (and the December number when it is reported) are hopelessly skewed by seasonal adjustments. And another statistical adjustment, known as the birth/death adjustment, assumed 800,000 new jobs were created this year by the birth of companies compared to the number of jobs lost due to the death of companies. Really? If it were not so sad, it would be funny.


Beyond the adjustments, the number does not include people who want a full-time job but are only working part time, or those who have been unemployed for more than a year and still have not found work, because it is determined that they must no longer be looking for jobs. If you take these people into account, the real unemployment number is closer to 20%.


So the official unemployment number doesn't even come close to telling the whole story. And the temp agency Manpower Inc. recently reported that they expect to see more job losses in Q1 2010. My guess is the headline number hits 12% by year-end.


Lesson for investors in 2010 -- Unemployment and the size of the workforce drive national income, and that will be lower in 2010 than in 2009, which will kill off any chances of sustainable economic growth. Invest accordingly.


Lie #2 -- The housing market is recovering.


Moody's reported that the rate of defaults on home mortgages has fallen to roughly 6.5% of all mortgages, and that the number will be slightly lower throughout 2010. They neglected to mention that the historical default rate is one-third that, or that the 2010 default rate on mortgages will be 300% higher than the historical rate.


Housing sales in 2010 will be worse than expected, and home prices will continue to fall as more and more foreclosed homes enter the market. There are currently more than 800,000 foreclosed houses that the banks have yet to put on the market, and another 1.5 million homes are expected to go into foreclosure in the next 18 months.


Lesson for investors in 2010 -- Don't bet on a housing market recovery next year. And realize that this sector will create a great shorting opportunity.


Lie #3 -- The credit crunch is easing.


The headline consensus on Wall Street is that the banks are stable and no markets are melting down. In short, things are returning to normal.


But we've seen a $1.5 trillion reduction in consumer credit during the past 18 months, and another $1 trillion (at least) is likely to be pulled back in the coming year, according to uber-analyst Meredith Whitney -- someone I wouldn't bet against. And almost no one is getting a home equity line. The credit crunch will continue in 2010, as lending standards remain high and banks horde their cash to stay afloat.


Lesson for investors in 2010 -- Less available credit means reduced spending in 2010 and beyond. Invest accordingly.


Lie #4 -- Consumer spending is returning to normal.


With 70% of the GDP driven by consumer spending, Wall Street wants to believe this lie so badly that it has convinced itself it's true. Even worse-than-expected Black Friday sales haven't forced the Street to give up this inane hope.


Real consumer wealth is down more than 40% in the past two years; credit is contracting and unemployment is rising. That is not exactly the recipe for increased consumer spending.


Lesson for investors in 2010 -- Companies that are dependent on discretionary consumer spending are going to get whacked.


Lie #5 -- China experienced double-digit growth in 2009.


If you think China saw double-digit growth this year, you may also believe swine flu is spread via flying pigs.


The London-based Lombard Group, using energy data from the International Energy Agency -- which we can assume is a bit more accurate that the nonsense printed by the Chinese government -- shows GDP growth may have been just 2% in the first quarter rather than the reported 6.1%. And even that growth is being held up by government stimulus and state banks lending money to anyone and everyone to build capacity no one needs or to invest in Chinese equities no one can fairly value since Chinese accounting is as good as Chinese government data.


Lesson for investors in 2010 -- Although it's likely going to be a while before it happens, the China bubble is going to burst. Keep some powder dry, because this will be the best shorting opportunity since the financials blew up in 2008.


These are just a few of lies we were fed in 2009. Check out the complete list of The 10 Biggest Lies of 2009 here.


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