The stock market rally of the past two months has been the most spectacular
of the current bear market. Yet this rally has materialized without a single
bullish prediction coming true about what would trigger it.

Let’s review the pre-Iraq invasion bullish arguments for stocks, none of which
actually materialized:

1. Supposedly, oil prices were only high because of the existence of a “war
premium,” and that if there was a quick victory in Iraq oil prices would
fall below $20 per barrel. With consumers no longer forced to spend so much
of their income on energy, they would be able to spend more on other items.
Oil prices are currently at $31 dollars per barrel and rising.

2. The dollar, which was theoretically only falling because of anxiety over
the war, would rally after a quick victory, attracting more foreign investment
into U.S. markets. The dollar index has fallen an additional 10% since the
invasion to a new 7-year low.

3. Gold prices, which in theory only reflected a $50 war premium rather than
anxieties about the U.S. dollar or the U.S. economy, would fall back below
$325 per ounce. The current price of Gold is $365 per ounce and rising.

4. Employers, who were putting off hiring because of uncertainties over the
war, would begin hiring after a quick victory. The weekly unemployment claims
and today’s release of the May non-farm payrolls shows that not only has this
hiring spree failed to materialize, but the economy continues to shed jobs.
This is particularly true in manufacturing, even with the weakness in the U.S.
dollar. As a result, America’s trade deficit is likely to grow further as Americans,
rather than buying more domestic goods, will simply pay more for imports.

5. Businesses, which were allegedly holding off on capital spending because
of war-related anxieties, would significantly increase capital spending after
a quick victory in Iraq. There is no evidence of any significant pick-up in
capital spending.

6. Consumers, who were refraining from spending because of war anxieties,
would increase spending after the war. This argument is ridiculous on its face
as consumers were already spending everything they earned and then some.

Basically, every prediction that stock market bulls made was wrong, yet the
market rallied anyway. Therefore this rally is based on nothing more than wild
speculation and short covering. In fact, given the terrible underlying fundamentals,
this rally is even more irrational than any we have experienced in the past
decade, and its end will therefore likely be even more spectacular. Look out
below.