Tuesday, March 18, 2008

Rally time? Don't think so.

The stock market roared today as the DOW moved up 3.5%. The Nasdaq was up over 4%. If you listened to CNBC you would have thought we were in the middle economic prosperity. Everyone was cheering the Fed cut. Analysts were turning bullish and calling bottoms. The Visa IPO was priced at the high end of expectations at $44. This incited more cheering that this is a sign that the credit markets are coming back. The bulls also chirped about how mortgage rates will drop because of the Fed cuts. Everything is just fine an dandy after seeing the news today.

So after hearing all of this many are starting to ask themselves is the bull back and ready to charge ahead? Ummm NO, sorry, not buying it. What I see is the picture above.

My take on today was that the bulls put on their best Sunday suit and tried to spin the fact that we have found a bottom and we are ready to move higher. They also seem to insinuate that the Fed is ready to bailout everything and might even buy off the bad debt from Wall St.(never gonna happen). So I guess we are now to assume that the economy is ready to boom after a week of bailouts, bank bailouts, and rate cuts? It sounds like a reason to sell instead of buy in my eyes. These fixes are nothing but signs of weakness in the economy.

It sounds to me like the Fed agrees. How can anyone be on the bull side after hearing their statement?

Here it is take a read from 2:15 today:

"Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.Inflation has been elevated, and some indicators of inflation expectations have risen.

The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability"

Downright gloomy isn't it? Its very rare that the Fed is this blunt about the state of the economy. Usually they like to tip toe around and not rock the boat. They are obviously seeing deep problems and the consumer pulling back. Remember the CONSUMER is 70% of the ECONOMY! If we stop spending then the economy goes nowhere.

Why did the consumer stop spending? Geez there are so many reasons. Let me try a few:

Higher mortgage payments, inflation pressures from food and gas, higher unemployment, stagnating wages, drop in house value which stops the consumer from pulling money out of appreciation, credit card default increases. Bottom line is the consumer simply can't spend anymore. Look at car and retail sales the last couple months if you want some evidence.

If you want more evidence just look around you. I see the financial pressures all the time with my own friends. Many are struggling with mortgage payments and can't sell their houses. One friend bought from a builder only to watch the same builder sell the same house a year later in the same development for $50,000 less. I watch the prices of things I buy go up monthly. When I am out in the city I never see cash anymore. I see nothing but credit cards. Are you seeing the same things? Sometimes I get angry with the financial press because they are so busy trying to sandbag us into thinking everything is ok that they forget that people are struggling out there.

A quick comment on the financials today:

I had to laugh when listening to the banks(Lehman and Goldman) talking about how strong they are. Goldman said today during their conference call that we have never had so much liquidity!!! Well then why don't you open up your books and show how many bad loans you have if things are so damn good? I ask the same question to every other institution!

The reason you are hearing such confident, bullish statements from the financials right now is because they actually feel the exact opposite and their balance sheets have never been so bad. This is a crisis of confidence and trust and they are trying to increase confidence by pounding their chest like King Kong.

Final conclusion:

Don't assume that this crisis is over. The DOW may rally 1000 points from here and it doesn't matter IMO. We will not see higher highs in this market until the following happens. The banks are transparent and write off their bad loans and allow trust to come back to the markets. Housing MUST return to affordability which would also go a long way towards getting the consumer back on its feet. The Fed MUST get out of this bailout mentality. These bailouts, arm freezes, rate cuts do nothing but delay the pain that is inevitably needed for the market to feel and then recover from. Recessions are healthy and bring balance back to our financial system. Until I see these changes I think the market will continue to churn in its choppy, violent,volatile ways.

1 comment:

Anonymous said...

Wow - this post is something. It was your chance to "flip the switch" from bear to bull that we all must do and you missed it. By being a permabear, you went from being right on everything beginning of the blog til now...and wrong on everything from now when you closed the blog out of shame in 2015.