Is the Relief Rally Over?

Happy Monday everyone!

What an interesting day in the markets. After watching the market action the last few days I am starting to believe that the Bear Stearns relief rally may be coming to an end.

The news flow continues to be bad and Wall St. is now starting to question where the earnings are going to come from going forward as more cuts were announced by the financials today.

The market is starting to focus on the consumer as oil continues to rise to all time highs. The market gave up almost all of its gains based one little profit warning from SanDisk, who claimed higher oil prices are starting to affect "consumer behaviour".

Here is the warning from SanDisk on Bloomberg:

"May 19 (Bloomberg) -- SanDisk Corp., the world's largest maker of flash-memory cards, fell the most in two months in Nasdaq trading after Chief Executive Officer Eli Harari said sales to makers of consumer products were ``soft'' last month.

Rising oil prices have prompted consumers to tighten their budgets, Harari told analysts at a conference sponsored by JPMorgan Chase & Co. today. Milpitas, California-based SanDisk's memory cards are used in consumer electronics such as digital cameras and media players.

``Gas prices are weighing and will weigh on consumer patterns,'' ThinkPanmure analyst Vijay Rakesh said in an interview today from Chicago. ``Demand is a little soft.''


Quick Take:

Duh. Anyone who can't see this coming as gas hits $4 a gallon needs their head examined. Remember, gas really didn't get up to the $4 level until around April. The consumer is also facing the reality that the spring selling season in housing has been a bust, and housing prices are going down month after month.

Banks are also pulling home equity lines right and left which is putting further pressure on the consumer.

Wall St. continues to crow that the worst of the credit crunch is behind us. I have yet to hear one good explanation from a bullish analysts as to where the new growth will come from going forward.

How can we continue to grow when you read this type of news:

Banks fail to disclose $35 billion in writedowns:

"May 19 (Bloomberg) -- Banks and securities firms, reeling from record losses resulting from the collapse of the mortgage securities market, are failing to acknowledge in their income statements at least $35 billion of additional writedowns included in their balance sheets, regulatory filings show."


Or how about this one?

"May 19 (Bloomberg) -- Take away Exxon Mobil Corp., Chevron Corp. and ConocoPhillips and profits at U.S. companies are the worst in at least a decade.

Without the $70 billion that oil producers earned in the last two quarters, profits at companies in the Standard & Poor's 500 Index tumbled 26 percent and 30.2 percent, the biggest decreases for any quarter since Bloomberg started compiling data in 1998.

Energy companies made up almost half the income growth reported by S&P 500 companies in the first three months of 2008 as oil prices surged past $100 per barrel, the data show."


Or how about this piece on the economy going forward:

"May 19 (Bloomberg) -- A normal U.S. economy is likely to look a lot different, and worse, after the credit crisis is over and financial markets settle down.

Companies will continue to struggle to raise cash for expansion and innovation as investors and lenders remain focused on conserving capital. Workers, too, may have less flexibility to go after new opportunities, because many will be stuck where they are -- in homes worth less than the balances on their mortgages.

``Once you've made terrible, overly optimistic errors, that paralyzes you for some time,'' says economist Paul Samuelson, a Nobel laureate.

The bottom line: The U.S. may have to get used to a new definition of normal, characterized by weaker productivity gains, slower economic growth, higher unemployment and a diminished financial-services industry."


Final Take:

There were 10 other examples I could have put up here proving that the bull market is grinding to a halt. Without the energy boom the past few months, the S&P 500 would have gotten slaughtered. Profits were the worst on record according to Bloomberg.

The consumer is dead and paying too much for their homes. In the meantime they are getting socked in the mouth by inflation.

Wall St. is beginning to look like a graveyard. CNBC reported that the financial firms on Wall St. may cut 15% of their workforce. You don't think that's going to leave a mark on the economy going forward?

Expect stocks to sink after this reality begins to set in. If commodities start to loose steam based on weaker demand then there will be no place left for the speculators to make money.

This might be a good exit point if you have some stocks that you have been looking to sell. Its going to get worse folks.

Wall St. may have relieved itself with a nice rally, but they need to start asking themselves "Now What?".