Friday, April 3, 2009

"Delusional" Market Rolls On!

Happy Friday to all!

Well Folks,

We saw another bullfest on Wall St. as stocks continued to move higher albeit mildly. So why did we move higher? Who knows? We all know sometimes the market beats to its own drum. The data continues to worsen so its not based on fundamentals.

For now, the bulls have successfully created a feeding frenzy based on speculation that the economy has bottomed. Combine this mania with a few interventions from the government and you create the perfect makings of a strong bear market rally.

Stocks popped late in the day as news spread that the "uptick rule" appears to be coming back:

"April 3 (Bloomberg) -- The U.S. Securities and Exchange Commission is considering dictating when traders can bet that stocks will fall, after lawmakers said short-sellers fueled the financial crisis by driving down shares, according to two people familiar with the matter.

The agency may offer two proposals April 8 that would place more stringent limits on bearish bets than a plan backed by four U.S. stock exchanges, according to the people, who declined to be identified because the proposals remain under discussion at the agency. Since taking over in January, SEC Chairman Mary Schapiro has faced pressure from Congress to reinstate the so- called uptick rule, which required traders to wait for a price increase before executing short sales."

Quick Take:

After this potential sticksave you need to ask yourself: Are there any left? I actually don't have a problem with reinstating this rule in some form. Some companies were destroyed as a result of being power driven down to zero by groups of short sellers.

However, blaming the shorts for this debacle is flat out ridiculous. Point the gun at Wall St and their risk managers if you are looking to blame someone. One negative to reinstating this is you pull even more liquidity out of the market. You may not like the shorts if you are a bull, but they did put money into the market.

One of the main problems this market has is a lack of liquidity. Forcing some of the shorts out of the game only makes this problem worse.

Why the bulls have it wrong

This recent move in my view is based on the bulls using the classic "recession playbook" that has been successful every time over the past 25 years. The playbook says buy stocks as the economy bottoms. The problem here is this isn't your average recession! This is an economic collapse. No one on Wall St today has ever invested in this type of market.

The bulls have attempted to play the same "recession playbook" several times throughout this crisis and they have been taken out to the woodshed and shot every time they have tried it.

How do they know the economy has bottomed? The statistics say the exact opposite. Things are worsening folks.

The jobs number today is a perfect example:



The government announced today that unemployment soared to 8.5%. This is the highest unemployment rate since 1983. Anyone seeing signs of a bottom here folks? Yeah, me either. All I see is a parabolic move to the upside on unemployment as our economy continues to shred jobs at lightning speed.

I mean these numbers show you how different an animal this recession is compared to anything else that's been seen in recent history. I mean look above and compare the unemployment rate to the tech bubble. The tech bubble along with '73/74 are the two worst recessions seen in recent times.

When you compare this collpase to the tech bubble from an unemployment perspective it makes the the tech wreck look like a bull market!

The tech recession at its worst saw the unemployment rate briefly touch 6% before pulling back. The tech wreck jobless claims peaked at a rate of 250k to 300k a month. When you compare this to our current jobless claims rate its not even close! We are currently running jobless claim rates of 600-700k per month. This is more than twice what was seen during the tech collapse which one of the worst recessions in recent memory.

Remember folks, the economy is all about jobs and consumption. People can't spend if they aren't working. They also can't make their debt payments.

Ben's Quantitative Easing Disaster

The Fed will be having nightmares tonight after watching the 10 year soar today:

Final Take:

This isn't what the Fed had in mind folks: Yields are soaring on the 10 year. When the Fed's QE policy was announced, rates on the 10 year dropped from 3% down to 2.5%. As you can see we have given almost all of it back. We closed today around 2.9%

This is what happens when our government spends trillions of dollars that they don't have attempting to bailout America. Money is getting more expensive to borrow because our deficit is soaring at an alarming rate. Consider this to be a shot across the bow from the bond market. This may prompt the Fed to do one of two things:

Option #1 is they will ramp up their balance sheet and spend billions on treasuries in order to keep rates low. Option #2 is they could create a market sell off by pulling liquidity from the market which then scares private money into the bond market which results in the same effect as option #1: Treasury demand increases.

Option two has been done before many times so be wary if you are on the long side.

Bottom Line:

I stayed short into the weekend on the S&P and treasuries. The latter trade worked nice today as the 10 year soared.

Chasing this rally here appears to be suicide in my eyes. The fundamentals remain weak, and the jobs report is flat out frightening.

I continue to see the perfect storm for a deflationary collapse aka Japan in the 1990's. The risk reward on the short side appears to be much better at these levels after watching the credit market today in combination with another horrible jobs report.

I am still placing small bets and scaling into this rally. The one thing that we all know is the market can stay irrational for a lot longer then most traders can stay solvent. I will continue to respect this move to the upside and continue to scale in short.

SRS dropped into the 30's today as the REIT's continue to stay alive via creative financing. CRE is still a mess fundamentally and getting worse. Office vacancy rates just hit 15% according to the WSJ. Need I say more? I am looking at June PUT's on the IYR instead of SRS for future CRE plays. I haven't pulled the trigger yet but I plan on picking some up on Monday. Some of the OTM's PUTS on the IYR are now under a buck.

Happy Friday!

6 comments:

Steve said...

A fantastic read...Thanks..

opportunistic said...

Everything's fine :)

Jeff said...

Steve

Thanks

Appreciate the support

Jeff said...

Oppor

Good to hear from you!

Been awhile. Hope things are well

opportunistic said...

Thing's are great, except for my infatuation with SRS. Been reading every day and beginning to feel dejavu from last summer when ALL news was not as bad as it could have been. Mostly sitting and watching in amazement, wondering how bad this thing really is and when the dam will burst.

Nice to see the reader base growing, I hope that's a sign of a more independent thinking public.

Thanks for the outstanding insight & research.

Jeff said...

Oppur

Good to hear things are well. I hear u. I am sitting back and thinking the same. Srs was painful. I hope todays post helped. I am starting to scale in short now. The uptick rule could take us higher but I don't see much upside after that. I will scale in further on any bounce from the uptick ruling because I think that the last bullet in the gun.