Tuesday, May 5, 2009

Market Pauses as the Stress Tests Loom

I must admit I did a lot of reading before starting tonight. Things are absolutely crazy out there and its hard to make sense of it all sometimes.

The market traded in a pretty tight range as it awaits the results of the banking stress tests. One thing that was interesting today was the huge volume. There were over 11 billion shares traded on the NYSE.

This action combined with the tight range tells you that the bears and the bulls are in quite a tussle right now as we head into the test results.

There are many rumors out there regarding the stress tests. SNL Financial is claiming that BofA and Citi need $54.8 billion and $71.8 billion of capital respectively. The Treasury supposedly has this figure at around $10 billion for each. Credit analyst Egan Jones reportedly believes that BofA may need $100 billion in new capital! Yikes!

The bottom line here folks is these estimates are a crapshoot. Trying to front run this news is a risky play if you are trading here.

Inflation or Deflation?

I am seeing so many conflicting signals around each of these in the market. I still believe deflation is the biggest risk.

The ISM number for April was much better than expected. However, this increase in demand has done nothing for pricing power:

My Take:

As you can see, prices continue to stay at very depressed levels which of course screams deflation. This is to be expected as the American consumer continues to recover from their massive credit binge.

At the same time, when I look at the markets I see lots of worries around inflation. China continues to buy massive amounts of gold. They now hold the worlds 5th largest stockpile. Could it be they are losing confidence in our treasuries and the US dollar?

I am also beginning to wonder if equities are also becoming a hedge for inflation. Are investors deciding that owning stocks is safer than piling up US dollars? This may turn out to be a wise move if the government continues to pillage our currency by spending like Paris Hilton on a shopping spree after a cocaine binge.

I have not come to any firm conclusions yet. Yale's Robert Shiller(whom I deeply respect) was on Bloomberg TV yesterday telling investors that they need to spread out their risks by buying stocks and real estate! This was an eye opener for me. When the man who helped create the famed Case/Shiller housing index makes this type of call on real estate you need to take notice of it.

BTW, the print article link that I included to Shiller's comments makes him sound much more bullish than his tone was on TV. He is still extremely skeptical about the economy and the market and believes this is just a bear market bounce.

Bottom Line

I guess my point here is the world of investing has dramatically changed. There are serious risks involved with anywhere you put your money in today's crazy world that we live in. This includes even cold hard cash! We are in unprecedented times.

Perhaps diversification into some hard assets with a short on the S&P 500 as a hedge makes some sense here. I am rapidly losing confidence that our government will defend its currency. The bailouts continue to roll and Ben seems hell bent on creating inflation.

The price action in the market recently tells me that everyone including the pro's are confused.

As a result, they are spreading out their risk and diversifying into many different areas. All you need to do is follow the money in the markets to see how this is all developing: At one point today everything was up! Gold, stocks, and treasury sales were all strong! The market is clearly dominated by two emotions right now: FEAR and CONFUSION.

The bottom line here is it might not be a bad idea to spread out some risk. Cash is still king in my book. However, going long a little gold and a few commodities like natural gas makes some sense as we watch the hit video "Government Spending Gone Wild". A small short on the S&P would be a nice way to hedge this bet.

Remember: Cash is king in deflation. Hard assets protect you from inflation. Protect yourself by owning both.


Joey said...

Hey Jeff,

What's the word? The market being an inflation hedge is a pretty good analysis.

Hope all is well

Jeff said...

Hi Joey


Its a tough market. Whoo boy lots of bad news tonight.

Futures are down 12 handles.

Reuters reporting BofA needs $34 billion in capital according to the stress test!!




Stock goes to zero tomorrow. 100-1 reverse stoock split.

Oh man....Are the wheels about to fall off?

BofA well capitalized...HA!

Hang on tomorrow

Gary said...

Good article. I have been wondering for several weeks if the rally might be based upon revulsion of the US dollar and fear of devaluation. I have been moving cautiously into gold miners, base metals, and US royalty trusts with the idea that oil and hard assets are a form of currency. Plus, the royalty trusts have no debt and pay monthly dividends. Most of their recent payouts are based upon $35 oil so they could get another nice bounce in a month or two when the distributions increase (at least that is my theory).

I am watching platinum for clues about inflation. Logically, I would have expected that the demand for platinum would be way down considering the U.S automakers and that the price would plunge but so far it is holding its own.

It's almost as if we are experiencing deflation and inflation simultaneously.

I was wondering where you get your data for NYSE stock volume. I use the WSJ market data page for statistics and it showed about 1.5 billion shares traded today. I may need to find a better source. Thanks

jeff said...



I picked the volume # up late via Richard Russell. That could be wrong.

Just checked. 1.7 on the DOW and over 800 million on the NASDAQ. Not sure what else he includes for NYSE trading.

17 billion on the DOW alone is strong volume.

I really like your plays.

Great idea with the trusts. Just keep am eye on their their balance sheets. They pay high div's for a reason.

I think we are seeing price inflation and asset deflation all at the same time. Its getting really tough to navigate the market right now.

The market could very well get killed tomorrow given the news. GM/BAC is a pretty rough 1-2 punch to the gut.

The stock and bondholders got creamed on this stock split. Its ugly. Preferred debt no longer means anything in this country.

Both go to zero tomorrow. Enron pulled this same crap last year. Different outcome this go around because the government is backing them.

Things could get ugly tomorrow!
Tomorrow is going to be really interesting.

jeff said...

oops typo above...1.7 billion on the DOW

jeff said...

Ok folks!

GM collapse has big implications. Lots of stuff hitting the blogoshpere.

If preffered bond holders get zeroed like its being reported with GM, how in the hell do the banks ever raise private capital?

This is the biggest news night in a long time.

The stress test's appear to be legit. I thought we were going to hear more bull****.

Whats scary here is the peak unemployment is only 10.3% on these tests.

What in the hell happens if we go to 12-15%?

I will not sleep well tonight. Scary stuff folks. scary stuff.

Minton Mckarkquey said...

Jeff - you needn't be so worried. Accordingly to Bloomberg, http://www.bloomberg.com/apps/news?pid=20601087&sid=asnDB772FbzE&refer=home:

"Companies in the U.S. cut an estimated 491,000 workers from payrolls in April, indicating the worst of the recession’s job losses may have passed."

...phew, for a moment I thought this was just another half million jobs gone, but actually it's an indication of a bottom.

Jeff said...




The press totally got the BofA story wrong. They shouldn't report this stuff unless they have it right.

GM is a disaster but it hasn't been realized yet.

-491k should provide a coil for the bulls today. 900 is a pretty big resistance level though.

Europe was pretty bland today. We may see a pretty flat day as the street awaits the stress test results.

Anonymous said...

for everyones info there was only 1.5 billion shares traded on the nyse yesterday. the volume was normal...

Jeff said...

post up round 7