Tuesday, July 21, 2009

Market Gone Wild!

Rally On!

The market was up once again today as the feeding frenzy in stocks continued. The NASDAQ was up for the 10th consecutive day today which is the longest streak since the bubble days of the late '90's. What a remarkable run.

Apple reported a blowout 3rd quarter after hours but guided lower for the rest of the year. The lower guidance didn't stop the bulls as Apple's shares soared in after hours trading. I'll tell you what, once these bull feeding frenzies get roaring they really are amazing to watch.

Remember folks, looking forward, I see nothing to sustain this rally long term. I believe that what we are witnessing today are companies that executed well and have done an outstanding job in terms of controlling costs when the economy collapsed in the 4th quarter. Kudos to the management teams at companies Like Apple that managed their inventories and continued to grow earnings.

You need to begin to ask yourself: Did companies overreact and cut back way too far in the 4th and 1st quarters when it looked like the financial world was about to end? When you look at the huge GDP contraction in both quarters you gotta wonder if that is what happened.

Perhaps what we are witnessing is companies benefiting from average demand versus the Armageddon demand that companies prepared for in Q4 '08 & Q1 '09 as they slashed their inventories and shredded their workforce.

Lets remember, the S&P dropped to 666 by the end of the 1st quarter. Every company thought that the 1930's scenario was firmly on the table for the balance of 2009. This fear forced companies to drop production to a standstill. Many refused to even give guidance for the rest of the year and only produced what was ordered by their customers.

Since the death drop to 666, we have also seen the government and its balance sheet step in and provide massive amounts of stimulus to the financial system.

I am starting to wonder if this huge move up in the market is a reflection of both the government intervention and the combination of both corporations and Wall St overreacting to the financial gloom and doom that appeared imminent in 2009.

Estimates were slashed and inventories collapsed as a result as both Wall St and corporations prepared for the worst. When things turned out to be just be "really bad" it became much easier to produce profits because companies had fiscally prepared for the Armegeddon scenario.

When you combine this with the huge influx of money into the banks that I discussed in my last post, it set the stage for the massive rally that we are now witnessing.

This is how I see it folks. I am sure all of you have drawn your own conclusions. Please feel free to share them in the comments section.

Reasons for Concern

As all of you know, I don't believe we are entering into a long term bull market. This is still just a large bear market rally IMO. The fundamentals still stink. The fuel that provided this bounce came as a result of nothing but temporary fixes. Cost cutting and government stimulus can only go so far.

Let us not forget:

We still have the $24 trillion Fed spending binge hanging over our heads. Here is a nice breakdown of the Fed's financial system support:


My Take:

Yikes! How in the hell do we ever pay this off with an annual GDP of only $14 trillion? The only way I see it ever happening is if we are all whacked with a 60-70% tax rate. Think that can't happen? Just watch. It's happened before(see WWII).

Again folks, lets compare our current debt vs. GDP to other periods in history:


The numbers don't lie folks. We are suffocating in debt.

Oh and uh by the way, I have one more question: How do we fix our social security and medicare problems(both of which dwarf this bailout disaster in size) at the same time we attempt to fix this debt bubble dilemma?

HA! Good luck answering that one. This is what keeps me up late at night folks.

Bond Auction:

Lets take a look at the bond auction today:




Quick Take:

As you can see, we saw a very strong treasury auction on the short end of the yield curve. What was interesting here is the fact that the primary dealers(Goldman Sachs etc.) bought about half of the auction.

Why was this the case if the auction had such strong demand? Also, why did yields COLLAPSE on a day where the market moved higher?

I mean take a look at the 10 year today:



You need to ask yourself: Is the smart money diving into treasuries? Usually huge moves in treasury yields like this are a result of investors running for cover after 400 point sell offs.

Bottom Line:

My point here is nothing in the market makes any sense right now. The usual correlations seen during long term bull markets are simply not there.

Gold should be selling off and treasury yields should be soaring if the market had a lot of confidence in this rally.

I continue to believe that this move is just temporary. I see nothing but deficits, foreclosures, and job losses when I look at the economy.

Until this changes, consider me a skeptic.

16 comments:

getyourselfconnected said...

Great points, all of them. I wonder now that earnings estimates will be higher for next quarter just how cost cuts are going to "beat" those numbers? The CAT data was especially not "green shooty" at all. Oh well, markets melt up.

Jeff said...

Get

Thanks

I thought the same thing.

I think the next couple quarters of earnings will disappoint the street because they will expect a lot after the impressive string of this quarters beats.

I heard CAT's earnings were pretty ugly. I haven't had a chance to take a look.

getyourselfconnected said...

A 1 billion miss on revenue, and if you dig there was some play with inventory as well. Mr. Practical on Minyanville has the goods if interested.

Minton Mckarkquey said...

This bull rally is based on absolutely nothing. Basically you've still got:

- Spiraling unemployment (most likely a leading rather than lagging indicator in a debt-obsessed consumer economy). Scary.

- Mark to market scrapped on the banks, which clearly means their balance sheets are worthless in real times (hey, were all worth a fortune if we scrap m-to-m). This is the core of the fraud that nobody pays any attention to.

- Continuing foreclosures and defaults, not to mention a massive credit card bubble about to burst (amidst falling demand on everything).

- And then - AND THEN - the freakin' Federal Government - as illustrated in your charts - just going crazy like a gambling addict in Vegas, *unchartered* in the country's entire history. It DEFIES imagination how this works out, regardless of your position on anything really.

PLEASE PLEASE PLEASE, someone tell me why this Bubble Vision picture of the economy is worth crap?

Btw, checking on the Cali numbers, fixing the budget gap basically involved killing absolutely everything (education may be worst hit, saddest of all, especially when oil company credits could have offset most of this). Governor Arhhhnold has actually done a gone job in a face of these morons, which is shockingly hard to say.

Moral: just because the music on the Titanic sounded good doesn't mean it didn't sink.

Keep us the good work, Jeff!

jeff said...

Get

I will have to check that out.

Apple guided lower. 1.21 going forward. I think they were at 1.35/share in the second quarter.

jeff said...

Minton

I was wondering if that budget fix was legit or just more kicking of the can down the road.

I am glad to hear they actually made some tough decisions.

I feel your frustration man. None of this makes any sense. I just want us to start fixing it versus pretending this mess doesn't exist.

This attitude fixes nothing.

Its a freakin house of cards thats about to topple over.

For whatever reason the trend is higher. There are a lot of people that have a vested interest in not seeing this market violate the lows.

Anonymous said...

Regarding our debt. Sure its massive but not unprecedented. The UK had debt far in excess of what we have now after WWII. They got outta that -- we can get outta this.

Heres what I think is gonna happen. Who here thinks they will get social security as promised at age 67?

*Crickets*

As we all know, it aint gonna be around for us. The govt is basically telegraphing this now. Every quarter you get that green SS statement saying what you "should" get, but theres all these caveats in there screaming SOCIAL SECURITY WILL GO BANKRUPT!!!!

So here they are telegraphing WE WILL DEFAULT ON THIS DEBT to guys like you and me 20+ years from now. WHen it happens, its not gonna surprise anyone.

Maybe a few skirmishes here and there, but given weve had a lifetime to get used to the idea SS wont exist, no widespread civil unrest.

Same thing with Medicare and a few other entitlement programs. Good thing is Europe will have to default on their entitlements first so we can see how they handle it and learn from their mistakes.

Anyhoo, take out those entitlement programs, and all that debt doesnt seem that unmanageable anymore.

Jeff said...

Anon

The problem is practically no one has saved enough to replace these benefits.

Millions will be forced to work until they die.

I guess thats the price you pay for getting so greedy in the first place.

Kharma is a bitch.

Anonymous said...

Jeff - actually what I should have said was that the entitlement programs will become "income qualifying" meaning that people like you and I who have saved will not get a dime, whereas the destitute will. Thats the type of default I am seeing.

I do agree people will work longer, but honestly thats the way it should be. When the age was set at 65 back in the 30s it was damn near a miracle you would make it that long to see that age. The presumption being, well if you are this close to death, you dont have to do (mostly physical) work anymore.

Over time, as average lifespans increased, that mentality got replaced by one that saw over 65 being your "golden years" when that was never the point. Moreover, now that so many jobs are not based on physical labor, there is a large population of the workforce that can work till well into its seventies. Thus, what they should do is make it again a "you get it if you are this close to death" sort of thing, just as it was intended to be.

Jeff said...

Anon

Great points.

Perhaps raising the age limits is a concession we will all have to make in order to prevent SS from blowing up.

I think it stinks that the people who have contributed into this all of their lives end up getting sqwat in the end, but again that may be a price that we are forced to pay as a result of getting into so much debt.

There are no free lunches and I expect to be heavily taxed for the rest of my life.

We will have nowhere near the quality of life in retirement that the baby boomers will have.

Thats why it will be critical to save for your future because the government will not be there to help.

Toney Brooks said...

Few off the cuff thoughts loosely tied to your post, Jeff.

How is it possible to analyze this market given 70% of it is HFT, mostly from Goldman. I'm not even sure traditional technical analysis is edifying.

I used to think, "How could those idiots from the 30s not see what was coming? How could they think 'the worst actually was over?'"

Now we know.

The market, esp. this market, is an indicator of precisely nothing! The fact that we spend so much time in fascination, talking and writing about it, is indicative of of a frenzied, addictive, giddy mindset.

There's no business like show business.

Jeff said...

Toney

I totally agree.

I read about that 70% number. The market is nothing but a bunch computers trading with one another at this point.

The stock market and the economy are no longer correlated at this point.

In the end, we know that the fundementals will come back and they will correlate with one another.

This won't happen until this cesspool is cleaned up.

I'll be honest its getting more difficult to write about the market right now because it makes no sense. its beating to its own drum.

Reality will rear its ugly head at some point.

The question is when.

Toney Brooks said...

This will sound a little nutty. For the vast majority of Americans and financial pundits of assorted intelligence, it's simply business as usual: the financial crisis is over and the recession soon will be over.

Then there's a handful of insightful financial blogs, non-dogmatic economists who think (Roubini, etc.), plus an assembly of attuned Main street perma-bears.

What we are attuned to is, I believe, unworldly. Certainly, we see things quite clearly that others are not seeing at all.

I'm going to think some more about this by placing it in a 2,000 year historical context and then make it the subject of a future blog post.

When things become this bizarre in the natural order it's useful to look through the other end of the scope to gain godly perspective.

CT-Hilltopper said...

What's amazing to me is how fragile evrything is, and how few people seem to realize it.

All it will take is for ONE of the "too big to fail" banks to actually fail, and it's game over. The FDIC doesn't have the money to cover the failure of anything near that huge.

All it will take is one failed treasury sale, and it's the same thing.

Yet, no one seems to see exactly how screwed we are. I wish I could slip into that plastic bubble that everyone else seems to fit into so I can't see what's coming.

To everyone else, we're one green shoot away from the recession being over, and we'll be right back where we were before this whole mess started. What the hell are they seeing that I can't see?

Jeff said...

As Jack Nicholson screams in that one movie "You can't handle the truth!".

I think its pure denial at this point. Accepting that your quality of life has peaked is quite a pill to swallow.

I have accepted it for awhile. Whats frustrating to me is how the government continues to delay the inevitable.

Kicking the can down the road is getting mighty old for my taste.

Lets get this mess over with already!

John Maynes said...

The big banks are backstopped by the FED and Obama. How could they fail? They are even allowed to cook the books. A few months ago they would have gone to jail for that. Now it's legal. There is no need for the FDIC to step in.

How can a treasury sale fail when the FED will buy everything up that the foreigners won't buy?