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:
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).
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.
Lets take a look at the bond auction today:
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.
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.