Tuesday, July 14, 2009

The Running of the Bulls?

After the Intel and Goldman's earnings home runs today you gotta wonder if we might see another leg up here.

We all know this isn't going to end well. My bearish sentiments are now stronger then ever. However, after watching the effectiveness of the spin machine in DC and Wall St since the market lows seen in March, you gotta wonder if we see one more manic push higher in the equity markets.

Why do I suspect this could be the case? Because both the government and the street realize the ramifications of the market breaking through the lows of 666 on the S&P set in March.

WHEN and not if this happens, its going to destroy this country economically. With a 4 or 5 handle on the S&P, many of the companies on the S&P 500 will not be able to fund themselves and will end up in bankruptcy. Unemployment will soar as companies cut back to the the bare bone.

Pension funds will be left unable to fund the pensions that many baby boomers and others depend on for their retirement. We are already seeing the ramifications of a crashing stock market in the pension fund world:

Many corporate and state entities like hospitals are currently being forced to throw millions of new dollars into their pensions as a result of the market crash because they must be fully funded annually by state law. Others must be fully funded based on corporate policy.

This has been a painful reality for many corporate balance sheets in 2009 after watching stocks plummet 50% in 2008. I have heard stories of companies cutting capital spending by 70-80% in order to both make their pensions whole and also cut costs in order to survive the greatest economic crisis seen since The Great Depression.

So how does the market bounce in such an environment?

Because the government understands how catastrophic the pain will be on the other side. Its really that simple. There is NO fundamental reason for the stock market to go up. However, that doesn't mean it can't be manipulated up. If you disagree just look at what has happened since March:

- Job losses have soared as unemployment has risen to 9.5%. U-6 unemployment sits at 16.2%

- Foreclosures and delinquencies on both prime and subprime loans have soared to new highs. (CNBC reported today that 25% of the people foreclosed on still had the ability to make the payments. They have decided to walk away because they are so far underwater and realize they will never get the money back).

- Consumer spending has continued to collapse.

- Business spending just fell for the 9th straight month.

- Commercial Real Estate have been overwhelmed by vacancies and falling rents.

After all of this bad news what has the market done? Moved up about 30%. Huh? Makes no sense right?

The only logical conclusion one can make is that the government simply refuses to face the inevitable collapsing of our economy. As a result, they are using every resource available to avoid facing the music. Wall St is more than happy to help them delay the inevitable. IMO, the TARP infusion into the banks was basically a $700 billion "buy" order on the S&P 500.

In addition, they have also taken advantage of their tremendous resources that come with being the world's largest economy.

Treasuries are a prime example of taking advantage of this situation. The whole world holds the majority of their assets in the US in the form of our treasury debt.

So how has the US thanked them for their support? Well for starters we took rates down to practically zero which means these countries are being paid nothing on their investments. Classy isn't it?

Then to rub salt in their wounds, we started spending ourselves into oblivion which then in turn increases the risk of holding our bonds due to the threat of a potential US default(this is looking more and more probable BTW).

Then, After sticking it to the world twice, we then have the arrogance and the nerve to ask them to buy more of our debt so we can continue our ridiculous irresponsible spending binge.

The Bottom Line:

Desperate times call for desperate measures. I think many of the bears underestimated the ability of the elite to delay the economic nightmare that inevitably will occur.

How much longer can they delay this economic crash? That's the million dollar question. Many think that reality will strike in September or October.

I think the music could possibly go on through the 4th quarter. Remember, the economy collapsed in Q4 last year as the financial system came within a hair of destruction. Companies virtually stopped spending as a result.

This should setup some easy earnings beats at the end of the year because even anemic spending will be enough to beat the 4th quarter numbers from last year where both consumer sand corporations looked like deer caught in the headlights.

This all being said, the fundamentals are horrific. The economy could very well come crashing down late this summer or fall.

Any growth in Q4 will be be an anomaly versus a trend. I expect us to be right back in the soup the following quarter.

The repercussions of our unfathomable spending deficits will be felt for a generation or more. Short term the futures are surging on the earnings beats. Tomorrow should be interesting.

19 comments:

Jeff said...

Hey all

Thought you might want to check this out.

Yesterday's post was highlighted in an article on Seeking Alpha.

Take a look if you are interested:

http://seekingalpha.com/article/148682-the-obscenity-of-bailouts-on-full-display

EDC said...

we go down tomorrow after a slight gap up...
intel won't push it higher.
sell the news is back in play.

great post as usual

Jeff said...

EDC

Thanks

Tomorrow should be a wild ride.

Treasury yields popped pretty nice today.

The bond market has been quiet and I don't think they are too happy about the healthcare reform cost.

I will be watching The credit markets sharply tomorrow.

Flipdippy said...

I don't understand the markets obsession with semis. They are IMO an indicator solely of the validity of Moore's Law.

If you look at the number of PCs before the tech bubble burst and the number of PCs when the economy recovered you will see the number of PCs were either 2 or 3 times higher. Yet there was still a recession in between.

CPUs are still following Moore's Law to a T. Intel will sell more chips for netbooks/notebooks/smartphones/desktops/servers which are logarithmatically faster cheaper and smaller.

Who knows what the markets do tomorrow but I am sitting on the sidelines.

Jeff said...

Flip

I will be sitting there on the sidelines right next to you.

I only know of one investment that goes up consistently right now and that is acclumulating cash!

this market is insane

Anonymous said...

Whats propping it up is the Hedge Fund/Banks backstopped by the Fed and their Alchemist ways turning lead into gold on false volumes as their Algorithmic trading lulls us into a sense of false liquidity. What a crock of shit this whole system is.
Or maybe if the Fed can stave of the inevitable the baby boomers will retire and there will be a surge in employment, to bad they won't have enough to retire on.
The complexity of all this manipulation is what will bring this down.

Alex

Anonymous said...

Jeff-
I have enjoyed reading your blog, it's refreshing to read dialog closer to reality besides all the green shoot/ mustard seed talk. I think the economy and the country's balance sheet has to be looked at in it's simplest terms. At some point the massive debt the country has accumulated will need to be paid down or off preferably. What will have to occur to make that possible, pain and sacrifice but some generation along the line will have to pay this price, I'm afraid it is the y & X that will be paying. The stock market is like one of those goofy carnival mirrors, it accentuates the situation as manipulation and future forcasters try to determine the ultimate direction. Again simple terms, earnings are what drives stock prices, lower earnings, lower prices. I've been accumulating cash as well and I admit, I should have traded short term in March as I expected a bounce but nothing as dramatic as what has occured. Keep up the good work Jeff!

Jeff said...

Alex

I couldn't agree more.

The whole market is a sham that's being dominated by traders trading on pure fluff. The consistently pathetic low volumes tell u that most investors want nothing to do with this market.
Fundamentals will come back at some point.

Jeff said...

Anon

Glad u are enjoying the blog!

Yeah I agree with you on our debt problem. I expect the bond market to take yield higher at some point.

Its going to be ugly when we have to start paying back these trillions of dollars!

Anonymous said...

ok, i am really frustrated here. So here is the picture: supposedly smart bloggers see all the problems and either stay bearish/short or simply in cash. Meanwhile people that are really smart are trading their ways to riches. Where do i find a blog like that?

jeff said...

Anon

You don't need a blog to find that info.

Take your pick

Jim Cramer @ the street.com
CNBC
Fox Business
Anyone connected with Wall St.

This is a short covering rally. Many shorts were calling the market dead after we stalled for a month around the 900-950 area.

They got toasted and covered which has created the huge rally today.

I have some trades that worked great today.

Treasury shorts(TBT) and owning metals are a nice way to hedge your market shorts.

GL

opportunistic said...

Stocks, bonds, and gold all up big today??

teddy bear said...

http://tinyurl.com/2d9o5w

well ... up up up

;)

jeff said...

oppor

Yeah it was a strange day. Bonds got crushed.

Gold up. Definately mixed messages.

I will have a post up around 7 or so.

CIT story is huge.

jeff said...

Teddy

Nice summary

Google is on deck with earnings tomorrow.

getyourselfconnected said...

Jeff,
Glad your piece was in the Seeking Alpha article. They do not always pick up every article I blog, nor every section. SA usually will add some reasonable traffic to my site, hope it does for you. I may exceprt the "Running of the Bulls" article as well this evening. Great blog.

teddy bear said...

http://tinyurl.com/mt3jam

too small to survive? ;)

Jeff said...

Get

Thanks a lot.

I did see a nice spike in traffic after that piece.

Glad to hear you have had some success with SA. I was pleasantly surprised when I saw Monday's post on SA.

I have been reading your blog as well. Very nice!

Jeff said...

Get

I just saw on your blog that you wrote that piece.

I was having a hard time figuring out who the author was on SA.

Thanks a lot for the support. I appreciate the props.