"Extend and Pretend" Only Works For So Long

Wow this is one tough market.

"Doom and gloom" one day and "happy days are here again" the next.  I bet the traders on Wall St are happy tomorrow is Friday.

Tomorrow is a key day for the market.  We now sit just below S&P 1100 which has been a very strong resistance for the bulls.  If we manage to break through then I believet the market could run higher for a bit.

If we fail to break through then my guess is we continue to trade in a range until we get more economic data.. 

The move today was all about earnings and Europe.  Microsoft's numbers were very strong.  Amazon however missed badly.  They earned .45 vs. the .54 estimate.  The stock is down 11% after hours.  It will be intersting to see if the market can shake this off tomorrow.  Futes are up so far.

One note here is the fact that Amazon relies heavily on the consumer.  This miss shouldn't have been a surprise considering the consumer confidence data that's been rolling in. 

Other companies like Microsoft have the benefit of selling to business as well as the consumer.  As corporations recovered the past year they started spending more money(although they continue to cut jobs). 

As I have said before:  The US consumer is toast and the 2nd half of the year will no doubt be dominated by much slower growth.  If you dig into Microsoft's earnings the consumer areas of the company like X-box were much less robust.

Corporate profits have been strong because they have become much more productive.  The corporate CEO's out there do not drink the Wall St Kool-Aid.  They see the storm coming. 

They are slashing payrolls and hoarding cashas a result  in order to prepare.  The balance sheets look strong for many of the corporate giants and there will be some historic values once the market bottoms.

The problem is DOW 10,000 does not mark the bottom although it might mark the top.  Many questions need to be answered before we see any sustainable rally(more on this later). 

Basically we flew through the first part of this financial hurricane in 2008.  We now sit in the eye of the storm as we prepare for the second wave.

The second wave will begin when the Fed is forced to withdraw their stimulus in order to stay solvent.

For now they are content to "extend and pretend" as they piss away our tax dollars at a record pace. 

This game can only go on for so long though before someone pulls the plug.  That being said, we will see a lot of volatility before we eventually reach this point.

Until then expect a lot of volaitility:  One day the market will rise as signs of a recovery are evident.  Then the next day it will break down as panicky investors sell when it looks like the world is going to end.

We saw a lot of market action like this in the 1970's.  My father(a Wall St Vet) tells me about the stories from Wall St during that period.  Gold would move up or down $50 a day as the market feared an inflationary collapse. 

Every day the desks would be filled with traders who thought the market wouldn't make it.  It did but not before we saw double digits rates and a deep recession in the early 1980's.

This go around the fear is deflation versus inflation.  Nonetheless, that doesn't mean that people won't act in the same fearful way.

I am starting to wonder if the market might act in a similiar way due to all of the fear.  As you can see below, the DOW in the 1970's basically flatlined at 1000.

I can't help but ask myself this question as we continue to break down once we get a tad above 10,000 on the DOW:  Could DOW 10,000/S&P 1100 be the top of the range for the next 10 years?  Only history will tell us.  However, the longer we keep failing to march past it the stronger the resistance will become.

The Bottom Line

The next few weeks are going to be very interesting.  We get the European stress test results tomorrow.  I am sure those will be a joke.  The way Europe has been rallying this week you know the news will likely be positive.  You have to also assume that the numbers have been leaked. 

I suspect you may see 1 or 2 banks that play the role of being the sacrificial lamb.  Another Ponzi style buying spree is very possible tomorrow after the press release. 

The bottom line here is the market thinks all is well now.  Europe has stabilized and earnings have been strong.  It's the perfect setup for a short move higher.

The problem longer term is there are too many questions that have no answers:

How long can the Fed replace the consumer?
How long can we continue to sell $189 billion in treasuries like we are about to do next week?
How long will unemployment continue to rise?
Where are the new jobs going to come from?
How are we going to pay down the deficit?
How are the states going to stay solvent?
How do we continue to fund Social Security and Medicare?

I will stop there but the questions are endless and I have yet to hear one reasonable solution.  The only solution thats viable is to slash spending.

If we don't do it now then the market is going to do it for us.  We can't grow out of this depression like we did during our minor recessions the past 25 years.  Wall St and the Fed keep talking themselves into thinking that we can.

The issue here is losses are too large.  If they could have been taken then we would have setup a resolutions trust like we did in the 1990's.  We couldn't do it this time because the losses were too overwhelming for the system.

When these losses are finally realized we will be right back in the soup except this time there will be no money left for bailouts.   There will be no recovery until these losses are recognized.

It's just a matter of time until they are exposed.  Fraudelent accounting and the Fed's balance sheet can only last for so long before the bubble bursts.  Enron learned this the hard way and I am afraid we will end up being forced to learn the same lesson.

I hope everyone takes advantage of this "extend and pretend" market by paying off debt and saving money.  You are going to need it as the "sugar high" from the stimulus eventually gets pried out of the governments hands.

Disclosure:  No new positions taken at the time of publication.

Has Deflation Arrived?

Stocks fell and treasuries soared today after Ben Bernanke called the economic outlook "unusually uncertain".

Here are a few of his comments:

"WASHINGTON (Reuters) - The Federal Reserve stands ready to ease monetary policy further if the budding U.S. economic recovery stumbles, Fed Chairman Ben Bernanke said on Wednesday, as he called the outlook "unusually uncertain."
Policy makers, however, still expect growth to be sustained despite a recent softening in the economy evident in data, Bernanke said in congressional testimony.

The Federal Reserve is continuing "prudent planning for the ultimate withdrawal of monetary policy accommodation" even as it recognizes the uncertain outlook, Bernanke told the Senate Banking Committee.

"We remain prepared to take further policy actions as needed to foster a return to full utilization of our nation's productive potential in a context of price stability,"

The U.S. central bank has kept interest rates near zero percent since December 2008 and has bought more than $1.5 trillion in mortgage and Treasury bonds to fight the deep recession and virulent financial crisis.

The economy resumed growth about a year ago, but stubbornly high unemployment, a fresh drop in housing activity and a slowdown in manufacturing have raised fears of a "double-dip" recession.

Stocks fell sharply as Bernanke testified. Some investors were surprised by the amount of time Bernanke spent in his prepared remarks discussing the Fed's exit strategy rather than possible measures to lower borrowing costs further. Others were taken aback by his economic assessment."

My Take:

Ben hardly sounded confident during his testimony.  

The bond market wasn't a big fan of his speech either which was reflected in the 10 year today.  In fact, the move down today on the TNX broke a key technical level as far as I am concerned:

Aside from the QE announcement, the TNX hit a new low.  The last time we saw the 10 year down here was when Greenspan slashed rates in response to the tech crash.

The low rates seen during this period was the fuel that Wall St then used to create the famed housing bubble.

The fact that we broke threw these lows over the past few days is significant, and I wouldn't be surprised to see the trend continue.  

The bond market is basically telling us that we are about to see a Japanese style deflationary collapse. 

The Japenese 10 year has collapsed during this period and still have not recovered 20 years later:

  

Bernanke has always been extremely concerned about deflation and it's destructive positive feedback loop where prices eventually collapse as demand evaporates. 

Basically what happens is buyers head to the sidelines as prices fall thinking that they will get a better deal if they wait.

This induces more price drops which then pushes more people to the sidelines and this continuous cycle continues until is basically destroys pricing power.  This then ultimately destroys the banks as their balance sheets become filled with now over priced assets.

This loop also takes the market down with it.  Take a look at the Nikkei during Japan's bout with deflation:

 
The Nikkei now sits at 9300 today after peaking at almost 39,000 back in 1989.  It's easy to see why Ben is so afraid.  Japan hasn't ever fully recovered from their credit bubble collapse.

The Bottom Line 

The inflation/deflation debate for now has been answered.  The risks have clearly leaned toward deflation.  The bond market is clearly signaling this as they pile into treasuries.

The question now becomes do we have enough control over the deficit to keep the bond boys there?  If Ben attempts another QE2 then they may decide to head for the hills.  Let's hope this doesn't happen because the USA will look a heck of a lot like Greece if it does.

After today's speech I don't think Ben is ready to head down the QE2 road yet.  I have to give him some kudos for not panicking and showing some restraint here.  He even talked about reducing the deficit.

Let's see if he can stick to his guns as the economic crisis intensifies.  I hope that Ben is starting to realize that you cannot force someone to borrow via lower rates when they don't have the desire or ability to do so.

The dangerous combination of high unemployment and falling prices that we are now witnessing is sending our market straight towards deflation and there is nothing the Fed can do to stop it.

What scary is our situation in some ways is worse than Japan's.  When deflation hit Tokyo they had an export economy to fall back on to soften the blow. 

Our consumption economy is not setup for deflation.  If the consumer heads to the sidelines(as it appears they already have in May/June) our economy will be hit by something this country hasn't seen since The Great Depression.

Greenspan said we hit a temporary wall in June.  The problem is that wall is filled with 3 feet of concrete.  What really happened is this country hit a wall in terms of the consumer's ability and/or willingness to borrow.

There is no economic recipe to turn this around other than lots of time, jobs,  and lower prices. 

Disclosure:  No new positions at the time of publication.

The Flight to Bonds Continues

I wanted to start with Mr. Ratigan tonight. I will have a few comments below the video.

This is a must watch in my view. As I watch this country begin to rot I must admit that I have become increasingly frustrated with the whole political system that's been bought and paid for by Wall St. 

It's great to see someone from the mainstream media that gets it.  I am sure many of my readers would agree.

Dylan became increasingly frustrated in this video as his questions were repeatedly ignored by another "puppet" from Washington DC.  My favorite line below is the response to Rep. Brady's comment that "you can't tax yourself into prosperity".  Dylan's response?:  "You can't steal yourself to prosperity either!".

I love it!  Everyone of these clowns from DC on both sides of the aisle need to be voted out of office if they continue to let Wall St pillage the taxpayer.

This guy wouldn't answer ANY of Dylan's intelligently laid out questions.  Why aren't the $145 billion in Wall St bonuses taxed at a 50-100% rate given the fact that they were earned by via fraud or speculation using the taxpayer's dollars?

When will someone ever answer these questions?  As Dylan says below:  How does this economy ever recover when the financial sector has a financial system that's setup to suck every dollar out of our pockets via taxes and personal debtloads? 

Also:  How do you intelligently invest in a casino that has totally been gamed via wild speculation by the banks at your cost?

Enjoy the video.  A few comments will follow.

Visit msnbc.com for breaking news, world news, and news about the economy

My Take:

It was great to watch a politician squirm while being asked the tough questions that most reporters are too afraid to ask.

I have never been so disappointed in the media in my life when it come to covering the financial crisis.  They have rolled over and played dead when it comes to getting to the bottom of why we are in this mess.

Why can't the media ask the White House the same questions that Dylan asked above?

When Tiger Woods is paying Elin more money for a divorce settlement than Goldman Sachs is paying in fines to the SEC for defrauding the taxpayer its time to start asking tough questions!

The press has become a joke!  Should we be surprised that almost every newspaper in this country is practically bankrupt? 

The NY Times is now filled with Paul Krugman op ed pieces demanding more and more stimulus. I want to vomit by the time I get to the second paragraph of this stuff

Should any of us be surprised that the public prefers to tweet on twitter instead of reading propaganda like this week after week in the media? 

The citizens of this country have become increasingly aware that the media no longer cares about the facts anymore.   Networks like NBC and FOX are too busy "spinning" the issues to the left and right respectively instead of getting to the bottom of how in the heck we got into this financial catastrophe.

The reality here is both parties got us here.  It's both of their faults.  Enough of the partisan reporting.  Let's move on!  Start focusing on the facts instead of blaming one side or the other.  I am tired of looking at opinion polls that blame the other party.

Give me facts not political fiction!

The same thing goes when it comes to our politicians:

If the Republicans really want to cut the deficit like they say they do then why not go on the offensive and start giving us the real answers when hard questions are asked?

Why couldn't the republican clown in the video above answer the questions regarding Wall St honestly?  Afterall:  THEY ARE THE REASON WE HAVE THE DEFICITS! 

Rather than facing the music: Rep. Brady chose to blab on and on about tax cuts and jobs when the real issue is a fraudulent banking system that rewards crooks instead of small businesses.   The tax cuts won't do jack for the economy if small businesses no longer trust the political or financial system that supports them.

Brady decided to hit the ignore button on Dylan and regurgitate the Republican talking points instead of making some progress and discussing the real issues around how Wall St should be punished for their actions. 

There will be no confidence in this system until we have done the right thing and punished the people who got us into this nightmare. 

If we don't want to prosecute the criminals then we at least need to take down the companies that put them in a position to conduct such atrocities against the people of this nation.

By not doing so, the risk takers who create small businesses will continue to hide because they don't know if they can trust who they are doing business with. 

The Bottom Line

Before I finish up:  I apologize if you get tired of hearing me discuss this subject.  I feel it's my duty to try and offer an alternative opinion to the mainstream media.  Too many people are getting fleeced by the inaccuracy of the facts around this economy. 

I have seen too many friends lose half of their life savings after getting sucked into this cesspool market by adviser's who are only looking for their next commission check instead of looking out for their clients.

The game is broken and it won't be fixed until the issues above are put to rest.

If I can wake just one person up about what's really going on out there per post then I will feel this place has been a success.   

As for today's market all you need to look at was the ten year:

Why do yields continue to collapse despite the move higher in stocks?  The bond market is saying "no thanks" to equities and sticking in bonds.  This is never a good sign especially on a day where the market rallies.

We continue to sit in a trading range for now.  The market is still telling us that it's still very sick.

Be careful trading this market.  Trading accounts have a tendency to get whipsawed down to zero in directionless markets like this.

Until next time!

The Battle for S&P 1100 Rages On

The market was pretty tame today after Friday's violent sell off.  
We are now pretty much left in no mans land.  The market has been pretty much trading on technicals recently and the big move higher followed by Friday's sell off has many investors confused as to where we head next.

The way I see it, if we don't break 1100 in the very near term we are likely to drop back down to the 875 area on the S&P.

The economic data continues to be bad.  IBM had a disappointing earnings report tonight.  The data that concerned analysts the most was the future bookings number which was very soft.  It came in at $12.8 billion versus the $14 billion that was expected.

This is a very ominous sign because tech was supposed to rebound strongly in the second half according to the "bubble analysts".  How anyone can come to such a conclusion is beyond me.

Most of the softness was seen in Europe.

Texas Instruments reported a 42% surge in revenue but the stock sold off after hours when the news was released.  The problem we have here folks is you just can't meet earnings in a market that's priced for perfection..

Stocks rose 69% from the lows last March and the market is now starting to realize during this recent pullback that the earnings just simply aren't going to be there in the second half of this year.

The market is always looking ahead and it obviously doesn't like what it sees right now. 

I still can't get over the fact that we couldn't bounce on the Goldman/BP news last week.  This was the most bearish price action I have seen in the market this year.

I mean how could stocks not rally when Europe stabilized, BP stops the largest oil spill in history, and Goldman settles a lawsuit that could have potentially taken down the firm and possibly the rest of the crooks on Wall St?

I can't get that day of trading and the susequent sell off on Friday out of my head.

We also got this piece of news on housing this morning:

"U.S. home builders' index falls to 15-month low


PROVIDED BY MarketWatch - 10:00 AM 07/19/2010

WASHINGTON (MarketWatch) -U.S. home builders were increasingly pessimistic about their business in July after home sales dried up when a federal subsidy expired, according to a monthly survey released Monday by the National Association of Home Builders.

The NAHB/Wells Fargo housing market index fell two points to 14 in July from a downwardly revised 16 in June. It's the lowest since April 2009, the NAHB said. All three components of the index fell in July. Economists were expecting a two-point drop in the builders' index to 15 from June's original reading of 17, according to a survey conducted by MarketWatch."

Quick take

Just another sign that housing is doomed.  I spoke to a mortgage broker over the weekend who was telling me about a critical change in FHA lending.

I won't get into the details but basically FHA is going to force buyers to come up with 6% in cash in order to qualify for a loan which is up from the current 3% that is required today. 

This law was supposed to go into effect this summer but it's been pushed back until the fall.  This is going to take another huge chunk of buyers out of the housing market once this rule is put in place.  Could this be delayed again?  Of course.  Just some food for thought.


The Bottom Line

A pretty quiet day folks.  All eyes are now on the Fed and it's fight against deflation.  This will determine the next big move in the markets. 

Will the Fed pull a P Diddy and yank another $3 trillion wad of cash out of their empty wallets and go on another debt spending spree in an attempt to defeat deflation?

 OR

Will they pull a Scrooge and let the balloon pop as they allow the powerful forces of deflation to come in and wreak havoc on prices.

I for one see them pulling a P Diddy because this arrogant group of narcissist's believe they can defeat deflation despite hundreds of years of history proving that it can't be done.

Its simple:  You can't spend your way into prosperity.  Without a thriving private sector the economy is doomed.  Throwing money to the bankers in an attempt to keep a credit bubble blown does nothing but help the financial elite in this country.

The zero rates are great for Wall St.  I mean who wouldn't want to borrow at zero and buy the long bond at 4% and pocket the spread?  The problem is this same game does absolutely nothing for the rest of the people of this country.  It ROBS the prudent savers who have now lost their ability to earn yields on CD's.

There is only winner in the game of easy money and it's Wall St.  If it helped the rest of us then unemployment wouldn't be at 10% as well as a U6 of 16+%. 

The whole financial system has turned into a complete fraud.

I mean let's put the Goldman fine into perspective:

Goldman earned almost $5 billion dollars in Q4 of 2009.  This means the $550 million dollar fine levied against them after helping create the largest financial fraud in history is about 10% of one quarter of earnings.

10 frickin percent.  Are you kidding me?   If that doesn't tell you who is in charge of this country then I don't know what will.

Wall St will cry for another Ponzi style spending spree from the Fed because they have no chance to survive without it.  My guess is they will find a way to get it.

This will result in more "unintended consequences" that will create even more chaos moving forward in our financial markets.

The saddest part is it will be our children that will be the ones left to clean up this mess.

Disclosure:  No new positions taken at the time of publication.