Major Two Day Rally: Hold Steady

U.S. stocks posted the biggest two-day rally since 1987, rising over 13%. That coming after the Obama announcement of his Treasury Secretary choice on Friday and the weekend announcement of over $300 billion for the Citi bailout, and in spite of Bloomberg’s calculation of total rescue costs over $7.4 trillion.

The two-day rise is certainly impressive, but it is not yet a trend reversal.

If you believe this is a blip and one more head feint in a larger down movement, the chart below will support that view.

If you think the last two days may be the beginning of a new bull market or a major bear market rally with legs, wait a while for a clear and sustained penetration of the general 850-900 area for the S&P 500 (roughly SPY 85-90) before risking capital.

Not only does the chart need more confirmation of a trend change, the dimensions of the problem facing the world economy and the financial markets grow larger. Markets may anticipate, but we think the horizon for better times is some ways off, and farther out than markets can currently divine.

Recent Comparators and News Snippets:

At various times in the past few days, the financial press pointed out that the total rescue package is equal to 1/2 of the US GDP; that the Fed lending last week was 1,900 times the three-year weekly average (equal to 36 full years of normal total lending); that massive additional stimulus (read borrowing) is promised by Obama and the Congress; that Europe is in recession; that the Gulf is in recession; that Japan is in recession; that China and India are slowing significantly; that Russia is struggling; that auto companies face possible failure, and so on …

The $7+ trillion bailout, according to a Bloomberg guest, is $24,000 per man, woman and child in the US. It is also a multiple of all the money we have spent cumulatively fighting in Iraq and Afghanistan.

We noted in an earlier post that the total outstanding US Treasury debt as of last June 30, according to SIFMA, was $4.7 trillion. China, Japan and UK are the largest owners of that debt, holding about 1/3 of the total between them. Can we really expect them to buy all the bonds we are going to have to float? Will the markets be as sanguine when the current insatiable demand for Treasuries turns into an oversupply? Will the Dollar continue to rise when the world has its fill of our Treasuries?

Rescue Relative Size:

Consider this table of nominal GDP for the 25 largest economies in 2007 (from a Wikipedia posting based on IMF data):

The bailout is roughly equal in amount to the total GDP of Japan + Germany, OR China + UK + France, OR Italy + Spain + Brazil + Russia.

However, we are told we also need an additional “massive” stimulus to bring the economy around. Perhaps we should think in terms of a rounded $10 trillion of total rescue dollars.

Putting all that together, we don’t see the fundamental basis for a stock market recovery just yet.

Time Frame for Market Bottom:

Obama/Summers say we need two years of economic stimulus, and APEC (Asia-Pacific Economic Co-operation) says the world economy can be turned around in 18 months.

If they are generally correct that 18 to 24 months is the time needed to mend the situation, and if markets lead the economy by 6 to 12 months, then it would be reasonable to expect a trend reversal in 6 to 18 months from now. There is no magic there, but it is a concept to consider in conjunction with the calamitous financial mess we are in.

Comments

[The LFB:]

We believe this will turn into a decent-sized bear market rally which should see the 21 day moving average tested, and a close above there could signal a move towards the 50 day MA.

2008 Nov 25 07:27 AM

[Kingsley An...:]

Nice article. Brick by brick...breaching the resistance that used to be support would be a step in the right direction. There is plenty of time to jump once we get further confirmation- 94% of stocks are trading below their 200 dma. It will take time for stocks to be tradeable on the long side.

2008 Nov 25 07:43 AM

[PeteK:]

7.4 Trillion dollars ?
Bloomberg must be kidding.
Every American family will be a millionaire
if that money is given equally to them.
As for the war, it was brought to the WTC at New York City
on 9-11-2001. Don't you forget that ever.
You rather fight it inside the USA ? Won't be good.

2008 Nov 25 08:35 AM

[wpdragon:]

lobster, don't you EVER dare tell people what to remember... we all remember that day, when the world stood on OUR side.

Then a moron in the white house with the backing of a greedy republican owned congress and the oil lobby used outright lies and bullying to start a war that had nothing whatsoever to do with what happened on 9/11/2001... and we are the much poorer both financially, constitutionally and in the eyes of the world for their despicable acts of cowardice and greed.

That is something I hope and pray we ALL remember as long as we still have a democratic republic to live in... so don't YOU ever forget that.

2008 Nov 25 09:23 AM

[QVM Group:]

Lobster:

"As for the war, it was brought to the WTC at New York City
on 9-11-2001. Don't you forget that ever.
You rather fight it inside the USA ? Won't be good. "

Please try to keep comments relevant to the topic of the article. This has nothing to do whatsoever with the article's content, purpose or meaning.

Richard Shaw

2008 Nov 25 09:59 AM

[bricki:]

Crikey it isn't that hard. The fundamental basis for a stock market rally will be when consumers have the confidence to go out and spend again. That will take:

1. A stable employment picture (i.e. unemployment rates not increasing).
2. Housing prices start to increase again.
3. Debt at manageable levels.

Bailouts and stimulus don't affect this. All they do is ease the pain of getting there - in trade for a weaker recovery because the long term price of capital will be higher.

2008 Nov 25 11:39 AM

[EricTheRon:]

Good grief! I would expect a real financial commentator to be more savvy than to repeat that stupid "Bloomberg guest" article, asserting $7 trillion has been SPENT (I think he also uses the term "blown"). "Spent" is money I paid for car, jewelry, or a coat. Money I use to buy stocks and bonds is not "spent", at least in my English. Almost all of that $7 trillion is used to buy Preferred shares and short-term lending, almost all of which will be paid back since this is senior to all other stockholders. I would expect this writer to know that. Of course, if it's not going to be paid back then it hardly matters, since if the financial institutions die we'll all be living in tents and eating soup from lines.

2008 Nov 25 07:26 PM

[lilimarlene1:]

Lobster is simply not drinking your Koolaid. Your Goebbel like lies have been repeated often enough. The fact is, we are not universally hated. Poland, Czech Republic, many emerging Eastern Blocs, not to mention Africa-where Bush did what Clinton did not: helped the people there suffering AIDS.

India doesn't hate Bush. Brazil doesn't hate Bush. France and other elites from the Old Europe and our media: they hate Bush. The incessant partisan hacking from our media for the last eight years was such that FCC liscenses should be pulled from the likes of MSNBC. Oh, a GE by-product.

What is hated is the unbelievable mainstream media. Hear that flushing sound? Yes, that's the New York Times, a leftist rag go the way of the buggy whip: utterly useless.

When China and/or Russian want to team with Iran and lob nukes our way; when Russia is drilling off the Florida coast; then Bush will seem like a genius and Obama the truly empty suit surrounded by idiots who did'nt know how to fight terrorism then and only know how to hand out bailout money to fat cats and Acorn. A pox on all three houses!

On Nov 25 09:23 AM wpdragon wrote:

> lobster, don't you EVER dare tell people what to remember... we all
> remember that day, when the world stood on OUR side.
>
> Then a moron in the white house with the backing of a greedy republican
> owned congress and the oil lobby used outright lies and bullying
> to start a war that had nothing whatsoever to do with what happened
> on 9/11/2001... and we are the much poorer both financially, constitutionally
> and in the eyes of the world for their despicable acts of cowardice
> and greed.
>
> That is something I hope and pray we ALL remember as long as we still
> have a democratic republic to live in... so don't YOU ever forget
> that.

2008 Nov 26 07:20 AM