We Can't Talk Our Way Out of This Market Mess

Our hat's off to the White House (along with the Federal Reserve). They have done an outstanding job of talking up the stock market since early March. With little in the way of funds available to bail out the ailing banks, and Congress in no mood to provide more cash for the cause, they’re trying to talk their way out of the slump. The propaganda we’ve heard over and over is that everything is fine with the nation’s largest banks and the economy will soon start to improve. The idea is that if people start thinking things are getting better it will become a self-fulfilling prophecy.

The success of this strategy is evident in the stock market’s rally off the lows and yesterday’s rebound in consumer confidence, which climbed by the most in six years (to an 8-month high). Of course improving confidence won’t automatically translate into a significant increase in consumer spending. And the latest consumer optimism had more to do with the perception of where we’ll be in six months rather than where we are right now.

In fact, the average man on the street according to the survey sees little in the way of an improvement in current conditions.

As for where we are today, also out yesterday, the Case-Shiller Home Price data showed the retreat in the housing is far from over. That follows last week’s dismal print on housing starts, which continue to spiral lower. And as long as the housing market remains in the dumps the chance for the economy improving remains dim.

We’ve seen numerous other examples of late that the economy is still very fragile. Unemployment insurance claims are moving higher again, for instance. And come next week the nation’s unemployment rate is likely to top 9 percent. Add in deteriorating retail sales and the picture is far from bright, to say the least.

Rising interest rates and commodity prices are largely seen as positive symptoms of a nascent recovery. However, rising consumer interest rates and oil back above $60 a barrel stand to short circuit any recovery. The Federal Reserve is monetizing the nation’s debt, purchasing Treasury and agency bonds with newly printed currency, in an effort to keep key lending rates in check.

For that we will ultimately pay a stiff price in the form of much higher inflation as our currency is debased.

The disparity between perception and reality on the health of the economy can only continue for so long. Unless we start to get improved readings on the economic statistics at some point—be it near where were we are now or from a somewhat higher level—the negatives will unfortunately overwhelm the thin “green shoots” investors are currently grasping.

Stocks have been mired in a trading range for the last several weeks. On the upside the 930 level for the S&P 500 has proven to be a tough nut to crack. On the downside, the 877-880 area is a widely watched support level. Failing that level would likely trigger a wave of selling as traders looked to lock in gains since the market rally began in early March. We expect that correction to unfold rather swiftly.

Comments

[manya05:]

Agree completely, when the correction comes it will be very swift. I say it will take 2 trading sessions to wipe out most of the last up-leg. And since most of the action happens in pre-market (during trading hours things remain mostly flat), I think the table is set again for the boyz to make a killing and the little guys to be wiped out.

May 27 05:16 AM

[wdhalgren:]

"Unless we start to get improved readings on the economic statistics at some point....the negatives will unfortunately overwhelm the thin “green shoots” investors are currently grasping."

It doesn't matter whether we get improved data or not. Price manipulation can paint a nice picture, for a while. But we've spent the better part of a half century degrading our ability to compete. Regulation, social welfare, bureaucratic entanglement, politically correct education system, tort lottery, environmental terrorism --- all of this has created a sclerotic and corrupt economic system that rewards pandering to the government above every other endeavor. There is no evidence of a willingness to reverse the functional decline, which means our debt load cannot be paid. Our lenders understand that now.

May 27 06:03 AM

[Insiderman:]

Here's a thought: Perhaps the government wasn't just talking up the economy but allowing big TARP borrowers to use unneeded funds to make principal trades. Hmmm. Evidence of that in spikes for Golden and Morgan Stanley?

May 27 09:25 AM

[Maxe Paul:]

Because everyone expects a sharp sell off, i expect the market will go higher. We may have seen our mini correction before heading for S&P 1000.

The market will not turn back around (down) untill we see a record optimism and bullishness return such as we saw in late 2007.

May 27 09:45 AM

[jeandit75:]

I don't agree with maxe, I think the sentiment is rather on the positive side now with all of those bull$hit green shoots talks and so if anything, people are expecting this rally to continue. If you want to be contrarian here, I suggest you cut your long positions and take profits. There is too much evidence that this rally was mainly the result of highly levered and low quality stocks outperforming the quality stocks and that is unsustainable by definition.


On May 27 09:45 AM maxe wrote:

> Because everyone expects a sharp sell off, i expect the market will
> go higher. We may have seen our mini correction before heading for
> S&P 1000.
>
> The market will not turn back around (down) untill we see a record
> optimism and bullishness return such as we saw in late 2007.

May 27 10:26 AM

[carey_jim:]

Just when we have almost forgotten that panic selling can occur, that's when the earthquake ....

Exits left, very quickly ...

May 27 12:08 PM

[Sad for now:]

The uptick in the market was caused by reinvestment in stocks from funds[retirement, etc.] and investment houses who went heavy to g-bonds in Nov. 08 to Feb 09, then when they got back their courage and knowledge they had nowhere to go with their money than back to stocks, because G-bonds paid only a fraction of one percent.

Signs are prevalent bond rates will increase[as they should] and the funds will again flip to G-bonds for yield. Then the market will retreat to previous lows, maybe even lower, especially if earnings keep dropping, as well as unemployment rising, and the GNP in the tank.

May 27 05:06 PM

[Graham and ...:]

The Case-Shiller Index is (unfortunately) a very good guide of where the economy is at.

May 27 06:30 PM

[Old Trader:]

maxe,

I don't know....the S&P is having a REALLY tough time getting past 925/930. I think we're up to something like 3 failed attempts, or maybe its 4. The bulls/PPT is trying to beat the band to cause an upside breakout, but it justn't seem to be happening.

Today's late day fade was allegedly caused by a spike in interest rates. Given the amount of government debt being dumped into the market, that's not going to change any time soon, and will get progressively worse, as time goes on.


On May 27 09:45 AM maxe wrote:

> Because everyone expects a sharp sell off, i expect the market will
> go higher. We may have seen our mini correction before heading for
> S&P 1000.
>
> The market will not turn back around (down) untill we see a record
> optimism and bullishness return such as we saw in late 2007.

May 27 08:44 PM

[Fighting Yoda:]

The rally should not have occurred at all. All explanations of oversold conditions, valuations, short covering etc cannot explain the huge run up. And then of course there was the huge PR effort – the stress test. But we know markets can go crazy, and often they do.

But the problem is fundamentals - economy is ailing - no end to job losses and home price drops, tapped out consumer. S&P earnings forecasts for '09 and '010 are dismal - $43 for '09 - PE of 21, $46 for '010 - PE of 19.5 - ridiculously high valuations.

Market will drop when and by how much - of course that time will only tell.

May 28 01:56 AM

[Michael Fit...:]

US policymakers continue in their attempts to fix a commodity problem (oil) with financial hijinx. it simply will not work. the only solution to the economic, environmental, and national security issues facing the US is a strategic, long-term, comprehensive energy policy:

thefitzman.blogspot.co...

aimed squarely at reducing foreign oil imports by using natural gas in the transportation sector. it's our only hope, yet we are stuck with an energy secretary who is "agnostic" on natural gas transportation yet loves the oxymoronic "clean coal". he should be fired immediately, yet obama apparently feels the same. the situation appears dire....

May 28 08:04 AM