The Stock Market's Illusion

"Wall Street Rally Takes a Pause" seems to be the consensus headline for the beginning of this week.

Nothing too dramatic so far unless you own shares of U.S. Steel (NYSE:X) down around 5% as of this moment, Genco Shipping and Trading (NYSE:GNK) down yesterday over 6%, BHP Billiton (NYSE:BHP) down close to 5%, or any of the silver producers or royalty stocks like Silver Standard Resources (Nasdaq:SSRI), Pan American Silver (Nasdaq:PAAS), and Silver Wheaton (NYSE:SLW), all down around 5% so far.

The one sector that was doing well yesterday, ironically, is the banking and financial sector. J.P.Morgan Chase (NYSE:JPM) for instance is rallying 1.5% as I write.

The Wall Street cheerleaders want this "Green Shoots" rally to keep pushing higher for awhile and I wouldn't be surprised if they get their way. It won't be straight up from here as even a rocket scientist could figure it out by observing yesterday's action.

Nouriel Roubini was quoted by Henry Blodgett on Yahoo! Finance's "Tech-Ticker". Roubini recently spoke at a conference and according to Blodgett he's singing the same sad song. This "song" is filled with the following warnings and opinions:

• Those aren't "green shoots"--they're yellow weeds
• The crisis isn't over, and everyone has become way too complacent
• We'll be in recession for another 6-9 months
• The recovery after that will be weak
• Big risk of a double-dip
• Households aren't deleveraging
• Oil could go to $200 just as economy starts to recover
• Real interest rates could spike, killing housing, etc.
• Concern about hyper-inflation
• All this could lead to "perfect storm" that will clip wings of economic and financial recovery
• So we need to stay focused on averting disaster before we redesign regulatory architecture.

Back at the old White House, President Barack Obama is promising to deliver more than 600,000 jobs through his $787 billion stimulus plan this summer, repackaging a pledge the administration made weeks earlier as the economy continues to lose hundreds of thousands of jobs each month.

Obama spotlighted billions in federal agency spending planned this summer in an announcement Monday designed to draw attention to his stimulus program.

Much of the spending he announced already was in the works, including hundreds of maintenance projects at military bases, about 1,600 state road and airport improvements, and federal money states budgeted for 135,000 teachers, principals and school support staff. Doesn't sound too "stimulating" to me.

All the news yesterday isn't helping the stock market, the energy markets or the precious metals market. It is helping the dollar and to a lesser extent the ten-year treasury bond whose yield is slowly inching towards 4% (what happened to lower interest rates that would lower mortgage rates which would stimulate home sales?)

Lawrence Williams, writing from London for Mineweb.com made these observations in an article entitled "Obama Effect--Good for Dollar but Bad for Gold":

More recently, as the dollar started to fall back on the recognition of the huge U.S. Deficits and the enormous increase in money supply as the Fed tries to buy the U.S.'s way out of recession - or perhaps depression - by printing dollars and gold began its move. As it has before, it got to around $990 and stalled and has since lost more than $30 as there is a sense that the worst of the recession is over, false in our view, and with the latest U.S. Jobless figures better than anticipated, the dollar has begun to pick up again. Markets are again rising - but for how long?

Some of this has to be down the Obama factor. In terms of rhetoric, and driving up people's hopes the charismatic U.S. President has no rivals anywhere. He may be anathema to the U.S. right, while economists fear the policies of spending, and printing, more and more dollars will ultimately lead to dollar destruction, but he has the capability of making Americans believe that things can, and will, get better. And belief or perception is half the battle in pulling out of recession.

If the American people believe that things will get better they will return to spending as only the American consumer can and will help pull the economy through.

The illusion of "the American people [and investors]" is that the American people have money to spend, and even if they had a few extra dollars, that they'd spend them rather than save them.

With between 300,000 and 600,000 people loosing their jobs each and every month you'd think that consumer spending (and "true" consumer confidence) would be heading towards the South Pole.

So, some fine day, we're going to see the "big dogs" of Wall Street, including those infamous "exchange specialists" running for the exits and driving the market down at least 20% from wherever the high of this bear market rally ends up.

That's an educated guess, but it is congruent with the lack of regulation, the lack of transparency, and the lack of "true" confidence that we-the-investor have in the markets in general since we were badly burned beginning about 9 months ago.

So a good rule-of-thumb right now is "hedge your bets", "keep some powder dry", "get ready for the unexpected", and don't forget that July through October can be a very ugly period for many investment classes.

The exceptions are often the investment vehicles owned by Federal Reserve and Federal government officials (or ex-officials) such as Bernanke, Greenspan, Geithner and Paulson, and who knows what they're invested in these days.

I'm told that Bernanke and Geithner are compelled by some law to be invested only in US Treasuries, so that may once again be a part of our "hedging" strategy...believe it or not.

The "Obama Effect" may help increase the odds of that strategy temporarily supporting the dollar and making it possible for the Treasury to sell tons of I.O.Us, even though the main buyers might be the Federal Reserve Bank itself. Stay tuned this summer for the "exciting climax" to this fiscal odyssey.

Disclosure: Of the stocks I've mentioned in this article, JPM is the only one I'm long in.

Comments

[atlasman:]

"Back at the old White House, President Barack Obama is promising to deliver more than 600,000 jobs through his $787 billion stimulus plan this summer, repackaging a pledge the administration made weeks earlier as the economy continues to lose hundreds of thousands of jobs each month."

No, that is incorrect. In one of the biggest farces ever conceived by a President he is promising to create or "SAVE" 600K jobs. I was shocked when I heard that line of arguement for the first time and immediately realized it was created for purely political reasons as it is impossible to prove or disprove. This financial problem will never be resolved until the people in charge stop lying to the US people (and maybe themselves). The truth will eventually come out, but only after the real financial 9/11 hits the country.

Jun 09 07:28 AM

[Gyoza Mimi:]

The market now reminds of a massive pump-and-dump scheme with the indexes inflated artificially at the end of each trading day. The rally appears to be hollow and the more it goes up, the more it will have to deflate eventually. I believe the goal is to lure the retail investors, hoping that that economy will be revived by the stock market entering a virtuous cycle where good news bring more investments, which is a good news that brings even more investments and so on.

Personally, I am all cash, not willing commit to either direction. On one hand it is more and more obvious that the rally is not sustainable and being long when everyone runs for the door is not the best situation. At the same time, I am not sure how much pumping can be done (after all we already had 14 successful weeks of it) and how much pain can be inferred through shorting.

Thanks.

Jun 09 07:43 AM

[prudentinve...:]

"...With between 300,000 and 600,000 people loosing their jobs each and every month ..."

I think you mean "... losing their jobs ...". This has become a very common misspelling on SA.

To SA editors: Please improve spelling checks on SA articles. Thanks.

Jun 09 08:23 AM

[TCK:]

"Create or save 600,000 jobs". The statement itself is laughable as it is unknowable by any measure.

Even worse, main stream media refuse to challenge the statement !

Jun 09 09:57 AM

[naidle:]

Hate to be that guy but it's not "loosing" but instead "losing".

Jun 09 10:20 AM

[Alphameister:]

I wonder if that catalog of possible horrors, with all its "could happen"s, is becoming a Roubini wish list. Seems that most pundits who make a great call become so over-invested in that call that their objectivity tends to suffer at some point.

Jun 09 12:26 PM

[Marc Courtenay:]

Thank you Gyoza for your comments and I share your concerns. Having a great deal of cash right now and remaining more "market neutral" is a sensible approach. I'm turning into a Black Swan investor which is the subject of a special report I just completed.


On Jun 09 07:43 AM Gyoza Mimi wrote:

> The market now reminds of a massive pump-and-dump scheme with the
> indexes inflated artificially at the end of each trading day. The
> rally appears to be hollow and the more it goes up, the more it will
> have to deflate eventually. I believe the goal is to lure the retail
> investors, hoping that that economy will be revived by the stock
> market entering a virtuous cycle where good news bring more investments,
> which is a good news that brings even more investments and so on.
>
>
> Personally, I am all cash, not willing commit to either direction.
> On one hand it is more and more obvious that the rally is not sustainable
> and being long when everyone runs for the door is not the best situation.
> At the same time, I am not sure how much pumping can be done (after
> all we already had 14 successful weeks of it) and how much pain can
> be inferred through shorting.
>
> Thanks.

Jun 09 12:40 PM

[Marc Courtenay:]

Whoops! Thanks for pointing that out !


On Jun 09 10:20 AM naidle wrote:

> Hate to be that guy but it's not "loosing" but instead "losing".

Jun 09 12:41 PM

[carey_jim:]

It's worth examining what happens when speculators drive the price of anything far beyond its actual worth, why they do it, and what the after effects are.

Because, in essence, during speculative bubbles, markets lose their efficiency and sometimes explode into complete chaos.

A deep study of this phenomenon would require an entire book, of course, but we can at least take a glance at it.

The first regulation of the SEC was the Securities Act of 1933:

1. It requires that investors receive financial and other significant information concerning securities being offered for public sale; and

2. It prohibits deceit, misrepresentations, and other fraud in the sale of securities.

Critics counter that government regulations are ineffective because government officials accept bribes, corrupt politicians make back room deals and are often drawn to politics for the sole purpose of gaining power and wealth.

Government officials point out that countless small time crooks, and sometimes big time operators like Bernie Madoff, steal billions of dollars from investors.

Hyperinflation in Germany and Austria are interesting case studies. After World War I, both cynical politicians and rapacious speculators welcomed hyperinflation because it allowed them to virtually steal Germany and Austria from their wealthy aristocrat and business owners.

Socialists battled with gangsters on the streets of Berlin and Vienna for control of their respective countries.

What was the aftermath of this brutal struggle between socialists and gangsters for control of a country whose social, political and economic integrity had been destroyed by hyperinflation? Adolf Hitler and ultimately World War II. The gangsters won.

If a workable balance between government regulation and free enterprise can't be found, a balance that prevents runaway speculation, we Americans might find ourselves facing a similar war over ownership and control of a economically, socially and politically devastated Untied States.

Jun 09 01:52 PM

[Moon Kil Woong:]

Although American's savings rates are increasing, declining home values, declining or lost wages, and uncertainty will keep people sidelined from incuring extra expenditures. Giving a people a few extra bucks or making a few extra jobs will not do much to contermand these extreme overriding forces dominating the minds of individuals. That is because they are 100% correct in curbing their expenses.

If only the government were so wise it would not be facing rising inflation and bond yields. It can go on and say, if there was no stimulus, no TARP, etc. everything would be terrible, but in many ways it sounds a lot like a spoiled kid screaming, "I want my shiny new economy now.", "If I don't get an ice cream cone I'll starve.", or "How will I go to school if I don't have a car." The government needs a parent to tell them, "Grin and bear it."

Jun 09 10:25 PM

[lex:]

Obamanomics is a joke. He is relying on his charisma to fuel the spending recovery in the US. Obamanomics is responsible for propping up the stockmarket, so sentiment will get better and thus consumer confidence will rise so that ppl will spend more. His propanganda machine is working overtime...save 600k jobs? how did he work that out?

Jun 09 11:52 PM

[carey_jim:]

The Obama administration is using the same tactics a Republican administration would use and has used in the past.

Gore Vidal said about American politics:

"[t]here is only one party in the United States, the Property Party...and it has two right wings: Republican and Democrat. Republicans are a bit stupider, more rigid, more doctrinaire in their laissez-faire capitalism than the Democrats, who are cuter, prettier, a bit more corrupt—until recently... and more willing than the Republicans to make small adjustments when the poor, the black, the anti-imperialists get out of hand. But, essentially, there is no difference between the two parties.


On Jun 09 11:52 PM lex wrote:

> Obamanomics is a joke. He is relying on his charisma to fuel the
> spending recovery in the US. Obamanomics is responsible for propping
> up the stockmarket, so sentiment will get better and thus consumer
> confidence will rise so that ppl will spend more. His propanganda
> machine is working overtime...save 600k jobs? how did he work that
> out?

Jun 12 02:30 PM