Has Anything Really Changed in the Last Two Days?

What, us worry?

Thank goodness all those silly issues that RELENTLESSLY dropped the market 1,200 points for the first 26 days of November all vanished in a puff of fairy dust at 9:30 yesterday morning! While I do believe in fairies, I do, I do, I also believe in fundamentals and none of them changed in the last 48 hours. Yes I do realize that I just said we were oversold at 12,800 but that doesn’t mean we can’t be overbought at 13,300 - who the heck expects it to happen within 13 hours of trading?

Of course we have the Fed comments but we just had a Fed meeting on Oct 31st, where they DID lower rates a quarter point to 4.5% AND THE MARKET DROPPED 1,200 POINTS. Leading up to that meeting the market ran up from 13,400 to 14,000 in anticipation of that move and now we’ve jumped 500 points already in anticipation of the December 11th meeting. With no new meeting until Jan 30th, this one better be a doozy to undo all the damage to the financial markets as we prepare to say goodbye to 2007.

One definition of insanity is to repeat the same behavior while expecting different results. Investors seem to fall for this all the time and our President is so proud of this tactic that he calls himself "The Decider," like it’s some kind of super hero thing. His Treasury Secretary flies around the world saying "strong dollar" while sneaking home at the end of each trip to print more. Our Fed pursues their own version of madness by lowering rates a bit at a time like some kind of Chinese water torture and the bulls run the market up on every move as if THIS time a rate cut will fix everything.

How will a 0.25% cut, a 0.50% cut or a 1% cut help the 2M people who are ALREADY IN THE PROCESS OF LOSING THEIR HOMES? How will it help the 2M people whose mortgages will reset next year and very likely cost them their homes. A bank bailout is nothing but welfare for the top 1% (and this is you and me my friend if you have $100K or more in the market) in order to salvage the paper profits the financial institutions booked when they ripped off the other 99% in the first place!

On Tuesday morning I was pleased that the markets were dealing with the death of the mortgage market and had worked through Denial, Anger, Bargaining and Grief and we seemed to be in a healthy stage of Acceptance. Now we have relapsed into Denial, if the market was Brittany Spears they’d be taking it right back to rehab after such a sudden relapse…

Didn’t Goldman Sachs just tell us the world was ending? Sure I said to ignore them but there’s a difference between ignoring them and doing the exact opposite. In Europe they are freaking out about inflation and our big solution is to cut interest rates with oil still over $90 and gold at $800??? If Europe is raising rates and Japan can’t lower theirs because they are already at zero after pursuing the same idiotic Fed policy we are running now and the US cuts their rates then what will happen to the dollar? There’s no need to wait for the answer, it’s already happening! The ECB funds are in such high demand (while our notes are not) that $30Bn in short-term notes went off at 4.7% yesterday, 0.7% ABOVE the ECB’s 4% policy rate.

Let’s do the math folks: Euros are tight, people want them and are bidding them up. Dollars are loose, nobody wants them and they are flooding our market. That’s what’s keeping our rates down, everyone is dropping dollars back into the system and they are sloshing around with nowhere to go. Who cares if the Fed is willing to lend dollars for less money, there’s no demand for them. That would be a stagnating economy plus inflation = STAGFLATION. Granted one of the things that exacerbate stagflation is tight money but America is no longer a global leader and the old tricks just aren’t going to work anymore.

I mentioned in comments today that the Durable Goods Report was terrible and we had an additional 1.2% decline in home sales and inventories are now up to 10.8 months of unsold homes, the most in 20 years and the Beige Book didn’t look so hot and none of this seemed to bother anyone but we loaded up on SPY puts into the close to protect some truly outrageous gains. I’ll be thrilled to take a loss on my hedge but I’m very concerned that this rally is nothing more than a lot of hot air, perhaps the last gasp of a dying market...

We’ll continue to watch my 13,000 to 13,300 range. The way this market is moving, we could got to 13,500 and I still wouldn’t be convinced to change my targets but above 13,300 and I will be ready to play the momentum game because, just because a rally irrational - there’s no reason we can’t make money on it!

Comments

[Georealist]

Mr. Self Important...per modus operandi...intersperse... just enough sensibility to justify the real point of his poorly proof read exercise..THE RANT. Does he want the Fed to cut by more than a quarter point? Would he like a full point?? What then of flooding the market with new credit issue? If "nobody" wants dollars then why the rally this week? However heartless it may seem...and on a person to person level it is criminal....does anyone believe the market will do anything but yawn next Spring at mortage resets? Or that Hillary or Obama aren't already working on a neat little engineering plan to re-erect these failed mortages??
The real problem with this overblown clown is that he throws a lot of complicated puzzle pieces at us Alpha readers..but not enough of them ever fit together into a cogent picture. Hyperbole and hype..and no thoughtful substance.

[NoFate]

Georealist - I think you are being a bit harsh here ...the author's premise is correct. Nothing really changed in the past 2 or 3 days that would warrant a rally like this. The Fed is basically useless and the subprime/credit crunch issues are still there.

Do you disagree? Great ...then tell me what changed!

I'm mostly short or cash ...my big question is do I take this opportunity to add more shorts. I'm on the sidelines for the moment, since I think it could still go higher before it ultimately collapses. But that's just one bear's view...

[NoFate]

I guess the Arabs giving Citi essentially a $7.5 billion loan at 11% interest is a change ...I would hardly call that progress though!

[RO]

Phillip,

Thanks for the article. I'm an American citizen myself and have been distressed for awhile now about our policies and the decline of our reputation abroad. Nonetheless, articles like this which espouse the legitimate viewpoints of experts need to continue to be printed, so that Americans will begin to wake up to the realities around them. Be bold in the face of hatred and denial, for that is what we will continue to see as people begin to perceive reality but refuse to accept it.

[TraderMark]

I like to call this Groundhog Day. We did the same song and dance in mid August, ahead of the 'surprise' (not to Goldman apparently) discount cut. Then off the Fed cut 6 weeks later we rallied the whole time. Then reality hits and we dump 10%. Now we are back to where we were, playing the same game - ho ho ho, Fed will cut, time to rally. Then when it's done, we can continue to fall as we face reality. Really are humans more advanced than lab rats?

Eventually I just think the goal is to get rates back to Alan level circa 2002-2003, then we can have our citizanry push their debt back into adjustable rate loans at 2-3%. Thats a 'solution'. Only thing working against that is falling home prices, but circa 2011 or so we can do this whole dance again... home prices flat to rising, Americans overspending and 'finding' money in their homes to compensate for their spending and away we go. THe only problem is (even Greenspan says) we are entering a new era of inflation that the Fed cannot control - its bigger than the Fed. A world of shortages - water, food, energy and hence prices must go up. And with a Japan type currency we are going to be paying more than most. So balance that against 3% type wage growth, and the gret middle class is going to be lucky to lose 1-2% in buying power a year. Yes we overspend but wages are not keeping up with real costs either, and this is like erosion - you dont notice it in any 1 year but over time its really hurting. This is why the non top 2% feel so unsecure. And that will only continue in the future. We are going to be a stronger version of Japan in 10 years based on what I see and "policies" enacted with no long term vision.

[dancing diva]

You miss the point. The market bounced not because it thinks a 1/4 or 1/2 point will make a difference, but because the Fed finally acknowledged there was a problem. Only then can there be a solution. Prior to this week it looked like the Fed members were completely oblivious to the issues with both the credit markets and the economy.

The market needs a proactive Fed not a reactive Fed. This week gave the first glimmer of hope it will move in that direction. As long as this becomes a reality stocks will be well supported. You forget this is not like 2000 when the market multiple was nearly double the current level. There is no reason for a stock market collapse unless there is an economic one. And there will not be one if the Fed and US gov't do their jobs.

[jcrash]

All this thinking that these loans won't get refinanced is pretty silly. It will happen, 30 yr rates are already at 2 yr lows, and if you dispense with LTV requirements, the payments are affordable if you can get the people out of the adjustable rate loans. That will happen, and the real homeowners will be allowed to refinance.

Speculators will and should get screwed, but they are not enough to cause more than mere heartburn for the industry.

This isn't to say there is no problem, but it will not be as bad as people are making it out to be (27 cents on the dollar, Etrade? You just gave away money).

[NoFate]

C'mon guys ...the Fed is useless. It takes 6-9 months for the rate cuts to take effect and it's the LIBOR that determines mortgage rates (it's not going down).

Besides, many many people are going to start walking away from their homes when they are worth less than their loan ...and most of the resets are still ahead of us. This could cause a death spiral ...prices drop ...people abandon underwater loans ...prices drop more ...more people walk away ...and so forth. There is allready a 10.8 month supply to prime this type of action.

Finally, credit could dry up quickly. Banks have to maintain certain margin and these losses could to cut into this leverage significantly. Am I ready to call the end of the world ...no way ...but many bulls are walking around with blinders on. There are huge dangers out there at the moment.

[jcrash]

Where I live (Tulsa, Oklahoma) our home sales are barely off last years incredible record pace. Prices might be off a little (less than 2% for sure), but there are no foreclosures. You watch too much TV. They sensationalize everything, always have always will. Good for us, they made stocks cheaper than they should be. They may have scared some consumers, but that is a temporary scare already being resolved with Xmas spending. California, Nevada, Ohio and Florida do not equal the whole country.

XLF has bottomed, LIBOR may determine some mortgages, but as I said, fixed 30 yr rates are at 2 yr lows. A 15 yr loan is 5.25 percent. Come on, those are affordable rates.

People will only walk away from loans if they are speculators, if they are living there, they will see it as the investment it is and they will refinance to a fixed rate if the government makes it possible (which they will).

You really think that you can just plot out the financial course of the country, especially one of doom and gloom because it seems logical? If it was that easy, we'd all be millionaires.

[NoFate]

jcrash - I can't speak for Oklahoma, but it looks to me like CA and FL are in recession already. And most big cities are looking pretty ugly at this point.

I do think many people are going to walk away from loans though. Most of the ARM resets are in the next 6 months ...and alot of loans were LTV over 100%! Nationwide houses have dropped in value now 4.5% (Case-Shiller Index) ...and the slope looks like about 80 degrees! This could get very ugly!

Finally, and admittedly, timing is the hardest part of trading stocks. And admittedly I do not have perfect knowledge. Much of what I read or hear (including most of CNBC) I dismiss, but there are certain people that regularly seem to know what they are talking about ...and if you are at all interested in hearing a more then below are some links to people I respect. If not, then it's really not my problem.

www.safehaven.com/arti...

www.hussmanfunds.com/w...

www.financialsense.com...

www.rgemonitor.com/blo.../

[NoFate]

And here is one more:

peternavarro.com/bigpi...

If you are still bullish after reading these 5 articles then more power to ya. If you don't have at least a few bearish doubts though, it just means you are not getting it.