Financials, Retailers and the 37-Minute Bear Market

 |  Includes: RTH, XLF
by: Richard Shinnick

Wall Street was positively giddy today. Retailers and financials led the market up and despite the early broad market swoon both sectors were pretty much in positive territory from the get go. After the "emergency" "surprise" expected fed rate cut yesterday morning averted an almost certain market meltdown, today the market focused on two themes. First, financial institutions will work through the credit problems.

Second, consumers will come roaring back and retail spending will pick up.

You heard it on CNBC all day "buy financials" and "buy retailers."

That's the recovery "playbook".

By the way, in case you missed it, the recession and the bear market occurred over the long weekend and it ended today at 1 p.m.. This is now the "new" bull market so lets take a look at those two leadership groups and see if we believe the story.

Some financials certainly have limited short-term risk and may work for an upside trade.

Bank of America (NYSE:BAC) was a name I wrote about earlier in the week as a buy in the $35.00 range. I made that trade and am almost completely out close to $40.00.

You give me 10% in a couple of days and I'm happy. As a sector, however, there is something missing from the story, about $300 billion or so.

Does anybody remember the $400-$450 billion in estimated sub-prime loan and derivative losses? There were many predictions in that range. For example,

Deutsche Bank Securities called it at $400 billion and the Japan Research Institute pegged the number precisely at $463.6 billion. So far, we only have about $110 billion in actual write-offs.

Is that it?

Could the Japan Research Institute (whoever they are) be off by 75%?

What happened to all those "dead bodies?"

Finally, it was widely believed that the meeting today between banks and the bond insurers caused that 600 point reversal. Let me get that straight, the bond insurers clients are going to lend the insurers money so that the insurers can afford to pay the claims made by clients?

Isn't this "risk layering" thing what got us in to this mess in the first place? Slap a triple AAA on that pig and call it a pony!

Goldilocks' other leg today was retail.

That would be the 75% of the economy driven by the consumer.

The consumer, of course, breathed a sigh of relief yesterday when the Fed cut rates, and today when the market was up 300 points.



Get this through your head Mr. Hedge Fund, the "consumer" does not watch CNBC because the consumer is too busy working.

Here is what is going on with the consumer.

First, their cousin and neighbor just went in to foreclosure, and their own home (if they have one) just depreciated by 25%.

Second, they are about to get a brokerage statement that shows that their retirement savings (if any), got whacked by 20% or so.

Third, they just got their credit card bill from Christmas.

Fourth, they are watching every single political candidate talk about recession and the economic mess we are in.

Fifth, if they have a savings account, they are going to see their monthly interest earned drop to about negative 1% in real terms.

Sixth, does anybody even talk about $3.25 gas anymore?

Seventh, the consumer debt load is at its highest level ever and up about 30% since the last recession.

Eighth, no more home equity extraction! That is $1 trillion or so less in spending versus the last 5 years. We make that up how?

Ninth, the consumer believes we are going in to a recession. On Kudlow tonight, pollster Scott Rasmussen's consumer sentiment index came in very near an all time low.

Tenth, aren't we still in a war?

Is it really the time to buy retailers? Really?

I apologize for my pessimism. In fact, although I have started short positions in retail (not yet on the financials), I believe that we may see a short term rally and I might even give it a thousand delusional points in the next couple of weeks.

Wall Street can feed on itself for a while, but please don't forget about Wall Street's major blind spot if you trade for the long run.

Yea, Wall Street has a major blind spot. It is the same blind spot that let Taco Bell janitors buy $7 million worth of investment property with Wall Street's money.

Wall Street has no idea about what is really going on in the real world (except for Goldman Sachs who wins even when they lose). Wall Street expects banks to keep lending and consumers to keep borrowing and spending forever.

Wall Street can't imagine a scenario where banks take the Fed's free money, fix their balance sheets and still tighten credit.

Wall Street also can't imagine a consumer that does anything other than robotically spend 3% more than they make in perpetuity. Before you decide to follow that playbook, however, ask yourself if the game has changed.

Disclosure: Author is short RTH.