Equities are a very good indicator of current to mid-term trends and there is no question that the equities were correctly predicting today's trends when they began rising back in March of this year. But what exactly was that prediction? Well, (thinking back) we were only a few months into the new administration. That’s when the markets tanked. And that’s when the markets provided the new administration with a unique opportunity. Or was it more like a bait?

The markets tanked because of uncertainties regarding this administration’s plans to handle the debt/credit crisis. And looking at the barrage of recently formulated economic policies it is pretty much clear which direction “all” this is going: More and more debt. What is striking here is that equities seem to be rising every time new spending plans are announced or formulated: Universal health care, economic stimuli, more bailouts, cash for clunkers, on and on. It does not matter. The more debt: the better.

The recent rally in the Homebuilders and REITs might have taken some investors by surprise. But what is even more surprising is the current valuation of these equities. A quick look at a chart of a trailing P/E for NVR over the last 44 months (or so) reveals an unusual spike:

One of the more interesting stock moves this week is that of AutoZone (AZO). Considering its all-time high, bullish investors might find it interesting to look more closely at this particular debt ridden equity. But solvency is not the only reason posing a risk to the current value of AutoZone shares.

The U.S.-denominated credit bubble has achieved great and fascinating progress in the U.S. and (especially) around the world. However, it did it so under a slightly over-prescribed - per Treasury's order - and massive credit overdose. And with the rude awakening from this credit trance came a realization of what the capital world looks like when the brakes are put on a massive credit generating mechanism: A glimpse into the end of times for the expansion of U.S.-denominated credit.

We can see the effects of credit expansion in many places. The interesting ones are with the globally producing creditor nations. It appears that the initial response (to the "end of times") is favorable to the U.S. dollar. And to explain that kind of strength, one can consider that some of these capital participants were entire economies that have absorbed our debt in order to spur their own economic growth. It is also helpful to note that their growth faltered as a result of our hold on credit expansion. From our vantage point these events (of a halt in credit expansion) might not seem too troubling at this point. After all ,the Feds have certainly done their part to ensure that this will be a smooth transition. A transition so very well crafted and handled.

It is certainly encouraging to see equities (be able to) rally, especially after some recently deflating market action. But regardless, the (historic) new trend in the bond market should greatly concern any investor.

As a trend, the flattening of longer-termed (Treasury) borrowing yields could be interpreted as creditor-capitulation. These terms on long term financing should bode well for a nation of great debt. After all, time can be of the essence (for a great nation of debt) during periods of debilitating credit conditions, as well as severe and punishing capital and economic contractions.

So what can we take away from some interesting two-day market action? Well for once we could finally confirm, at least on Thursday, that a (much anticipated) surge in U.S related equities could indeed occur at the expense of both a weaker dollar and a weaker treasury offering. Add to that a rally in gold, and here we go: Inflation, waiting at the doorsteps. We were even beating out our yen counterpart. Just to emphasize where our greenback really stands.

Okay, not withstanding Friday’s reversal in the bond market, crude, equities (though late-day), and just about everything else, we could have looked pretty good selling an environment of higher interest rates and (possibly even) hints of economic growth a la Wal-Mart. It’s hard to believe that equities could even rise in such an environment. And sure enough, they could not hold on today. But when you find yourself in a recessionary/deflationary tailspin, even (slight expectations of) higher interest rates will lift the markets.

There is nothing more comforting to the existence of capital (liquidity) than a good jolt of market-cap (appreciation). A healthy dose of equity rejuvenated. A Contra (counter) move such as the one today serves a good reminder to the kind of world we live in. With all the negativity and immense erosion of capital (occurring), we are yet reminded that it is not very wise to think of a world in the absence of capital markets. After all, did the evolution of civilization (or call it what you like) not go hand in hand with capital expansion in past (many) decades?

Well, there was technology for a while. And wow. What an immense impact did that create on the average person’s lifestyle. Communication, the digital world, all these elements transformed our civilization. No doubt that a lot of faith (and “appreciation”) was injected into the (many) components of our capital system. And price appreciation was not just factored in for components that were directly embedded in the fabrics of such amazing progress.

It is amazing to see the financials still hold up so well. Well, in a relative sense. With so much (overwhelming) negative talk from Washington, it is amazing to think that we even have a market place.  But the government is taking decisive action in order to restore the complex (broken) functions of the capital markets. Progress has been made as far as isolating and understanding the components (and processes) that have been so immensely destructive to capital expansion and preservation.

The massive global government bailouts aim to support the financial system by guaranteeing (defaulting) debt in hopes of (eventually) re-introducing (worthy) credit elements to the capital markets. These guarantees will eventually have to come face to face with much weaker economic output, and/or a soft labor market. Or, they will pose challenges to concerns regarding the U.S. as a great nation of debt. So the question remains: Can our government convince its creditors (and world markets, alike) that U.S. credit (at its origination) will once again return to normalcy.

So here we continue with the saga of our nation's debt. And that debt is about to become significantly worse. In the meantime, we question if Congress will allow the Feds (via its use of our nation's treasury) to take full reign over attempts to ease the credit liquidity crunch. The Feds have made their case. They are about to demonstrate how the absorption of a handful of frozen and illiquid assets (onto the books of the Treasury) can transform itself into the catalyst for a chocked up credit market.

There are certain elements of the bailout that will undoubtedly have a positive impact on the credit markets. Just as the massive Fannie (FNM) and Freddie (FRE) absorption stabilized the mortgage securitization business, this bailout of all bailouts will allow banks (give or take a few acquisitions along the way) to once again sell their own paper as (their) risk spreads flatten. Fair enough. In the context of lending one could consider it essential to capital expansion.

Fannie (FNM) and Freddie (FRE) have just left the building. Their offices shut down. Raided by the actions of Uncle Sam. Also at the scene nearby, Bill Gross. But now, Uncle Sam is stepping in to take control of the balance sheets with plans to greatly reduce their function in the mortgage business after 2010. Sure this makes sense. For once, the taxpayer should accept the confiscation of these assets: They are shrinking, deteriorating, or hurting the economy. The perception is that this action will heal the markets as healthier (and more competent) entities will eventually enter the mortgage securitization business and once again establish order.

The government might have taken its clues from Bill Gross, the important recipient/creditor/pivot-man in the much ado Fannie and Freddie paper world. Bill Gross, incidentally, recommended the confiscation of these assets. Are we surprised? Of course, not. A man in his capacities would be the last person to recommend the complete shut down of an ill-fated mortgage securitization business. Maybe he understood that the Feds had to make choices. And, he knew their weakness: Facing those old guarantees that got them in this mess in the first place.

This week’s debt offering by Fannie (FNM) and Freddie (FRE) sparked an intense rally in the stocks of the two companies.

There is not much good happening right now in the business of Fannie and Freddie. They have sold debt before, like in their better days. In fact, investors who picked up Fannie and Freddie papers this week would have been foolish to walk away from three-month notes yielding 2.58 per cent. Mind you, these instruments have some kind of government guarantee attached to them that (from what these investors like to believe) must cover the near full percentage point over Treasuries. I am wondering if that auction raised an eyebrow or two at the Treasury Department, or at least, raised some concerns regarding the Treasury’s own debt offering. But the Fed doesn’t seem to want to take action. This gives investors the perception that the markets will have to play themselves out.