Last week was the party, this week sobriety
By Trading Alpha
There was this enormous punchbowl. The market, financial sector, media and world leaders had a great time celebrating the many apparent turning points last week with frequent trips to this punchbowl. In their minds, the week included great accomplishments like breaking back through 800 on the S&P 500, entering a new bull market (20% up), seeing the demise of market-to-market accounting, having a productive G-20 Leaders meeting and seeing better than expected improvements in virtually every economic result that was published.
The U.S. equity market that added another 5% on the S&P 500 bringing this new bull market to just about a 22% rise off the bottom. Time to "back the truck-up" and buy stocks said Cramer and Mr Mustard Seed. This has been the most amazing "V" recovery of the U.S. equity market we have ever seen in seventy years of bear markets. Apparently we won't have capitulation for the worst bear market since the Great Depression. Things are different this time I guess. Over the last month numerous pundits have declared the bottom was established in U.S. equities.
Note the returns from the closing lows of March 6th to last Friday, April 3rd:
The party continued until the punchbowl was empty closing out the week with the Dow at 8017and the S&P 500 at 842.
First sobriety then a hangover
First comes the sobering effects this weekend as people assess the strong equity performance another week has provided and decide they should take some profits in next week. In the last 70 years, we have never had such a quick and violent recovery after being down 30 to 50% as we have just seen. The previous times all ended with giving back the gains and retesting the previous lows. We have not retested the 6600 lows on the Dow. The notion that we got to a 27% recovery (from intraday lows) in four weeks looks much more like a bear market rally then the beginning of a new bull market. This run has been too easy and what is easy is often a mirage.
Next there is the G-20 meeting. As I wrote in this article "The G-20 is Here to Save Us, Again" (http://seekingalpha.com/article/129548-the-g20-is-here-to-save-us-again?source=wl_tab), if we examine the key objectives the G-20 was supposed to have accomplished from their last G-20 meeting, it was a clear failure. Why should we view these new pledges any differently?
Then there is the economic news. Last week was quite amazing. The media and the markets were clearly looking at the data with rose colored glasses. The chilling Case-Shiller information on housing prices was shrugged off. As I wrote in this article, "Housing in a death spiral.." (http://seekingalpha.com/article/128851-housing-in-a-death-spiral-taking-the-mortgage-industry-with-it), this is extremely serious and many are turning a blind eye to the free falling housing prices only to instead cheer a 5% sequential rebound in existing home sales over an absolutely horrendous prior month. Housing will continue to drag down our financial institutions and government's balance sheet as well as increase defaults on all types of loans and create the worst negative wealth effect we have ever seen in our generation. Other economic news if negative was labeled in line with expectations and there was great celebration for any apparent spec that might be a mustard seed. Housing values are the Titanic and the rest is more like arranging the deck chairs - last week the mainstream focus was on how neatly the deck chairs were lining up.
The real hangover will start to hit this week as financial institutions work through the proposed FSPs on changes to market-to-market and figure out there is not much punch to the changes and the media and analysts have been vastly overstating the positive effect of these changes. As I described in my early Thursday morning article before the FASB vote, the consequences will be far less than expected - "What Consequences will FASB's approval have" (http://seekingalpha.com/article/128851-housing-in-a-death-spiral-taking-the-mortgage-industry-with-it). Expected positive effects have not been overstated by 50% or 100% but rather by a factor of 5X to 10X. You'll see evidence of this start to emerge this week as the sharper analysts and larger financial institutions work through the details and word starts to get out to the market. It will come even more in focus as this month unfolds and Q1 results and conference calls take place and 2009 outlooks are discussed. All of a sudden the recent near 60% run up in financial stocks will take on a scary new light.
The author is short financials