Tuesday, March 24, 2009

Tuesday Afternoon Markets Update

Well, there's been a bit of sturm und drang in the markets lately.  Barack Obama may already be in the stock market's history book:

The S&P 500’s gain yesterday pushed the index’s increase since sinking to a 12-year low on March 9 to 22 percent, the steepest two-week advance since 1938.

The S&P 500 needed only 10 days to enter a bull market after taking seven weeks to fall 20 percent and give President Barack Obama a bear market.

Who knows how many more swoons and surges the next 46 months will see?

The financials are strong recently, but among the big 4 banking companies, only JPM has definitively penetrated its 50 day moving average; WFC, BAC and C remain in confirmed downtrends.  So are AXP and GE.  The large cap financial with a promising chart is NTRS, which has penetrated its 200 day MA and for which the 50 day MA is in an uptrend, unlike JPM.

Fundamentally worrying re the financials is the recent hype, which elicited these comments in a Bloomberg.com article this morning:

Already, some banks are bragging that they are starting to make money on an operating basis from trading profits and bigger lending margins.. .

It could create even more chaos in the financial system if some banks gave back the TARP money, only to howl soon after that they still needed it after all. "We see another $1.5 to $2 trillion of as yet unrecognized losses from U.S. assets still to hit global financial sector balance sheets and challenge its institutions," said Daniel Alpert, a managing director of Westwood Capital.

"The near daily announcements over the past two weeks, by money-center banks and finance companies, that they are making money this year on an operating income basis, have become borderline irresponsible, relative to continued deterioration in value of the assets on their balance sheets and the continuing impact of a worsening recession," he added.

It smells like a manipulated rally in the financials.  Any bank that is not booking operating profits when its cost of money is close to zero should be liquidated on a variety of grounds.  The Fed is guaranteeing operating profits.  Solvency, however, is not so simple, even with the Geithner gift (TARP III or whatever you call the latest bailout plan).

The major technical problem with the stock market is the almost complete disappearance of leadership.  Last year, at least we had WMT and MCD.  These are at best starting over.   This year, everything takes its turn moving up and, to date, collapsing.  Especially weak is Procter & Gamble (PG), which is worrisome.

Fundamentally, with the economy definitely in a severe downturn, where oh where can the cash come from to fuel a lasting rally?  It would seem that the Fed and the Feds are much too busy keeping the financial system afloat and trying to gin up some inflation- anywhere- to create so much money that much of it seeps into stocks.

Re Treasuries, what can you say about a Fed that is so desperate to accommodate the Feds' borrowing needs that it feels it needs to print money to help create a market for the world's most tradeable notes and bonds?  The classic response is to sell if you happen to own the specific securities that they are buying.  However, Bernanke et al are no dummies.  Do they really intend to generate big losses by buying Treasuries at expensive prices?  A conundrum, to be sure . . .

Gold remains in an uptrend but feels a bit tired and temporarily overexposed to the public, and has characteristics of MCD before it rolled over.  Diversified accounts definitely want exposure to gold, but physical possession is emphasized.  A significant drop in the gold price, even if much higher prices are in the offing, is a strong possibility in a future liquidity panic a la last year's panics.

Silver actually has a stronger chart than gold.  Each metal can be heavily manipulated both on the short and long sides.  When cash silver outperforms cash gold in a basically deflationary environment for raw materials, as has been the case for the past 3 months, I want to look for the rat even if I can't smell it, and not chase any rallies.  The only reason gold is priced where it is versus other commodities is as an alternative currency, not as an inflation hedge, so silver outperforming gold as the world economies nosedive appears illogical.

Longer term, the very bright SocGen strategist James Montier recently wrote this about gold:

Of course, recently everyone has been talking about gold (not hugely surprising given that it is up some 30% since late October) - something that makes me nervous. However, gold is institutionally massively under-owned, so whilst it may have been moving up the list of attractive assets of individual investors (if the EFTs are anything to go by) and sensible hedge funds (such as the likes of Greenlight, Paulson, Third Point, Eton Park and Hayman), the mainstream institutional appetite for it has remained depressed.

Overall, these are headline-driven, governmentally-influenced markets which ultimately will follow the rules of markets in that they will seek fair value, but in the short term are impossible to trade with any confidence without receiving a phone call from that certain someone with a name such as Timothy or Ben.

Copyright (C) Long Lake LLC 2009

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