Monday, November 2, 2009

On a Good Screed, the Economy and the Markets

Barry Ritholtz at The Big Picture has a guest post by the former head of Fast Money, Dylan Ratigan. In Why Keep Geithner, he puts forward a nice screed. It is good to see a former MSM guy speak out in this way. Where I disagree(d) with him is that I always thought that Mr. Volcker was just an old guy who the Obama campaign kept around for show, that a President Obama was getting too many campaign contributions from Big Finance (but would have been a credible vice presidential candidate), and I opposed Mr. Geithner from the get-go, given his obvious central role in the financial scam(s) of last year plus his tax fiddlings.

Switching to the economy, the Institute for Supply Management reported strong numbers re manufacturing today. The manufacturing downturn is over for now; this is not a big part of the economy.
Jobs and consumer spending data are poor. Once again, gold prices went up more than stock prices. The data point in that ISM report that struck me as supportive of a fundamental reason for that trend is that many commodities were reported to have gone up in price, but no shortages were reported. In other words, this is looking like a sort of reply of the False Recovery from the 2001 recession. Total debt to GDP is at new record highs. One has to assume that lots of leverage has been underpinning the markets.

Too many market leaders since the March stock market lows have truly poor stock charts while the averages hold up to suit me. This is typical of an evolving correction. I am out of almost all stocks on a tactical basis. A suspicion is that this market is similar to that of 1975, with a halfway-completed structural bear market after a huge rise off of a scary bottom. Just as this market has retraced half its losses, it would be reasonable to expect it to retrace half this year's gains off the bottom. Assuming Citi does not follow CIT into bankruptcy in a Lehman-like manner, then it would be reasonable to look for a second and final leg up, as in 1976, as the toxic effects of leverage tend to get hidden until the Fed tightens. And if the economy is so weak that the Fed never tightens, I have no idea what things will look like.

In any case, market risk is very high in my opinion. Revelations re Mr. Geithner, Citi, BofA, Hank Paulson, or an unexpected source could cause at least a short-lived panic and could cause a gap opening. In the meantime, any disappointment on jobs may not benefit the Treasury market as that would imply the likelihood of yet more Federal debt issuance or obligations.

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