Consumer confidence pops

The consumer confidence number bounced significantly.  This is generally  supposed to be positive to the currency, but because the US dollar has become a carry trade currency through the zero interest rate policy, now  good economic news has an inverse effect on the US dollar, moving it lower.

It’s hard to believe that consumers are spending more money when their 401ks, house values and wages are down significantly, unemployment is rising and even if they are spending money retailers have marked down items so low their margins are razor thin.

The problem is that when there is bad macro news, such as the rumor of the US losing its AAA rating, the US dollar sinks, too.  US equities can’t continue to rally if the currency continues to sink at this rate.  All of the consumers will lose their purchasing power

Feeling frothy?

As the rally appears to be running on fumes at this point, I’d like to say that I was a little early saying to sell it before, but one never can trust a bear market rally.  That’s what it still seems like we’re dealing with, too.  The technicals were powerful during the 8 week surge, but we do not yet have a Dow theory buy signal (need a close above 9125) or a break above the 200 day moving average on the S&P 500.  Now the charts are beginning to look more exhausted as the overbought conditions are worked out.  Longer term the trend remains down as we seem to continue with the 10+ year double top formation playing out on the S&P 500.

Banks led the rally up and now they are beginning to give way as fundamentals point to a more pessimistic picture than the prior trading action of their equities might suggest.  While I do feel that the substantive cash injections, ZIRP cheap liquidity and stimulus have filled part of the vacuum left by the implosion of Lehman and the deleveraging process, there is simply too much enthusiasm around when this alleged recovery is due to transpire.

We are quite literally in the midst of a complete reinvention of how the world does business and in that process there likely will be further dislocations and market abberations before settling in to a U or L-shaped recovery — either economic destiny will be determined by the shape of fiscal policy and whether insolvent institutions are infact allowed to fail or continue indefinitely as “zombies”.  Unregulated derivatives markets must be brought in to the light and fully regulated in order to prevent credit default swaps and other leveraged contracts from contributing to widespread system disruptions.

This turning point has been marked by the downfall of the US as the financial capital of the world.  A slow unwinding process that in the decades to come will be much more apparent than it is now.  This is the unfortunate consequence of being the largest debt bearing nation in the world whose currency is quickly losing popularity as reserves for central bankers around the world.  The unraveling is going to degrade the quality of life for Americans and boost domestic inflation considerably.

If nothing can be done to restore confidence by regulating the shadow markets and unraveling the insolvent institutions, then this trying period shall last quite a while.  At this point I don’t feel the actions of the US government or the Federal Reserve have been constructive to that end.  That is why I feel the rally is largely unsustainable and right now we are in a frothy period where short positions in equities and long positions in foreign currencies may be appropriate to consider putting back on the table.

Disclosure: Short US equities, long foreign currencies

Is the rally real?

Much of the rally has been predicated on increased optimism because the recession may be slowing. Many recessions have double dip bottoms and most bull markets are not led by the same groups that led the last bull market.

In addition, the US still has a lot of problems with the deleveraging consumer, potentially insolvent banks and a financial system whose accounting has reverted back to off balance sheet trickery and mark to make believe models.

How can we believe the rally is real if it is within the context of one of the sharpest downturns the world has ever seen, where the fundamental macroeconomic picture has not improved and nor has there emerged a true cyclical leader for the next bull market?

It’s time to sell the rally

For the past seven weeks there has been an impressive, rip roaring 30% bear market rally from the March lows.  There has been no fundamental reason or glimmer of hope that truly spells the end of this recession.  Instead what we have are bank earnings that no one in their right mind can trust with the amount of accounting trickery taking place.  Consumer credit card interest rates skyrocketing.  Record foreclosures in both residential and commercial real estate.  And a parade of uninspiring earnings and guidance from the S&P 500.

Room for gloom and doom

The market has been ignoring bearish news which  could be viewed as bullish, except it is also ignoring the fundamental macroeconomic picture.  Emerging markets in Eastern Europe and Asia are hard hit by the global economic crisis.  Some are on the brink of default with their sovereign debt, forcing them to seek loans from the IMF.  Others are rapidly devaluing their currencies.  Either  path demonstrates signs of extreme financial stress.

There is no end in sight to the problems with real estate, which led us in to this mess.  We have yet to see a meaningful bottom in housing and now commercial real estate is suffering.  GM is on the verge of bankruptcy with few alternatives and to top it off global GDP will likely shrink the first time in decades.

Froth at the top

On a technical basis the S&P 500 seems to be overextended.  It has been overbought too quickly for most of the momentum to be sustainable.  In the last week we’ve seen a lot of that momentum fall to the wayside.  While consolidation is normal, we can’t with any confidence declare this as more than a bear market rally to which an abrupt and painful end may be in sight.  The bank stress tests are expected to start being released to banks this Friday and to the public in early May.  The old adage “Sell in May” could be a very meaningful pronouncement for this Summer.

Keep your powder dry

I recommend using this rally as an opportunity to raise cash, sit on the sidelines and wait for a good buying opportunity for the long term.  Short term the best position is a short bias.  I don’t feel that being constructive after such a massive build up, especially when some of the larger gains have been on light volume, is warranted.  Possible support exists at 850, 830, 800 and 775.  At this point it is conceivable that we also retest the lows in the 660s over the Summer depending on how severe some of the interim problems become.

Washington is losing sight of the real crisis

Washington is losing sight of the real crisis.  Incompetence, loose money and impulsive decision making are what brought us to near collapse.  Why are we repeating these same mistakes again?

Bonuses of the bailout

The $2B in Merril bonuses and the $187M in AIG bonuses when the government effectively saved these institutions from their own incompetence is far from acceptable.   There is no reason that people who created the systemic risk should be rewarded by the bail out money which is ultimately funded by tax payers facing higher taxation and a reduction in government services.

Having said that, the anger that swept the US House of Representatives to pass an unconstitutional bill that singles out individuals and retroactively taxes them at a 90% rate is equally an unacceptable reaction.  The bail out bill contained the provisions to allow these retention plans and bonuses.  How was this overlooked?  Because most lawmakers don’t read bills before signing them in to law.

Global righteous indignation grows

It’s an unbelievable situation we, as global citizens, find ourselves in.  The international banking conglomerates have failed us.  Our respective governments have failed us.  Yet they now want to claim to be the heroes and the saviours that will restore prosperity to the world.  Cutting interest rates, funding defunct institutions, floating trillions of dollars out to prop up bad debt all to relieve the liquidity vacuum the last bubble bursting left in its wake.

In the last two weeks there was a positive change of character, albeit short-lived, that boosted markets worldwide.  It was the prospect that the rules of the game had been set in the United States to favor a partnership between private capital and government loans that would allow an eventual transition away from the US Treasury and Federal Reserve propping up the every marketplace they can.

In an attempt to quell popular angst over the AIG bonuses, which were 90% less than the Merrill bonuses and 99.9% less than the total bail out AIG dished out to other banks, including non-US banks, the House of Representatives set out to destroy all the good faith that had been built.  Completely ignoring the bigger picture that AIG was simply a proxy for money that was siphoned all over the world, in the billions, not millions.

Who’s really in charge?

Let’s not forget the US Government is a majority stakeholder in AIG.  They own 80% of the shares and easily control any issue put to vote.  They can also demand the board and even CEO are replaced.  These types of extreme actions wouldn’t be positive, but they certainly seem more logical than passing a retroactive 90% tax.

The problem is the government keeps changing the rules in the middle of the game.   It’s very difficult to restore confidence when no one knows what the law will be tomorrow, let alone next week.  Every time there’s some level of complacency that the rules have been set, the rug gets pulled out again from under everyone.

Laws and lawmakers

The rule of law is a fundamental element of successful capitalism.  There is no confidence if laws  can be arbitrarily and retroactively changed or contracts can be freely broken without consequence.  I fear that more of this knee jerk legislation will completely reverse progress we’ve made toward restoring some level of confidence.

It’s unfortunate that we’ve propped up any of these institutions and in my prior entries I’ve always spoken out against bail outs and the corporate welfare environment it engenders.  No business that is unable to continue to sell products or services should be allowed to be given second, third or forth chances funded from the public trust.  Innovate entrepreneurs will create better, more profitable and functional replacements in time.

The problem is, Washington only realized this after the fact.  Only in retrospect do lawmakers seem to understand that most if not all of the effort was a waste of money.  Now, in order to not look foolish before the 2010 elections, lawmakers are putting on a big media circus to scapegoat everyone but themselves, who share in the blame just as much as the banks.  Let’s not forget as citizens that any lawmaker who voted for the TARP or the stimulus was complicit with bonuses and retention plans.

Even back when Fannie and Freddie were taken in to conservatorship, part of the contract with the US government was to guarantee the bonuses and retention plans remained.    The US Congress would have us believe that they were swindled and the bonuses flew under the radar.  Seriously?  Did you guys even bother to read the bill you signed?

Light shed on JP Morgan PrISM insider scheme

Recently there’s been some discussion about regulation and improving oversight of our global markets.  Of course bankers and would be capitalists scoff at the notion.  Why would we want to regulate a free market?

In what seems to be a massive legal loophole being exploited for the gains of insiders with privileged information at publically traded companies, the existence of the JP Morgan PrISM program provides compelling reasons to closely examine the way banks and brokers handle securities and favor their biggest clients at the expense of everyone else.

The creation of a legally rigged market alienates and burns most average market participants, whether they are traders or long term investors.  If insiders are allowed to freely trade their company’s stock with privileged information, where is the incentive for any other person to participate?

Anyone who would knowingly lie, cheat and steal in this manner undermines the very system that allowed them to accumulate wealth and operate a business.   These individuals deserve to be held accountable for their actions, especially now that the world knows how disruptive this level of fraud can be.   What we’ve seen with AIG, Citigroup, Bernie Madoff and the rest of the firms and individuals is nothing short of a cataclysmic blow to free market capitalism.  To restore some level of trust we need to see a lot more folks than just Mr. Madoff going to prison, not passing go and paying BACK the $200 (or however much bailout/bonus/fraud money they received).

Just how many banks have a PrISM-like insider trading system much like JP Morgan?  With cockroaches you know that there’s always more than one.  I feel this scenario plays out much in the same manner.  More banks will have whistleblowers reveal that they also have insider trading and other very unethical programs.

Just how many money managers try to avoid doing their homework and try to cheat the system by getting insider information?  How many will be investigated by the SEC and actually be arrested?  Will the SEC reinvigorate itself to return as the sheriff of Wall Street or will this administration create a new, larger and more overbearing regulatory apparatus?  More importantly, will the crooks go to jail?

Or will we keep the status quo?   A revolving door between the SEC and Wall Street where former officials are given cushy jobs as legal counselors or advisors.  This massive conflict of interest includes members of the Madoff family working for the SEC and Bernie himself being a paid advisor for several years, helping to shape policy for the agency that was supposed to watch out for people like him!

I say we close all the loopholes and start prosecuting the crooks post haste.  No one deserves another breath of fresh air or moment of freedom if they are directly responsible for lying, cheating and stealing our system in to near collapse.