Why do I feel like after the past week, I have entered the enchanted forest, as the markets have behave as if they were bi-polar, only to finish the week as if everything is purely delightful the SPX 500 is up 6.98% for the month, corporate earnings at first blush have been looking good (they have hurdled on the EPS front the vastly lower bar, but unfortunately revenues have been historically as a percentage of earnings), retail sales inched up this past week, the CPI is low if we strip out essential items we need to live, interest rates are at record lows, the B-52-man Bernanke will once again likely have to prime the proverbial liquidity pumps to inject more money into the lecherous banks coffers to hopefully stimulate the economy as the Fed-heads see a continued slow down….and they are ready to act to the extent possible if things head further into the abyss, and of course almost all of the European banks heavily laden heavily with debt passed their so called stress test, and we've got a new financial markets regulation bill which will save us from economic collapse. SO ALL IS WELL RIGHT (I think-not)!
I have issued a warning for 2-weeks now that I expect the July-relief rally to fail as we near the closing of the monthly books (once again though it has run a tab bit further than I thought) The indexes had a great week last week with the average gain around 4% but much of that was due to massive short covering with that wild gap-run on Thursday and Friday's short covering (see technical section below). Please remember that due to the huge wave of short covering and anemic volume the SPX-500 surging above OHR at 1,100 was NOT a break of OHR (overhead resistance). It was simply a print above it into the close. The resistance at 1100 is still intact, and the ball is in the hands of the bulls, will they press the futures higher pre-market for another gap-run, or will they lose this level….looming right above is a brick wall of OHR on the SPX-500 as resistance comes in at the 200sma 1,113 and the 50% retracement from the March 2009 lows at 1,116.
Tomorrow early directional tonality will be established before we awake in the futures markets as the stress test results were released after the markets closed in Europe; basically meaning that Monday's European market action and overall sentiment could have substantial impact on how we open on Monday. The analyst's reports on the validity of the stress tests will be weighed and judged in the European markets well before our markets reopen! Personally I don't think the tests were worth the toilet paper the results were printed on and I don't think real savvy fundamental and technical investors do either; but like on Friday it only matters in the short run how the European markets react and how the stories are spun by the often hyping financial bubblevision networks like CNBC!
Surely my forecast for a major/major inflection point in the markets will be tested this week and my weakness heading into the end-of-the-month scenario as well. The major prop-desk traders and program traders of institutional money (these players have accounted for over 72-75% or shares traded this year) have already loaded their bets and now we have to wait for the hand to play out to see if I have read their tells and the table right. This current earnings cycle is nearly over, yes I know that there are plenty of firms still left to report but we know how the story is going to end, and I believe it ends awful as 78% of firms already reporting managed to beat on the EPS line and 67% eked out a beat on the revenues line according to the headline hype…now as Paul Harvey was so fond of saying…."For the rest of the story" earnings growth so far has come in at a whopping 42% through Thursday but revenue growth has been a mere 6.8% so the beats once again have not come as a result of demand, more from head-count reductions, expense cutting, deferring taxes, and balance sheet manipulation! Of those reporting the vast majority have reduced estimates for Q3 and Q4 so where is the compelling reason to be long these firms, or the markets during the summer doldrums (over the August/September period), that is what most savvy traders and investors will decide this week and next!
I would look to short the 1,115-1,120 level with a strong, bias and I would be a very reluctant buyer on a break out above the 1,127-1,130 level on the SPX-500. I am always prepared to reverse my bias as longer term bull market rallies tend to breakout when you least expect them so we don't want to be caught with a firm bias that is only focused in one direction…been screwed before when I allowed my bias and ego to rule!
This summer and into the fall we will no doubt have a very nasty mudslinging election cycle and each party will be telling Americans how bad it is and why only they can fix it if elected (hardly great for overall sentiment), as most Americans will only remember the bad part because it makes for great sound bites.
Despite these sharp-painful (if you are short) rallies like last week the various indexes are still in a downtrend since topping in April, as we keep making lower highs and lower lows and until that trend is broken I am a seller into OHR as I believe the buying interest will wane.
We saw that the indexes surged higher on Friday as the market-players (prop-desks, program traders) after the release orchestrated a very nice light volume short-squeeze….off of the pro forma mostly upbeat and highly hyped news about the stress tests (The market was expecting weaker results from the European banking stress test and the hyped news provided the background for strong bout of short covering ahead of the weekend as only 7 of 91 banks failed the stress test) how we can even call them a test, more like a pass…this is an travesty) on European banks, and the hype seemed at first blush to relieve investors anxieties as the results yielded no surprises (the bid surprise to me is that they were more of a joke than I previously had thought they would be! They want us to believe that the "adverse scenario" was not all that adverse was a major hurdle for the banks, and that only seven banks failed and two of them were already nationalized, and we saw that only one Greek bank failed. As one of my subscribers put it this week…. {rosie} there is no way to have a stress test on a bank that owes its life line to the state without including a stress test of the state as well….the stress tests were a sham in my opinion! On Friday we saw confirmation that banks will only be tested for sovereign debt exposure just on trading books, not on debt held to maturity. And we saw that just 4-5 weeks ago, all the banks decided to quietly reclassify their over $850-billion of sovereign exposure from "trading" to "held to maturity," as these banks followed the lead of their illegitimate cousins advantage of the same FASB 157 accounting abortion rule that out banks especially the too-big-to-fail banks that have wrapped up into for over two years now, its blatant accounting fraud in my opinion.
OUR FINANCIALS……….
Back at the peak of the financial crisis that was dominated by the cheesy, lecherous greedy SOB bankers, a FASB late in the night stealthy ploy designed by the bankers and sold to the accounting standards board through congressional pressure was passed back in 2007 known as Statement 159 (formally known as the "Fair Value Option for Financial Assets and Financial Liabilities" which somewhat secretly allowed banks to book profits when the value of their bonds and other instruments dropped below par. This ridiculous rule extended the daily marking of banks' trading assets to their liabilities, under the notion that if the debt were bought back at a discount it would yield a profit **(what a farce).
The rule is a very nice way of manipulating and increasing the various banks income statements which has of course made them significantly better than they really are. The large to big to fail banks generally have used the rule to their advantage during the depth of the crisis they were responsible for creating. These banks could benefit again, at a time when earnings which are greatly lacking are sorely needed to be manifested out of thin air.
Bank of America for example, could record a $1.0-$1.3 billion second-quarter gain from this rule, according to my research (fuzzy math accounting at its best), this would account for about 60-65% of anticipated firm's pretax income. At Goldman Sachs such an application of this nutty application of the rule could account for $375 - $450 million in profits in the second quarter, while JPMorgan might be able to gain $315-375 million due to the rule, unfortunately when then, debt prices reverse in quarters ahead this could create a dismal earnings surprise a nasty double edged sword.
Investor fears of a Greek and other PIG's defaults, have aided in stalled a so called economic recovery and tougher industry regulations have rattled markets, snapping banks’ trading streaks and rekindling doubts about their creditworthiness. Prices for Bank of America’s credit derivatives; used by traders to bet on the likelihood of the firm’s default, rose by 34% during the second quarter, while Morgan Stanley’s doubled and Goldman Sachs surged 86%. In practice, this fuzzy-math accounting is an accounting “abomination” because fluctuations in the value of the debt don’t change the amount the banks owe I'm amazed that this is even allowed as regular folks would love to use the same tactic.
So please my friends….do not be faked out by the headline numbers as savvy market participants like myself will adjust as just because these lecherous banks credit spreads have widened out this quarter doesn’t mean that their ultimate interest and principal payments will changed one bits it’s a very huge smoke and mirrors sham! As I will and other will back out these bull-crap-numbers!
In the first quarter, amazingly the four biggest U.S. lenders (BAC, JPM, "C' and WFC) produced combined profits of $13.5 billion, the most since the second quarter of 2007, mostly through accounting gimmickry. That figure probably dropped by 28-34% in the second quarter. The banks are scheduled to announce results over the next two weeks, led by JPMorgan on Thursday. Including JPM, these four banks probably had debt-valuation adjustments, or DVAs, amounting to an average of 20-24% of pretax income
So if Friday's manipulated pro forma stress tests results are supposed to inspire confidence in the banks, then I need a long-long vacation the markets have once again turned a mega blind eye to reality. As I explained in relation to our banks, and illustrated how it would relate to the stress tests last week, as the contagions will only pertain to trading books. This is Europe's equivalent of FASB 157: as everything that banks claim that they will now hold "to maturity" (massive underperforming loans) will not come under scrutiny or a haircut, and very likely there are no contagions at all if we believe the hype, this basically means that all the European banks that hold such debt will merely reclassify their PIGS exposure from trading to held to maturity, what I'm calling a hold-to-bankruptcy. All we need is to see now is Rod Sterling drop down from the heavens and blessing of European banking assets (which I have previously written is coming in at a $115-118 trillion mega cluster of a contagion) where one bank's assets now are another bank's liabilities… this is mega joke, ) this would have made a great script for a twilight zone episode! The states gave grades to the banks like Harvard, as hardly ever a student fails to get a "B"!
These banks are not capitalized properly we all know it, so why did we see all the incessant positive hype! Bankers, as they all stuck together, and unfortunately they control the financial bubblevision media and the trading prop-desks. The results of the European stress tests indicated that seven of the 91 banks tested would need additional capital if the European economy took a turn for the worse (the so called worse turn that was applied was miniscule). They ignored the potential contagions all together of a potential sovereign default were never taken into account. The release of the European stress tests just made me wonder what’s being hidden beneath the fuzzy-math accounting from public scrutiny. The pro forma BS stress tests, similar to those conducted on U.S. banks last year, removed one source of anxiety about the financial sector, with the results showing that 84 of the 91 banks tested passed the take home test, just seven banks will be required to raise additional capital totaling about $4.5-billion to bolster their pro forma balance sheets against economic deterioration or another financial crisis; this is a pure sham and untruth….
Greece was the initial catalyst for the EU debt crisis, but their economy only represents 2.5% of the European Union’s GDP; and when they couldn’t refinance 11 billion Euros in May without outside intervention from the lecherous banks , the markets looked at other more heavily indebted nations and didn’t like what they saw. Portugal, Ireland, Italy, Greece and Spain surfaced immediately and each have had their credit ratings recently downgraded. Now let's follow the bouncing ball, an estimated 34% of Portugal’s debt is owed to Spain, who in turn owes Germany the equivalent of 11% of the German economy. So how does Italy repay France what amounts to 20% of the French economy if Spain doesn’t give Italy the 36 billion Euros it owes the Italian taxpayers…oh what a evil-web we weave when we practice to deceive….this is a proverbial house of cards; sounds like something Bernie Madoff may have spun. The stress test ignored the fact that the PIIGS (Portugal, Ireland, Italy, Greece and Spain) have huge unsustainable debt to GDP ratios and extremely generous pension benefits which compromise their ability to satisfy these debt obligations. Moreover, a lot of the sovereign debts of these nations are held on the balance sheets of private banks, and should they lose significant capital due to a default, liquidity could dry up like the Mojave Desert and lead to another financial crisis.
On Friday we also saw that after 12:30est GE announced they were raising its dividend by 20% (2-cents) and restarting their $15 billion stock buyback program (remember this is a program not a commitment), as GE had halted the program in September 2008 to much needed conserve capital. The GE announcement on top of the pro forma stress test news started a very decent short squeeze. They hype especially on CNBC went like this "You don't announce a 20% increase in your dividend and start buying back billions in stock if you think the economy is going to weaken again. This is a very bullish move by GE." well a 2-cent dividend increase is nice (if you hold 2,500 shares of GE in your retirement portfolio at an average of ~$20,000 a share ($50,000 position) you will get an additional $50.00 a year…wow I jump for joy at this) nevertheless GE's CEO said the decision was due to "continued strong cash generation, the recovery at GE Capital and solid underlying performance in our industrial businesses through the first half of 2010." as such we saw that GE a Dow component spiked over 4% on the news and started a rally in the Dow and related DOW tracking ETFs; and of course this led to further short covering in the indexes and out of thin air we had a nice manifested short covering rally….and just when it was about to stall, Sanofi-Aventis would be making a hostile bid for GENZ and it spiked 20% in seconds at just 30+/- minutes after the GE news was hit. This right cross followed by a left hook forced various ETF and leveraged pro fund players to cover and as a result all the indexes broke up above critical OHR levels on anemic volume the indexes had been trending lower until those announcements and the shorts got squeezed.
This week the theme was every-which-way but loose, as it was a week of extreme reversals on anemic to light-moderate volume, the market so far has been unkind to both the bears and the bulls (especially the bears) the bulls in the know, like Goldman who does god's works *(program traders and prop-desk traders) as they had the play-book, and it was a top-secrete) as both sides of the tape were hit as stops were run and this is an extremely frustrating development to old savvy traders like myself it's especially dangerous if you try to hold overnight…the tape this week was very bi-polar as we have seen one significantly confused market/tape right now. And as I have always said a confused market on light/anemic volume is a dangerous market to trade. Need I say more?
The B-52 man's rhetoric on Wednesday left market participants feeling negative and quite pessimistic, as without a doubt both for political and nexus reasons Bernanke can't say we're headed for a double-dip recession (or worse that we never came out of the first one) as he's the bankers best buddy, and in my opinion the biggest economic terrorist for fixed income and real Americans we have ever seen, nevertheless instead of speaking the truth instead he says these times are "unusually uncertain"….please remember as I have written so many times this past year, that the one thing the markets hates more than anything is uncertainty and it showed its absolute angst within after his remarks were reveled on Wednesday with a significant selloff following the gap up and run up into his speech. Bernanke's "slower growth" unfortunately for the bulls points to another global slowdown (this means recession in normal speak, not fed-speak) and while he can't say recession specifically he can at least be on the record as having pointed out much to the dismay of talking-butt-head's that have their head in the sand, that the economy looks like it will start to slow again in a significant manner. This guy is no fool, despite his prostitution activity with the too big to fail banks as he's a history buff and he is well aware of how others after debacles will pull out quotes from the fed-head speeches and testimony that showed complete naivety (remember his idiot quote "this will be contained") so I'm sure he's doing his very best to stealthily say what he feels he needs to, but for political reasons and his ties to the banking industry is unable to come right out and say it as it is, but he doesn't what to be remembered in the history books as a fool!
I have been hoping that before I pass on, and head for the pearly gates (hopefully not the furnace) for once in my life we will see adults and honorable folks in charge of our great country as I would love it if just one, of these influential folks guys would tell the truth and stop being so full of lies and crap or so confusing with their words that we need a special dictionary to transcribe the BS. It's the reason I'll never be able to hold public office as I would make a horrible politician, as I'm to old and cantankerous to BS, as I'd tell people the truth even if I believe they are unable to handle it, as we could together make appropriate plans no matter how painful they will be to remedy the contagions, we would take our medicine, start the recovery process then get on with life.
Then came Thursday, and after a strong mega futures induced gap up during the premarket hours the markets and participants appeared to have decided after sleeping on it that the B-52-man (Bernanke) meant "unusual uncertainty" must mean we're going to see the economy grow by leaps and bounds and that will be unusual due to the uncertainty and it will happen in uncertain terms; so they for some very strange became reckless buyers on very light volume after the mega gap-run event that lasted 25-30 minutes . Yea, that's the ticket. Let's rally!
Fed-head Bernanke said this week that the U.S. economy faces "unusually uncertain" prospects, and that the central bank was ready to take further steps to bolster growth if needed. "Even as the Federal Reserve continues prudent planning for the ultimate withdrawal of monetary policy accommodation, we also recognize that the economic outlook remains unusually uncertain," Bernanke told the Senate Banking Committee. "We remain prepared to take further policy actions as needed to foster a return to full utilization of our nation's productive potential in a context of price stability." He took lessons from Greenspam, as he fed-speak is getting better! The markets ignored thee bearish comments entirely "Although fiscal policy and inventory restocking will likely be providing less impetus to the recovery than they have in recent quarters, rising demand from households and businesses should (this is a hope and a prayer in my opinion) help sustain growth," he said. For now, he said the Fed expects economic conditions will warrant an exceptionally low benchmark federal funds rate for an "extended period" repeating his vow to help his fellow bankers especially the too big to fail SOB's. I was amazed that the markets rallied on Thursday/Friday as his testimony was not at all optimistic, as it clearly implies that the Fed had a relatively cloudy view at best of the future; and storm clouds are starting to develop. Bernanke said a significantly weak job market will likely remain a drag on consumer spending, and said it would take a long-long time before the economy can restore the nearly 8.5 million jobs lost in 2008 and 2009 (as such I was amazed at how far the retailers and other stocks rallied on Thursday/Friday).
After three quarters of solid growth, the U.S. economy has been unlike the stock market steadily losing steam, with most firms still very reluctant to hire and the housing sector is seemingly unable to exit a prolonged dip in the cesspool of despair. With fears of a double-dip recession mounting, Bernanke attempted to reassured lawmakers the Fed is prepared to take further steps if the situation worsens appreciably (wow can it really get much worse). "We are ready and will act if the economy does not continue to improve, if we don't see the kind of improvements in the labor market that we are hoping for and expecting (hell what are they expecting, I have seen little to no improvement for over 36 months now), Bernanke told the House Financial Services Committee. Even with interest rates effectively at zero, Bernanke argued there is more the central bank can do if needed to spur growth. It could lower the rate it pays banks to park excess reserves at the Fed (hell this rate should be nothing in my opinion, they should be putting the money to work, making loans) or purchase yet more mortgage or Treasury bonds he stated.
On Friday the bubblevision networks ignored the poor and lackluster economic data… The Monthly Mass Layoff report showed a rising pace of layoff (hardly bullish) events at 1,647 in June compared to 1,412 in May, and the overall number of workers involved rose to 145,538 compared to 135,789 in May; this is happening at a time when employers should be adding to payrolls if the economy is turning especially ahead of the holiday-demand season…manufacturing represented 11% of all layoffs and 12% of initial claims. This report is hardly a green-shoot report and explains the declining economic and consumer sentiment; despite the hype! Then we had the Weekly Leading Index I have been writing about all year, and just maybe it is starting to stabilize (at least for a week) despite the mega drop in sentiment last week. The index was flat with last week's 120.7 reading; however the annualized growth rate declined again to a negative 10.5% for the 11th consecutive weekly decline; this is hardly bullish as well) and this is a nasty developing trend….I/we need to continue to monitor this very important economic indicator as until the trend turns up again, out economic recovery will unfortunately relapse into a coma.
The economic calendar this past week was benign but the next 2-weeks are full of market landmines that could derail this snap-back relief rally. The biggies this week are Housing report on Monday, the consumer confidence report on Tuesday and of course the Fed Beige Book on Wednesday and the initial reading the GDP on Friday. The Beige Book will enlighten us (if we are to fully believe it) about the economic conditions in each of the Fed-head regions; this is a monthly report and we need to see that conditions are not getting worse, to move forward, and I do not believe we will see such a development! The GDP report on Friday is going to be a critical psychosocial report (remember it's an initial reading and they are almost always revised lower). The current estimate is growth of 2.6-2.7% for the second quarter. This is the first GDP report for 2010Q2 and estimates were for 3.0-3.3% growth just a couple weeks ago, and they have now been ratcheted down to allow for a beat and another contagion that could beset the markets would be if we see revisions to prior quarters downward. This is going to be a major hurdle for the bulls if the GDP comes in weaker than expected.
Bernanke to Congress: Don't End Stimulus Spending as he told Congress as the fragile economy still needs government stimulus spending to strengthen the recovery and help reduce unemployment. Bernanke urged lawmakers to come up with a credible plan to reduce the government's record-high budget deficits in the long run. But he said they shouldn't move now to slash spending or boost taxes, or undertake some combination of both. "I believe we should maintain our stimulus in the short term," Bernanke said.
We saw a similar view this week from former labor secretary Robert Reich stated that the economy needs more fiscal and monetary stimulus to avoid falling back into recession.“We’re not in a double-dip recession yet. We’re in a one-and-a-half-dip recession,” he wrote in a column on Business Insider. Retail sales, home sales, housing starts and consumer confidence are dropping, so I tend at first blush to agree with him, but I so hate taxpayer give away programs. President Barack Obama should demand a massive national jobs program for millions of people, even if government has to pay their wages directly, Reich argued (I agree we need to eliminate free money transfers no work, no money).
As for all the hype surrounding the so called stellar pro forma positive earnings being a reason for the rally, I have to respectfully disagree as I have gone back and looked at over 100 charts of firms that have reported earnings during the past several weeks and the responses to earnings has been extremely sporadic to say the least these past two weeks….as decent earnings are sold one day and bought the next, then without warning the market participants switch gears and then crappy earnings are bought one day and sold the next. This has surely been a very perplexing development for me. We have enjoyed some very nice earnings plays (longs/shorts) but as a trader we like to see significant consistency, and what we have seen is anything but.
In all seriousness my friends this market's whacky bipolar behavior is very dangerous. Volatile price action like this is typically a very unhealthy signal for the markets and participants as bull markets thrive on a steady diet of worry with some good news sprinkled in for good measure, and tend to crawl higher at a relatively steady pace with decent volume, and when the Prozac runs out and they become manic-depressive all hell could break lose as this is often a sign of a market in a distribution topping mode. Yes we could rally a little further (Monday gap-runs have a high probability), and there is the possibility we could run up for another 8-18 hours right smack dab into my major/major turn time but in my opinion the potential for a nasty selling event and reversal as these indexes and high-beta stocks that have flown upward in a parabolic fashion just like Icarus who with a set of wax coated wings decided to fly towards the sun, before the wax melted and he plunged to his death….as the markets move higher they become more and more vulnerable to a very nasty correction/reversal.
As I wrote last week I have a major/major market inflection scheduled to hit this week and when you throw in several other significant divergences in the market place, along with a plethora of economic data to be released (5-trading days left to the month) and we throw in another so called extreme astrological event, something I don't fully understand but many an astrologists believes this will result in many forbidding contagions, they call it a Cardinal Climax which is a particular alignment of 5 planets, something that hasn't happened in 1000 years (some say 10,000 years). Arch Crawford says certain planetary alignments put people under additional stress others severe stress (and this is of the severe stress variety) and of course that's reflected in their moods which is then reflected in the stock market as its run by people that of course are influenced by these developments. This particular alignment is supposed to be accompanied by some particularly nasty things (possibly involving a nuclear and/or nasty radiation event). Arch Crawford is calling for a market crash and he has been at times very accurate in many of his past calls to dismiss this lightly.
