16 September 2009

Stock Market Rally: Shenanigans Abounding

This is just an opinion, and it could be wrong, as all opinions may be.

To be long US equities at this point seems risky, bordering on reckless, for anything but a daytrade. And there is plenty of that going on.

The US markets in general have every mark of a maturing Ponzi scheme in the steady run ups on weakness, and the ramps into the close with the selling after hours on weak volumes.

But why?

Thursday is option expiration, a quadruple witch as we recall. September is one of the big ones, often setting up declines in the month of October. Further, we have Rosh Hoshanah beginning at sundown on Friday September 18. As the saying goes, Sell Rosh HaShana and Buy Yom Kippur.

The government is anxious to encourage 'confidence' to the extent of skewing the statistics to create hope in the public, the consumers. The banks are flush with liquidity, but really have no place to put it but for a minimal return at Treasury, or in some hot money trades. They certainly are not interested in making new loans, but the credit card business is reaping some nicely usurious returns between fees and 26% interest at the drop of a hat.

Where is Goldman Sachs business revenue and profit coming from now? How much real investment banking is being done? How much M&A activity and IPOs are there to sustain it at this size, unscathed by the recent market downturns?

Obama and his team have NO credibility for reform on Wall Street after their handling of Goldman Sachs and the AIG payouts. We hear that Goldman had shopped the idea of those derivatives to the London office of AIG which was up for a quick quid, became their biggest customer, and then when the music stopped they managed to obtain the 100 cents on the dollar payouts from the government even as AIG became hopelessly insolvent.

Bonds, stocks, metals, sugar, cocoa, and oil are all moving higher, while the dollar sinks. Is the dollar funding a new carry trade?

The markets are increasingly the flavor of choice, and if the markets do not show a way, they will make one. Volatility is a screaming buy. Put vertical spreads are remarkably cheap.

Be careful. October looks to be the stormiest of months, if we hold out until then. The market is overdue for a correction, which can be up to 20%. Given the distance we have come on thin volume, what may make this correction shocking is the speed with which it will come.

Watch the VIX.

We remain guardedly 'optimistic' on the markets for next year ONLY because of the Fed's and Treasury's willingness to continue to debase the dollar to cover the massive unrealized losses in the banks' portfolios, even as they return to manipulating markets in business as usual.

Inflation is good for financial assets, and we think another bubble is in the cards, at least for now given Obama's unwillingness to reform, unless some exogenous event or actor intervenes. The other troubling thing is the lack of vigor in the real economy. The stagnation in median real wages is strangling the middle class. There can be no resurgent economy without them.

As much of an outlier it might seem, it is possible that Bernanke and the Treasury might lead the US into a stagnation similar to Japan, but with stagflation, because of their policy errors driven by the distorting demands of an outsized and corrupting financial sector.

Wall Street is throwing buckets of money at Washington to fight even a moderate reform such as a financial 'consumer protection agency.' These fellows will never quit, until they are stopped. And it does not appear that Obama and his cronies have the traction or the fortitude to get the job done.

Until the banks are restrained, and the financial system is reformed, and balance is restored to the economy, there will be no sustained recovery.