In short...it's crazy out there. We had the results of the "stress test" released today. My thoughts are that this report is the biggest sham so far pulled by this administration's Treasury. The figures they used for "a more adverse" scenario aren't all that adverse for the current environment. Why do you think there was so much "negotiating" between the banks and the Treasury in the time since the tests were finished? Most likely so the Treasury can spin the outcome into some kind of positive. Tiny Tim is grandstanding promoting transparency, which couldn't be further from the truth. Bernanke and the Fed aren't releasing any information as far who got loans, who's participating in some of their programs, and how much money was actually doled out. Pretty sure that creates opaqueness not transparency. All in all, these test results cannot be further from the truth. The banking system may not be completely insolvent, but to say that certain banks need to raise a total of $75 billion is a slap in the face to the American public because these banks will come crawling back to the government for help and will get the capital needed in order to keep the doors open.
We had some very interesting events today. First, consumer credit declined by $11.1 billion and the consensus was for a decline of $4 billion. That's a HUGE decline. With Obama touting that, "credit is the lifeblood of our economy" this figure should make his heart drop. If you haven't realized, consumers are cutting back. They are cutting back on their purchases and their willingness for credit. Combine that with tighter lending standards by banks and we see the seeds planted for a much deeper contraction than what the "adverse scenario" lays out. I look at this as a good sign because it shows that people are deleveraging and hopefully beginning to save. People need to learn to live without the idea that they can take a loan out for anything they want to buy.
There was a bond offering today as well. It didn't go so well. The rate on the 30-yr rose to its highest yield since November. This could be for a number of reasons. It means that investors are demanding a higher return for holding these long term securities. It could signal signs of inflation, signs that foreign countries may no longer want to finance the U.S. spending, or possibly that investors in general are losing confidence in the ability for the U.S. to make good on its debt payments. This auction will most likely get looked over because the bond market moves slow and the media doesn't understand it and therefore cannot cover it. Anyways, what people want to listen to how a bond yield rose by 4 basis points? Not many. You need to watch the bond markets because it absolutely dwarfs the stock market. The traders in the bond market are extremely smart and it's very important to follow their trends.
The stock market was roaring this week. Financials and energy were the leaders of the pack. I think the run up in financials is going to allow the banks that need to raise money to do secondary offerings at much higher stock prices. All these secondary offerings are dilutive to the current shareholders. Each new share issued means that future profits will be spread amongst more people meaning lower EPS which will lower the multiple at which a stock will trade at. That is baked into prices right now but analysts are still overestimating earnings forecasts. We saw a pull back today. Still sitting above the 900 level leaves the market in a tricky position. Most indicators are showing overbought/exhausted conditions. A more telling level will be around 875 which is the critical point of past resistance. If we break through 875 I'd look for the market to be a in pretty heavy downward trend. Tomorrow will be nuts, with the market straddling overbought indicators and the potential for a further run up on "positive" stress test results and what I think will be a lower than expected unemployment rate. I thought the rate would be higher but with ADP figures much lower earlier in the week, that will most likely lead to the unemployment rate temporarily easing.
This puts investors in a very precarious position. The fundamentals are still deteriorating which means stock prices should be lower. Technicals show that the market is overbought which means that it should be lower. All the bad news that has been dumped on us the past few weeks signals the market should be lower, but there is no should in stock markets. Using a quote from the legendary Bill Belechick, the market "is what it is". Usually when things look as if they should be one way, the market will do the opposite. While the market looks as if we'll see a selloff heading into the weekend, a key indicator to watch is the dollar (DXY). It's resting on a resistance level that if pushed lower, CAN but not necessarily WILL, push the market higher. If the dollar loses value, assets priced in dollars will go up. It's sort of like a seesaw. So while the market feels like it should go lower in the next few sessions, please be aware that because something should happen, i'd be willing to bet that it won't. The popular opinion is rarely the profitable one.
Look for an interesting session tomorrow heading into the weekend. Good luck!
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