Don't Believe The Hype

Last Tuesday I had posted that the market was about to bottom short term.

http://tradersutra.blogspot.com/2010/07/is-market-about-to-bottom.html

Surprise!
Surprise!

The SPX is currently hugging its 200DMA at 1113 after a big rally that started Thursday. The Wednesday downdraft at the moment looks like a bull trap as more bogus economic reports came out of Europe. What the sheep don't understand is that Germany and to a lesser extent France are the only countries worth a damn in that continent. If you back out Germany and France, you basically have Berlin right after WWII ended. Europe has massive mid/long term fiscal problems. They must get their act in order. The Stress tests are bogus. We all knew this well before Friday.

In fact the below video from PBS will let you know all you need to know about the finances in Spain. This pretty much is the story across Europe.

http://www.creditwritedowns.com/2010/07/edward-hugh-speaks-to-pbs-about-spains-underground-economy.html

If you thought Enron, Worldcom, and Adelhia Cable were bad you have not seen anything yet.

So what we currently have are surging markets worldwide. Everywhere I read its the same. The Markets are ready for a technical breakout. The markets have discounted the bad news.  Europe is coming back as the Stress Tests are not as bad as previously feared. China has slowed down its economy. Its the great moderation in the Far East. Where have we heard this before?

Well I am here to tell it like Public Enemy. DON'T BELIEVE THE HYPE.

Forget the double dip recession talk. We were never out if the first recession. In fact I am telling you we are in the middle of a depression.

This rally is doomed to fail because of the following:

-Last week the market rallied when unemployment insurance was extended. This was the seventh time benefits have been extended the last two years, all at a time when almost half of the ranks of the unemployed have been looking for a job for at least a half year.

-The unemployment rate for adult males (25-54 years) hit a post-WWII this cycle and is still above the 1982 recession peak, and the youth unemployment rate is stuck near 25%. These developments will have profound long-term consequences – social, economic and political. Did I mention that most of the recent college graduates have student loans up the wazoo? There will be a massive student loan bailout program subsidized by you know who in the future.

-The White house just raised the deficit for 2011 to $1.4T. This is from $1.267T. Hey whats an extra $133B? Oh yes...$133B figure was exactly the deficit in 2002. You can't make these things up.

-The FDIC seized and shuttered another seven banks, making it 103 closures for the year.

-How do banks that have not been folded surviving? Not by making loans or doing normal banking business, but by bleeding back loss reserves unto their balance sheets. The banks have reduced loan loss reserves and this is why they have made their quarterly numbers. These are not real earnings and the banks know it.

-Household Debt/Income ratio is at 120%

-25% of all consumers have a sub 600 FICO score. Fannie/Freddie won't look at you at this level. Good luck in trying to modify your loan or get a mortgage.

-If the FED thinks we are in a statistical recovery, why is Bernanke still openly contemplating QE and other ways to stimulate growth?

-Bank Credit and M1-M2 Money Supply growth still contracting. The Velocity of money is non existent.

-Bank wide consumer credit outstanding fell $2.2B, real estate lending contracted $9.2B, and commercial & industrial loans slid $5.B. This is not Monopoly money folks.

-The Fed taking down the reserve interest rate to 0% is so laughable. The banks will not lend. Why would they with the above referenced stats? They are doing just fine parking their money with the Fed as well as the Treasury. The Fed is not going to take away the free carry trade from the banks. Take that away and its GAME OVER!

-The securitization market is dead. FINREG did a huge service to the country by making the Ratings Agencies accountable but this will hurt bond offerings and securitizations going forward.

-After $1T in deficit financing to try to kick start the economy we still have rates headed lower. The 5Y is at 1.734% and the 10Y is at 2.994% The bond market is not buying it. When all else fails listen to the bonds. There are many structural issues that are evident in bond land. Securitiation is again non existent so money is flowing to the most liquid tradable securities. The US Treasuries are clearly the least ugliest house in a flat out fugly neighborhood.

-US Dollar weakness with bond market strength is deadly for risk assets. REPEAT! Deadly for Risk Assets.

-Housing is still a black hole. This will be like this for at least another 5 years. Who cares if mortgage rates are low. The Fed owns hundreds of billions of high coupon MBS. As rates drop these securities lose value via negative convexity. This is inherently deflationary is it not? By the time the Fed gets around to dumping these securities it will far to late in the game. The NPV losses will be staggering.

So what we have here is the momentum crowd pushing stocks higher. Fundamental analysis went out like Barry Bonds a few years ago. Its all about sentiment and momo.

Program trading, HFT, ALGo's, momentum trading, and technicals are all in play at the moment. Meanwhile, the Treasury market has refused to budge from what is reality. The bond market is a lot like my dog Mikey. Mikey was my beloved German Shepard who knew trouble when he sensed it. He knew as soon as I made the turn into the complex where the Veterinarian was that there was trouble ahead for him. He didn't budge from the car. This is how our bond markets are. They know trouble and they sense it. Even today real rates are lower at this moment.

I am amazed that this market can't see through this crap. Earnings are so manipulated and managed. The ECRI just hit -10.2, a figure that screams economic trouble ahead.

So I say....SELL THIS MARKET!