solarbird | Sep. 29th, 2009

Good morning. Before I get started, I want to talk very briefly about this equities market rally. Sure, it's taking a tiny bit of a break today, but that's no big deal. It's still in a serious up trend.

I don't understand this stock market. I really don't. I was expecting a correction and a bit of euphoria over the whole stimulus package, and I understand the inherent UP UP UP!!! of the modern market player, who is a deeply-inbred bull. So I expected a rally.

But this is acting like a bull market now. Even if Hedgie is calling bullshit, for cause, you have to admit that by most - and I must emphasise most - traditional measures, this looks like a real bull. Smita Sadana discusses this market in comparison to the 1930 false rally in depth, here.

However, despite this, I do want to call out that the 20 week moving average has not yet reached the 50 week moving average on the S&P500. It's getting close, but it's not there yet. This event - which hasn't yet happened - has never failed to indicate a longish-term bull market.

If we get there, I'll understand this market even less. I simply don't see the fundamentals here to support this market. I don't even see those fundamentals on the horizon. You've got rallies in toxic securities floating bank stocks, when those toxic securities are still returning 3-4¢ on the dollar in free trading. Sure, they're marginally off their just-under-3¢ lows, and I guess you can call that a rally - or you can call that gambling and market noise. And you've got TARP inspector Neil Barofsky saying that the financial system is more, not less, shaky than a year ago. And let's not forget that seven million withheld-foreclosures which haven't hit that market yet. Essentially none of these loans will 'cure', and all these houses will go to foreclosure. Karl Denninger talks more about 'Mark-to-Myth' and nonperforming loans here, and how it's about accounting avoidance of recognising losses, which is in direct violation of GAAP rules, or, as he puts, it accounting fraud. He does further math here which indicates, "$869 billion in losses remaining in single-family mortgages alone."

Of course, this has been normal for some time. The regulators actively refused to enforce rules when times were good, so it's unsurprising they'd refuse to enforce them now, when it would mean more bank closures. (If that link doesn't work for you, go here first, then follow Patricia Sullivan's first-paragraph link to the story. It sets permissions so you can still read it without a login. Yay, moronic access rules!)

But even setting aside all that - which you of course can't, but let's play pretend - the economy weakened in August, with the National Activity Index falling to -0.90. Note:

The index, which is based on 85 economic indicators, is designed so that zero means the economy is growing at its historical long-term rate. When the three-month average drops below negative 0.70, a recession is likely.

Employment is, by almost every estimate, going to lag for years. And that's taking the BLS's farcical "Birth/Death model" as given! Mish Shedlock goes into more depth than usual into this, noting that in reality - vs. in the B/D model - business creation has been much lower than normal during this recession. The B/D model implies instead that it has been higher. All during this, the 16-24 age group, which always has naturally high unemployment, has set a record at 52.2% unemployed. (eta: Note: this is not the same as BLS unemployment either U3, U4, U5, or even U6. Tracking numbers in this range is difficult and the source here mislead as to the nature of this number. This is percentage of all in age group who are not working, which includes students, who often do not want work. However, even this number is still atypically high. When I've looked at it before, it's been in the low 40s, or occasionally upper 30s; I haven't gone back to check that, it's just from memory. Regardless, 52.2% is still not normal. It's just not OMG WORLD DYING.)

And don't think all this is ending outsourcing. It's not. That's Robert Cringely reporting on IBM's plans moving forward - IBM in particular, because he did an investigation recently. Check that.

Sales, tho', aren't doing too badly - up a smidge - +0.4% - in September vs. August. That's good, but requires a little more depth: these are same-store sales. Stores that close (and thus produce no sales) are not included. Retail closures have been significant, and falling sales tax revenues indicate that if you factor that in, total retail sales figures are probably continuing to decline.

Regardless, I don't see how all this adds up to OMG BULL MARKET. I really don't.

In other news, consumer confidence - which measures more about consumers own abilities to spend and plan - slipped unexpectedly to 53.1. Expectations were a rise to 57. This is a very low number, tho' of course still well off the panic of February. Home prices rose a bit, for the third month in a row - 1.6% - but remember all those houses not yet in the market. More supply means lower prices ahead.

Kevin Depew at Minyanville talks extensively about the Fed and its current irrelevance.

There are several warnings out about the US dollar again this week, with World Bank President Robert Zoellick saying that the US shouldn't 'take for granted the dollar's place as the world's predominant reserve currency.' Indeed. Beijing has started selling bonds denominated in yuan, in Hong Kong. HSBC Holdings and Bank of East Asia are selling. China has also started buying Australian debt.

US corporate debt defaults are expected to hit "unprecedented" levels in 2009.

Japan is in a deflationary mess, with price deflation setting in fairly strongly.

New Zealand on the other hand, appears to have emerged from recession.

This is a bigger deal than I'm giving it placement, but it doesn't quite fit anywhere else: this series of captured breaking bulletins notes how the FDIC has just moved to require banks to pay the next three years of FDIC payments now, because FDIC balance sheets are negative. They're expecting another $100B in payouts and no recovery in their balance sheet until 2012, hence the pull-forward.

There's more, but this post is already insane. Good luck.

One more thing.

Back during the early 2000s, when economists were talking about Japan and their long lost decade, there appeared to me to be a fairly solid consensus that the big problem was directly tied to the refusal of the LDP-led Japanese government to force banks to acknowledge their losses, instead propping them up, and creating an entire financial industry consisting of so-called "zombie banks." The carry-trade didn't help either, but that was more a later phenomenon, and we were looking at the original lost decade.

When the United States found itself in functionally the same position as Japan, facing an awfully similar situation - an imploded stock market, an imploded and massively over-invested properties market, massive default in banking, and so on - two things happened. One, the Bush-led US government did the same thing the LDP-led Japanese government did, and two, the consensus changed overnight from "propping up the banks was bad" to "they just didn't stimulate quickly or substantially enough."

And now the US financial system is filled with zombie banks, and the US dollar is becoming a bit of a darling to the carry-trade class.

Really, the biggest differences I see are that the US population has much more debt and much less savings going into this event than the Japanese had going into the start of their (first) Lost Decade, so is less able to weather a decade of this bullshit than were the Japanese of the time.

US dollar is up a bit today, btw. I don't know why.