It's a pause before another drop
The question was asked: isn't it a positive sign that the market has shrugged off all of the recent bad news?
Yes, but the market strength needs to be understood.
2 weeks ago, when I compared this cycle to previous market cycles, I showed that there were some rally points along the way. Dead cat bounces. It's a normal part of financial behavior.
But this particular one has some legs because the Fed is lending free cash to investment firms, not just banks. And the loans are due in ~2 weeks.
Clearly fundamentals are working against the market really rising:
* Corporate profits are falling. http://www.marketwatch.com/news/story/gdp-unrevised-06-weakest-us/story.aspx?guid=%7B3B6DDF46-888D-49CA-B53C-0183A4614A02%7D
* IT spending is slowing as evidenced by Oracle's earnings release
* Housing continues to weaken
* Manufacturing continues to weaken
The point is that I am not going to get pulled into this. Maybe there are some short term moves up, but I am not really looking to capitalize on them
Yes, but the market strength needs to be understood.
2 weeks ago, when I compared this cycle to previous market cycles, I showed that there were some rally points along the way. Dead cat bounces. It's a normal part of financial behavior.
But this particular one has some legs because the Fed is lending free cash to investment firms, not just banks. And the loans are due in ~2 weeks.
Clearly fundamentals are working against the market really rising:
* Corporate profits are falling. http://www.marketwatch.com/news/story/gdp-unrevised-06-weakest-us/story.aspx?guid=%7B3B6DDF46-888D-49CA-B53C-0183A4614A02%7D
* IT spending is slowing as evidenced by Oracle's earnings release
* Housing continues to weaken
* Manufacturing continues to weaken
The point is that I am not going to get pulled into this. Maybe there are some short term moves up, but I am not really looking to capitalize on them
posted by Andrew at
7:23 AM
7 Comments:
Andrew, I agree with your point on the fundamentals but sometimes it helps to follow the trend and invest. Of course there are two opposite forces fighting against each other Fundamentals V/s Fed free money. But I think Fed free money will work till the elections and we may not see this low levels again till the elections are over. What the Fed is saying is that bring any piece of paper that says I owe you and take the cash. That’s a great deal for an investor - cheap money and Fed as an insurer.
I could be totally wrong here because it all depends on how far the Fed will go and support...but the important question is do they have any other option? No?
Yeah..I kinda agree with takestock. It looks like Fed is doing every possible thing to not let the sh** hit the fan. Wonder why nobody(including the mediocre congress) not questiong why fed is giving away free money those bastards? But, sometimes, fundamentals take a lot of time to strike. Today, the market is resisting to go down after so many negative data.
BTW, Andrew, why do you think Fed will not lengthen the debt to another 28 days. What stops them?
We have a clash between an economy headed down and a Fed determined to prop it up.
Look at the recent numbers. http://biz.yahoo.com/ap/080327/wall_street.html
"And while consumers increased their buying at a 2.3 percent pace, which was ahead of the 1.9 percent growth rate that had been estimated, investors seemed unwilling to make big bets that the economy will soon recover."
The point isn't that consumers aren't makingbig bets, the point is that inflation is running at least 4% before oil/food. So the 2.3% increase actually means that consumers are buying a lot less, but paying a lot more.
Buying less means a slowdown.
The Fed, meanwhile, is pouring money into 2 places: housing and the stock market. But the Housing problem is over $1T before we even talk about HELOCs. The Fed simply doesn't have that much money.
So my take is that the market is flooded with new money but there is very little worth buying. I expect a little blip, but the wave of bad news has begun and it will peak in 2 weeks as company earnings releases show problems.
I do think that in the next 2 weeks the market can resist the downdrafts, but it won't last. Sure, they can probably ask for another round of free money and the Fed may be willing to do it, but it won't work.
for proof, I look at the mortgage market. No matter how hard the Fed tries to lower mortgage rates, the market is pushing them up.
There are some gems worth buying. hell, we owned them recently. But overall, the downside risk far outweighs the upside potential. A flood of easy money won't stop that downfall.
So the Fed giving cash to only selected few? Or to any investment banker who needs the cash. If they are...then who is selling the stocks in the market now? Retail investors?
If you look at the volume I don’t think it’s just the retail investors. Moreover the Fund houses which borrowed money from the Fed have to return it one day with interest...so how they will return it if they don’t make profit ? So the market has to go up for the Fed to get back its money?
The Fed's cash infusion is helping in a few ways:
1. Low borrowing but high margin lending - The spread is significant. They are borrowing at 2.5% APR and lending at 8% APR. That's 0.5% profit per month on billions of dollars.
2. Trading fees - They make money on the new business brought by a move up
3. Trading profits - A lot of retail investors are piling back in after the sudden surge. But notice the slow downward drop. The investment houses are slowly pulling out at a profit.
4. Better borrowing rates - Invetsment houses with 10s of billions in debt can reduce that debt with lower cost debt
I do think the Fed intended each of these to happen in the drive to help investment banks clean up their books. The Feds want to slow the fire drill caused by these companies having unacceptable asset-to-debt ratios. Slowing that fire sale is also a means of propping up the prices.
The only way to pay off the debt is to sell assets, and the only assets are stocks. When the selling starts, it happen with a fast momentum because nobody wants to be left holding the bag. I am talking about trading limits being hit.
ETrade is a massive buy because of the above
Good points…But what if investment bankers start buying puts and short the stocks with the Fed borrowed money? Are they allowed to? That would be interesting... … then Fed will pump more money and this cycle will keep repeating till Fed run out of ink to print more money:-)
Since last week lot of money has gone into India and China ( Hong Kong) market from here and some of these fund houses have given a bullish call there.Now I know..
Very intersting analysis, indeed. I didnt think of margin lending until you told so. Its indeed huge. Thanks!
Post a Comment
Subscribe to Post Comments [Atom]
<< Home