This rally is getting to the ridiculous stage. There was a net loss for the week when I last wrote, but that has been overtaken for the markets to reach new highs for the year.  We have the expiry of the September futures and options tomorrow and we could see the start of a correction next week, but don’t hold your breath.

So what is causing this irrational exuberance in the face of the highest unemployment rate since 1982, falling house prices, record foreclosures etc,etc?

Everyone is talking up the market.  Bernanke came out this week and said that the recession is “very likely” over, so of course the market went up.  The US dollar is tanking, gold is soaring, CPI is increasing, wages reducing, yet all is well!  It is the old story, you can fool some of the people some of the time, but you can’t fool all the people all the time.  Lets look below the “robust figures”.

This week retail sales surprised to the up side, increasing 2.7%.  But how much of this was due to the FED’s various stimulus packages?  One commentator says 100% of the increase is due to the FED.  The two biggest factors have been the “cash for clunkers” and the “first home owners grant”.  I was reading an article this morning where a couple received their $8,000 grant and went out and bought a new leather couch, table and chairs, a new bed for their new apartment.  Would they have even bought the place without the grant, if they did it is unlikely they would have spent that extra $8,000.

The cash for clunkers has ended, the first home owners grant is due to finish in November, but already there are calls for it to be extended for another six months. Forty percent of home sales are going to first home owners. The big question is how many people would have bought a new car or house without the FED giving them money to do it?  It will be interesting to see the vehicle sales figures now the cash for clunkers has ended.

From Bloomberg this week Joseph Stiglitz, the Nobel Prize winning economist, said that the US had failed to fix the underlying problems of its banking system, and that the problems at the banks are worse than they were in the 2007 before the crisis. This comment is reinforced by three more banks failing this week bringing the total to 92 for the year.

I am a bear in my outlook, but I am not alone.  This rally is caused but all this cash from various stimulus packages and bailouts being parked in the market. Plus smoke and mirrors to lure the small investor back into the market.  It is working though, I just hope they are nimble enough when the market turns again.

Well it has happened, a week when the markets went down overall.  Though the US markets had an up day on Friday before the long weekend.  It is hard to see what caused such enthusiasm. On Thursday the initial unemployed came in highter than expected, but little notice was taken of this, the market has become used to people losing their jobs. Over half a million people were laid off in the week.  The market was waiting for the non-farm payrolls on Friday.  This number came in better than expected with only 216,000 lost when the market was expecting 240,000. But that is still nearly a quarter of a million jobs that are no longer available.

With the figures coming in consistently around the quarter million mark each month it is not so surprising that the unemployment rate in the US is now 9.7% (those that they count) and closer to 16% in real terms.  Considering that when the stimulus plans were floated, the recovery time was based on an unemployment rate of just 8%.  It is estimated that the countable unemployment rate will be over 10% by the end of the year and will not “top out” until over 11%. It could be that the recovery will take longer than first estimated.

All this means that although there may be a statistical recovery with some positive GDP numbers, there is no real recovery.  What we need for that is an expanding economy with  jobs created each month leading to more people in work etc.  So much was said over the last decade as to how the “consumer consuming” was 70% of GDP.  It is going to take a lot to get that consumption going again.

Last Tuesday was the biggest down day for several weeks, bought on by renewed nervousness about banks, and their profits, or lack of them.  With good reason, anothe 5 banks failed during the week bringing the total for the year to 89. At this rate of failures it will only be another few weeks before we are into triple figures for bank failures.  If banks are continuing to fail at this rate when the economy is meant to be “recovering” it would tend to suggest that all is not what it is cracked up to be.

The next couple of weeks will be interesting.  Was this week’s loss just a pause in the rally or the turning point?  Time will tell.

I am calling it a Lazarus rally because each time it should end it rises up again. But sooner or later it will eventually run out of steam and the next big down leg will start.  We are coming up on the anniversary of last years crash which could cause a bit of nervousness in the market.

It is two weeks since my last post and in that time the market has risen to a close on Friday of 4918 points, some 240 points higher than what I thought would be the top. It seems determined to make the psychological resistance of 5,000. However both the S&P500 and the DJIA had a down day on Friday.  This was too small to signal a change in sentiment at this stage, we would need to see some follow through this coming week.  Another factor is that Monday is the last trading day for the month.  Mutual funds and hedge funds like to be able to report positive figures for the month.  Will rationality return to the market?

John Mauldin’s e-letter this week is about Uncomfortable choices.  The US has now got its self into the position where some uncomfortable choices will have to be made.  The past decisions of taking the easy way out have now led to the situation where they have “painted themselves into a corner” and steps will have to be taken that will ruin the “recovery”.

Richard Russell of Dow Theory fame wrote this week about how the US national debt is now over $11 trillion dollars with an interest bill of $340 billion which is at an interest rate of about 3.04%.  The Obama administration admits that they will add $9 trillion to the national debt over the next 10 years, bringing the total to 20 trillion dollars.  If interest rates remained at today’s low level it would still mean an interest bill of 618 billion dollars in a year, around 1.7 billion dollars every single day.  He says, and I agree, that no nation can hold up in the face of these kind of expenses. Either the dollar will collapse or interest rates will go through the roof.

The choices that will have to be taken at some stage will cause pain and anger, and changes of government.  It is the politicians need to hold onto power by keeping the voters happy that will delay any action to the last possible minute.  Just think of the problems California is having.

I have given up predicting when the rally will end, but one thing is clear: just as an individual can not indefinitely live beyond their means, neither can a country.  Sooner or later the punch bowl will be removed. John Mauldin is predicting another recession and he reminds us that in a recession the market drops by 40%. He did say his past history is of calling recessions early, but they still come. So make sure you can exit quickly if you go/are long.

The rally which has gone on since the middle of July has got well ahead of the “recovery” such as it is.  I am sure it has sucked in many small investors, who having lost money in the crash last September-October, have re-entered the market, not wanting to miss the boat.  Now I fear they are about to lose again, as the market heads lower.  The reasons I make this comment are many, and I will try to cover the main ones below.  But first the chart.

The FTSE hit resistance with a double top at 4778 and 4776 on Thursday and Friday (September Futures).  This combined with the news out of the US this week could signal that this rally has come to an end and the market could be heading for another test of the March lows. This last leg of the rally has been all about “signs of recovery” (green shoots), and much tinkering with the statistics to give a rosy view.  Historically markets have often dropped in September and October including the 1929, 1989, 2001, 2008 crashes – and so the market is usually either quiet or slightly down or strongly down on these anniversaries. Given what I write below the markets have no justification to rise further.

HOUSING: Much was made about the rise in home sales, but a look at the actual numbers is not pretty. The market is divided between sales of foreclosed homes (damaged 26%, move-in ready 23%) short sales 14% (price lowered to achieve a quick sale) and only 36% for a non-distressed sale.  Foreclosures are increasing! Last Month (July) saw a record number of 360,149 properties that received a default of auction notice or were seized.  Next year will be the peak for Adjustable Rate Mortgages resets to higher interest rates so we cannot expect an improvment in the real housing market for at least another year, if then.

BANKS: Another 5 banks hit the wall, bringing the total to 77 for the year.  I read a while back that before this is all over as many as 1,000 banks could hit the wall.  With the increase in foreclosures above it is continuing to affect bank profits and will do for some time. One way some banks are making a profit is borrowing from the FED at near to zero interest, then buying treasuries from the FED with that money and earning 3.75%. Just another way of supporting the banks and making it seem like there is a strong demand for Treasuries.

Unemployment: Perhaps the biggest con of all. As mentioned last week it is a puzzle as to how unemployment can drop (percentage wise) when non-farm payrolls was minus 247,000 jobs for July. I find there is an official class called U-6. This counts all those not counted in the official figure. Those who have given up looking for work, or are employed part-time but want full time employment.  There are 2.3 million in the U-6 class. The loss of jobs since this recession started (8 million) has wiped out all the jobs created since the 2001 recession.  With the population increase in the US there needs to be 150,000 jobs created each month just to keep unemployment stable. So it does not take a genius to see that there is a long long way to go to recover the 8 million jobs lost plus the 150,000 per month needed to cover the increase in population.

CONSUMER CONFIDENCE: On Friday the University of Michigan released its consumer confidence figure.  It came in at 63.2 when the market was expecting 69-70.  Notice is taken of this figure because it is produced outside of the government, and is not subject to “seasonal adjustments”. Consumers are battered and bruised. Many have lost their houses or jobs, or both. Or they are in fear of loosing their houses or jobs, or both.  The mood is not good, they are saving frantically, paying down debt. Even with the “cash for clunkers” in full swing, retail sales were down.  Consumers are not spending which will have consequences further down the track.

So you can see from the above there was no good reason for the market to rally to the hights it has achieved.  The insiders have started to sell shares and there is a good reason for this. However I remind myself that the market can remain irrational longer than I can remain solvent if I insist on arguing with it.

It has been over a week since my last post and the market has continued up thanks to a boost on Friday.  I happened to be watching the market on Friday when the US reports were released.  In seconds the FTSE went from minus 30 (it had been at minus 56 a little while earlier) to plus 20, finishing the day at plus 48, for an intraday movement of over 100.  Volatility is not dead yet, but was this move justified?

The cause was better than expected non-farm payrolls number, only 247,000 jobs disappeared (-325,000 expected), and even more surprisingly the unemployment number dropped from 9.5% to 9.4%.  How can this be when the day before initial unemployed came in at 550,000, and the average time it takes to find a new job has blown out to over half a year.  So how can the unemployment percentage drop?  It depends on who you count as unemployed.  When a persons unemployment benefit runs out they are no longer counted as unemployed, just what category they now fall into does not matter to the bean counters.

There are moves afoot to extend unemployment benefits in the worst hit states by another 13 weeks.  Mean while the government is hemorrhaging money. Cash for clunkers is the latest, boosting car sales, mainly for Ford. But again only by giving away taxpayers money to people that don’t really need it.  As soon as you drive a new car out of the show room it has lost 25% of its value.

Banks are failing at a steady rate, but it no longer affects the market. What does it matter if a bank fails, the FED steps in and business continues as normal.  In the old days when a bank failed the depositors lost their money, no longer though, so it does not matter if the bank “fails”.  With this weeks failure of three banks the total for the year is now 72.

The market has got well ahead if its self. It will correct but from what level, that is the question.

Over the past 26 weeks we have been students of John Thornhills Mastercalss course on how the make money on the internet.

Today we received approval from clickbank for our product, “Beat The Medical Odds”, so we are now live on the net.  The next stage is to create traffic to our web site and hopefully sales.  Its all quite exciting.  We have made several attempts before and attempted other courses, but this course of John Thornhill is by far the best, as can be seen in the result so far.

It has been almost two weeks since my last post.  Life has been exceedingly busy, what with the day job and launching Harriet’s  ebook on the market. So now I can take a breath and think about the markets.

Since Friday the 17th the DJIA has risen 350 points, the S&P500 38 and the FTSE 157.  What is the reason for this exuberance? Make that unjustified exuberance.

Headlines on the last few days include:
Regulators shut 7 more banks, boosting total to 64
Caterpillar 2Q profit falls 66% on weak demand
US Home prices drop 5.6% in May from year ago on job losses
Jobless checks for millions delayed as states struggle
US consumer confidence drops in July – etc etc

But the market seems to have blinkers on and can only see that banks and a few other sections made better than expected profits for the quarter.  Then there is the “swine flu” panic.  The pharmaceutical companies are having a bonanza. (How did this virus get released?) Hmmm…

I’ll catch up again on Sunday.

The rally that failed to appear after the Independence Day holiday came this week. All markets made gains, The DJIA gained 612 ponts, The S&P500 62.6 and the FTSE 261 ponits.  It seemed to be another week when and good news was exaggerated and any bad news ignored.  Mind you the fact that the July options expired on Friday could have had a bit to do with it.

Much has been made of “more than expected” housing starts. It’s summer in the states, if you were building a house, summer is the time to do it. It is not a reason for jubilation, it is just common sense.

Another reason for the rally was the “stellar” performance of JP Morgan and Goldman Sachs.  There are two paragraphs from this weeks letter from John Mauldin that I would like to quote.

In the first few years of the G.W. Bush administration, the banking authorities decided it would be OK to allow five banks to increase their leverage from 12:1 up to 30:1. Which five banks, you ask? Bear Stearns, Lehman, Merrill Lynch, JPMorgan, and Goldman Sachs. How did that work out, just five years later? Three are gone and two survived with large dollops of taxpayer money.

(Sidebar: Is it really any surprise that Goldman and JPMorgan are making record profits on the underwriting and trading side of the business? Hell, if I could eliminate 50% of my competition, my profits would grow too! JPMorgan’s consumer credit, credit card, and other business groups are losing money big-time.)

John Mauldin’s letter this week is largely about banks and leverage and how the banks in Europe have an even bigger problem. His warning of removing sharp objects and pour another adult drink are not in jest.  We are not out of the woods yet.

Another two banks in the US hit the wall this week, both from Southern California, bringing the total for the year to 57.  CIT Group has been in the headlines this week, their plight has not rattled the markets though.  Evidently they are now in talks with (guess who) JP Morgan and Goldman Sachs about short term financing, but bankruptcy is still possible.

An article tells how thousands of people are running out of their unemployment benefits. By the end of September more than 500,000 will exhaust their benefits payments.  What do you do when you have no job and no benefit payment coming in?  It’s not a position I would want to be in. Some say things are improving,  the evidence is more like not getting worse as fast, but still getting worse.

It is often the case that after Presidents Day, Independence Day and Thanksgiving, the market resumes with a “patriotic” rally.  Not so this time. The DJIA lost 156, the S&P500 lost 19 points and the FTSE lost 95.5 points. All points mentioned were on the September futures. Last week I mentioned that the FTSE was forming a support level at 4180, but this failed to hold on Monday.

You can see from the chart that the market is now back below the 200 day moving average (green line).  There was much rejoicing amongst the bulls a few weeks ago when the market rose above the 200 day moving average.

The S&P500 has also returned below the 200 day MA (just, by only 3 points)

For the first time since January the initial unemployed number came in below 600,000, but to counter that good news on Thursday, on Friday the Michigan Sentiment came in at 64 when the market was expecting 70.  What this is saying is that the “man” on the street is not as confident as he was last month when the figure was 70.8.

Meanwhile another bank has hit the wall making the total 53 for the year – here in Australia is it hard to comprehend that number of banks failing. Australia only has 4 banks and they are some of the only AAA rated banks in the world – explained by our very high fees. 

GM has come out of bankruptcy in record time, but I see more problems ahead for the slimmed down company.  For how long and how much will the 60% shareholder (the US government) keep pumping money into it to keep it afloat? Consumers are still not buying cars.  The savings rate is increasing rapidly which is not good for any retailer selling anything other than the necessities of life.

In California things are going from bad to worse. Arnie failed to get budget cuts through months ago, and now they have run out of money and are issuing IOU’s instead of cash. But what can you do with an IOU if nobody wants to give you cash for it?  Arnie saw the problem growing and wanted to do something about it.  They even had a referendum about the need for cuts and Arnie was defeated.  Now they are paying the price.  California is the 8th biggest economy in the world and it is in real trouble.  It can’t print it’s own money, but it is trying the next best thing, printing IOU’s.

And to close, John Mauldin’s letter this week added more doubts about there being a sustained recovery any time soon. He was pointing out that with the record number of countries running deficits and record deficits at that there is just not enough money in the world to fund them all, or even a substantial number of them. So where will the money come from?  Lets see what the reporting season brings this week.

Today the US celebrates Independence Day.  However fewer and fewer citizens are truly independent.  Yesterday the markets took a turn down after the non farm payrolls came in worse than expected. Initial unemployed still remains above 600,000 and the unemoloyment rate hit 9.5%.  This is the official figure which does not count those unfortunate people that have run out of thie entitlement. (Now 39 weeks, up from the normal 26 week entitlement)  I have read that the figure counting all those unemployed or under employed is closer to 20%.

Early in the week there was optimism that the worst was behind us. Bernie Madoff was sentenced to 150 years in goal.  What are they going to do? Keep his coffin in there until 2159?? Even George Soros said that the crisis was behind us and growth will begin next year.  Then yesterday we read that another seven banks have hit the wall bringing the total to 52 for the year.  Two and a half years ago I was giving a running total of mortgage firms that were hitting the wall each month.  I did not dream that banks would fail at a similar rate.

Can you remember when it was said that the US was “a goldilocks economy” (not too hot, not too cold). that “it dosen’t matter if internet companies have no earnings”, or “high P/E ratios don’t matter”.  What about “subprime loans aren’t important” or that “foreign economies have decoupled from the US”.  All the above have been offered as reasons why “this time it is different”.  So it is too early to see “green shoots”.  That falls into the same catogory as “house prices never go down”.  If you believe that you will believe anything.

Now that the quarter is over, in a few weeks we will start to have the earnings reports and predictions for this quarter.  Most will have their rose tinted glasses on.

There will not be a sustained improvement until employment starts picking up and confidence returns to the person in the street; where they are confident they will still have a job next week, next month, next year.

Finally for my rays of sunshine this week I read that India joins Russia and China in questioning US dollar dominance. If these three huge traders decide to circumvent using US dollars for trade amongst themselves, as China has already agreed to with Brazil, then the US dollar is going to be less desirable a currency to hold.