Wednesday, April 16, 2008

Stock Market No Longer Relevant

Another one of those strange days. If you could read JUST the basic headlines for the financial news and then tried to fathom a guess as to what the averages were doing, you would have been way off I imagine. All news is good news once again!

Bank of England Will Copy FED Crap Swap Plan - See, the US does Export Things!
While the federal Reserve and the Treasury department on this side of the pond have been doing gymnastics to invent new and creative ways to lose taxpayer money, so far the Bank of England seemed satisfied with bailing out one measly bank (Northern Rock) and doing a bunch of complaining. Now, however, our neighbors across the way have decided to go the full monty and directly copy the US model of rewarding big banks:
Government plans to help UK banks
By Stephanie Flanders BBC economics editor
The Bank of England is poised to launch a new lending programme for UK banks in an effort to break the logjam in the credit market, the BBC has learned.
Final details are still being worked out including the scale of the plan and the exact terms.
But it will be similar to moves in the US, will be backed by the Treasury and could be launched as soon as next week.
The scheme would temporarily allow banks to swap their mortgage-based assets for government bonds.

The government does not consider this a bail-out of the banks and the BBC understands the scheme will not go ahead unless it can be designed to protect the taxpayer from any loss.

HAHA! The UK is always so "you foolish Yankees" but now they are going down the same road we are! I love the use of the word "temporarily" in regard to the swap program. Only if temporary means over 5 years! How about this non starter "..unless it can be designed to protect the taxpayer from any loss". I got news for you, there is no way to protect against the possibility of a loss unless you are a major US bank, then you are covered!

While some would see this as a great relief that the Bank of England is getting involved, I see it more through the lens of another sign of how screwed the systems are around the world. Imagine a CAPITALIST market whose slogan is "The Government is our best Friend". Not much to brag about.

Stock Market No Longer Relevant
Checking out the reaction to the "positive" earnings reports today, especially those in the financials, has left me with only one conclusion: the stock markets are longer relevant to any discussion of the economy, housing, banking, etc. Some may argue that the markets are always irrelevant, and to be sure there are many times they are, but I would say 80% of the time they are a useful proxy for analysis.

The stocks of the banking and financials are a perfect example of a irrelevant action. At this point the banking system suffers from the following major macro issues:
  • No reasonable time frame for the housing issue to improve (3 plus years out)
  • No transparency on the value of many assets (REO's, Level III's, CDO's)
  • Reliance on a FED with open wallets
  • Reliance on all time low interest rates
  • Reliance on foreign cash or private equity

A very precarious situation.

In the face of this, many are desperately trying to call "the bottom". This is of course retarded. Bottoms form when no one even wants to try and find one. Tech stocks bottomed around Nasdaq 1000 (down from 5000!) in September 2002. Try a Google News archive search from that month and you will not find one article, headline, or guestimate that the bottom was in. This is important to understand.

If you are a short term (1 week or less) trader or a daytrader some of these reactions to news matter to you. If you are following trends and macro environments the short term moves are worthless. Banking stocks are so badly understood right now only wild swings are to be expected. Lets take a look at the JP Morgan Wells news from today as an example.

JPM beat analysts expectations by only posting a 50% DROP in quarterly profit. That must be good because the stock itself popped for almost 7% to the upside. The basic comments made were:

  • JPM did not do even worse, so this was an upside surprise
  • JPM CEO Dimon is the new master genius of the universe
  • JPM (and WFC) were inline with loss expectations

So there seems to be some contradictions here. First off, I could orchestrate the Bear Stearns takeover with the FED doing all the finance and heavy lifting, so lets get over Mr. Dimon already.

The moving of the goalposts for the banks has been impressive. Lose more than expected, the worst is over. Lose less, and this is the bottom. Come in right at expectations, and this is really an upside surprise. There is no way to lose! At this point I call on all financial analysts to stop issuing calls on the banking sector. It is obvious you have no idea how to target these stocks, and the numbers game looks silly.

Unless you are a short term guy, I am now calling the stock market irrelevant to any meaningful discussion of the financial events at hand.

The Fix is in on The DOW? (and others)

After Friday's down day, things looked grim. An entire weekend of bad news, and toady's terrible inflation and oil price results, one would expect some kind of downside to stocks. In keeping with my irrelevant call, a huge up day ensued. Strange? Maybe. Fixed? Quite possibly. Pull up a chart of any of the averages since January 1, 2008 and you will see a ridiculous tight ass range for the markets. There is an absolute floor for the indices, regardless of data or news. Is it the FED? The banks themselves? The Treasury? Martians? I don't know but the DOW is range bound from 11,700 to 12,700. Tightly bound. Almost supernatural! Until the DOW breaks either number in the range, the daily move makes no difference to me at all.

Have a good night.

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