The Thin Veneer of Confidence

It was 50 degrees this morning. I am shocked at how fast the fall seems to be rolling in. Traffic was much higher as well due to schools opening up this week.

The Thin Veneer of Confidence
I would like to lead off by saying it was almost surreal to see a down day in the markets. I guess I am just conditioned for a positive close, so the when the indices closed about at the lows I was shocked.

That said, I have already seen some of the more bearish types high fiving and getting excited about a new downturn. I would agree fundamentally, but this market is still flying on hope. Be careful here one and all.

What was most interesting to me about today is two items that served to peel back the thin veneer of confidence that has been the mission objective of policy makers since the beginning of the crisis.

Car Sales Numbers
The "Cash for Clunkers" program no doubt was able to borrow car demand from the future and burn it this summer. Expectations varied from 13.3 million to 15.5 million light vehicle sales (Zero Hedge has estimates, real number, and a projection). While the August reported number of 13.7 million beat the low end of consensus estimates, it is my opinion that the street was looking for a print over 14 million. They did not get it.

If US buyers cannot be lured into taking on a huge car loan when handed a few free dollars, this does not bode well for a consumer spending rebound in the near term. The low number also calls into question the supposed ability of the government to "stimulate" the economy. I think today's report is going to damage confidence going forward.

Banking Problem Rumors
The more revealing event of the day was a rumor that some large bank may be facing serious issues, and possibly a failure. I will not recount the various players mentioned (they ranged form some big US banks, to some smaller firms, and all the way to Europe for candidates) as it is not important at all. What is important is that after all of the support programs by the FED and Treasury, banking stocks that have doubled or even more in price, calming words all around, and excess reserves made available from the FED, the mere mention of a bank failure had the following response today:

Which bank is it? It could be anyone so lets sell them all.

It could be anyone.

Not quite the response those propping up the banks would have wanted.

I think this is a key point and it speaks to the serious disconnect the markets have been showing from reality.

When you take the lower than really estimated car sales number and a investment public ready to pull the trigger on a bank failure rumor in 5 minutes it would seem confidence has either been damaged or never really existed to begin with.

Today I was thinking of Bernanke's recent "We saved the world" speech. I would argue they were successful at changing the subject from bank liabilities and loan losses meaning practical insolvency to speculation on just how the government would bail out the system. The core issue never went away, it was just ignored while observers tried to see just how far the FED/Treasury would go to support banks. After unprecedented support programs (and the bending of some laws) the banking sector does not seem more insulated from problems, it was just that nobody bothered to ask for a while.

Again, I see a market that goes higher from here, but today we had a glimpse of what can happen if the confidence game takes a hit.

Have a good night.