The 50% Dilution Rally
Even Republican perm-bull, Dennis Kneale was baffled by Tuesday’s rally. On Kudlow, he expressed confusion as to why stocks would rally on Merrill Lynch’s disastrous news. MER shareholders were diluted by an astounding 50% by the new stock MER dumped on the market. And this came just a few days after CEO John Thain said everything was cool. Perhaps this can be called “The Last Lie Rally” as the market celebrates the very last lie from the bankers.
The Last Write-Down?
But have the bankers really told their last lie? Jim Cramer says that the market rallied because we finally got a clearing price for all the junk mortgage paper on bank balance sheets: 15-20 cents on the dollar. Banking analyst Meredith Whitney also praised MER for marking to market. But is this true? If you read any of the stories on this deal, you probably noticed a lot of weird details such as MER loaning 75% of the cost of the paper to the buyer. Bizarre, right? Economist Nouriel Roubini says that we don’t have a clearing price after all because this deal wasn’t a real market-based sale, and I agree. Merrill paid somebody to take the paper off of their books. So it was more BS from the bankers.
Bankers are Allowed to Lie
On Fast Money, there was disgust over how the government is cracking down on short sellers, but bankers like John Thain are allowed to lie like rugs. While true, this misses the point. Short sellers must be silenced precisely because they are telling the truth. The only way to get Larry Kudlow’s “Summer Rally” going and save the Republican party in November is by having an army of John Thains out there dispensing a tidal wave of BS.
Will it Work?
You can see why the stock market has a history of not faltering during an election year. Every time you turn around, Paulson and crew are hatching a new crazy scheme. As Todd Harrison says, they have a mandate to get stock prices up. But will it work? I don’t think so. While they can reduce shorting activity, in the end, they can’t make you buy stock. And even though the BLS has been creating hundreds of thousands of phantom jobs with their birth/death “adjustments”, enough of the jobs truth is getting out to keep traders from clicking the buy button. And amazingly enough, during the banking panic on July 15th, Bernanke didn’t even deliver a token quarter-point rate cut. So, it doesn’t look as if the entire federal bureaucracy is successfully being marshaled to enforce this mandate.
Just Another Month-End Rally
So, if John Thain is not our savior, then why did the market rally? I think it can be easily explained as typical month-end window-dressing action. The market closed on Monday leaning short, and the light volume made it easy for the mark-up elves to get a short squeeze going. The elves should pull back and bid underneath Wednesday and Thursday, so while the market is overbought, it may be able to levitate until the end of the month just like at the end of June. Lucky for the elves, their work will be done before the jobs report hits on Friday, though they may have to burn through some extra capital if we get another bad unemployment claims number on Thursday.
What is Getting Marked-Up?
Have momentum funds piled into financials? Will they keep them up until the end of the month? I haven’t studied this closely, so if you have ideas, please post in the comments. What I did notice is that the XLE was the only sector to finish in the red on Tuesday. Of course, the big funds began dumping their energy stocks on July 1st, so nobody’s trying to mark them up now, and they should continue to be weak. And while KOL and POT finished in the green, they were down in the morning, and floated up on low volume in the afternoon. This reluctant participation in the big rally indicates to me that nobody is trying to mark up coal or ag stocks either.
What is the Pattern?
You can make a case that SPY and QQQQ are developing ascending-triangle patterns. You could draw the top line of SPY’s triangle at $129, and that of the Q’s at $46. Both will need to fight up to their top lines soon or face being downgraded to symmetrical triangles. I think the jobs data could easily trigger that downgrade. Also, it’s important to look at the patterns of leading stocks. As Paul pointed out yesterday, Google has a classic bear-pennant pattern on its daily chart. If this pattern continues to play out in textbook fashion, Google could drop another 70 points. Not good for the Q’s or SPY.
Jubilation in the Bull Camp
There was quite a lot of celebrating in the bull camp Tuesday, and that is rarely a sign of a lasting rally. Lasting rallies are met by skepticism, because skeptical traders have not yet bought in. Celebrating bulls have abandoned skepticism and bought in, indicating that everybody who is likely to buy at this level have already done so.
Starbucks is closing most of its stores in Australia. Wasn’t Australia supposed to be a strong resource-based economy with huge exports to Asia? And now the Ausies can’t afford coffee any better than Americans? What is going on there? This can’t be good for S&P 500 earnings which have benefited from the global economy and weak dollar.
I actually had “MONTH-END MARK-UP” penciled onto my calender for Tuesday, so I feel stupid for putting my short positions on too early. However, I don’t think SPY, XLE, KOL, or POT are going to run away from me, so I will just have to put up with any mark-up action on Wednesday and Thursday. When June’s mark-up action ended, the market opened on huge gap down July 1st. It did rally back, but then rolled over and took out the March low. So, perhaps we will see another post-mark-up plunge, even if the jobs numbers don’t throw cold water on the rally.
Watch the comments as I will be posting updates during the day Wednesday.