The Rally Looks Tired

by Addison Wiggin

  • A stock rally that’s looking “tired”… Dan Amoss on why this is not March 2009

  • $100 billion in a day… Uncle Sam’s drastic revision to the national debt

  • TARP is dead, but hardly buried… Rotting near-corpse of AIG dealt another setback

  • U.S. Mint deals silver investors a blow

  • Next shoe drops in the “who owns this title” scandal… Why it won’t crash the system

It was the best of times… the best September for the broad indexes since 1939. Alas, “the September rally looks tired,” opines Dan Amoss as we kick off this first full week of October.

“The timing and size of the Federal Reserve’s next round of money printing,” suggests Dan, “are driving the stock market right now. My read of both factors tells me that the market is at risk of another sharp move lower.

“The S&P 500 is encountering strong ‘resistance’ at 1,150. One can easily imagine a return back to 1,050 — the starting point of the latest sprint.

“Plus, one of the key indicators of a sustainable rally is missing: Treasury yields haven’t budged much at all (see blue line above). Contrast the barely noticeable blip up in yields with the spring 2009 leap of 150 basis points in a few months.”

Then notice how the benchmark 10-Year Treasury yield sits about where it did when the S&P hit bottom in March 2009.

“The Fed is promising to buy more Treasuries,” Mr. Amoss explains, helping to put this week’s trading into context for us. “Primary dealers have run out of other attractive trades and are front-running the Fed.

“Personally, I think these traders jumped the gun. With gold breaking out to new highs and the stock market in a happy mood, I doubt the Fed will be aggressive anytime soon. Rather, I expect the Fed to spend its limited political capital when financial market indicators are much more stressed.

“In other words, because the markets have already anticipated quantitative easing (QE2) by pushing up stocks and Treasury bond prices, it’s less likely to happen soon.”

In this light, it’s worth pointing out the “retail investor” sat out the “best September since 1939.” Money has fled stock mutual funds ever since the late-April highs, to the tune of $43 billion in the third quarter.

Trading volumes are thin. Hedge funds are guarding against potential losses and banks are taking free money from the Fed to play high-frequency trading games, but that’s it.

Quality stocks?

“Investors aren’t responding to quality in any shape or form,” says Morningstar’s director of equity research Pat Dorsey. “In fact, forget about quality — they’re just not responding to stocks.”

Here’s another figure weighing on institutional minds… if not individuals.

On Friday, as the new fiscal year dawned, Treasury was still crunching the numbers for the final day of the old fiscal year… it appeared Uncle Sam ran up the national debt $1,545,753,247,046.20.

This morning… looks like they were off by some $100 billion. The official total rang it at $1,641,083,866,542.37.

Meh… what’s a hundred billion among friends?

“The tax base just isn’t recovering anywhere near where it was near the peak in GDP,” Dan points out. Despite campaign rhetoric about reigning in federal spending, neither party is committed to making it happen — regardless of turnout or outcome in the first week of November.

So what’s it all mean for stocks in October?

“With year-over-year earnings comparisons getting tougher,” Dan concludes, plus “federal stimulus spending fading, 99-week unemployment benefits beginning to roll off for the chronically unemployed that were laid off in fall 2008 after Lehman’s bankruptcy, this should be an interesting earnings season…”

Translation: a long, tough month for stocks ahead.

Some of Dan’s short targets have already issued warnings. Weeks ago, they were highfliers… but Dan anticipated trouble ahead by reviewing a few of the basic documents every public company files with the U.S. government. More on the USC 78-a, here.

One play is up 64% in less than three months. Another is up 35% in less than six weeks on news of an SEC investigation. It’s an ideal strategy to apply when a market’s looking toppy. Not to mention when the political and economic environment remains uncertain. On the lookout for shorts, Dan revels in this kind of situation and can help you put a decent strategy to work in your portfolio right here.

Indeed, stocks have gone mostly nowhere this morning. Whether it’s front-running as Mr. Amoss suggests or just a moribund rally, money is pouring into Treasuries again and the 2-year note hit a record low yield this morning (again) of 0.39%.

Currency traders, too, are renewing their nervousness about the euro, though for no obvious reason. The dollar index emitted an audible meow as it bounced off the 78 level this morning, recovering to 78 and some small change.

TARP is dead… dead and gone. But its ghost will haunt us for years to come. The Troubled Assets Relief Program — authorized by Congress two years ago — expired yesterday. The program can no longer be used for “new” bailouts. But existing ones may take as much as a decade to work themselves out.

Allegedly, much of the $700 billion that was lent has been repaid, at a profit. If we’re to believe the Congressional Budget Office (CBO), taxpayers will be on the hook for only $66 billion by the time all’s said and done.

As it stands this morning, around $190 billion in TARP money has yet to be paid back.

Turns out $190 billion is very close to the total bailout of AIG — $182 billion. And while the company firmed up plans to get back on its feet last week, it’s hardly a sure thing…

  • Treasury gets a 92.1% stake in the company before it begins selling its shares. Even before that happens…

  • AIG must raise money from private investors and regain a top rating from credit agencies.

S&P says it’s ready to upgrade AIG as soon as the erstwhile global giant unloads two insurance subsidiaries, including an IPO of its Asian business AIA. Unfortunately, AIG just had to lower AIA’s valuation this morning to get Kuwait’s sovereign wealth fund to play ball.

And so it goes.

The FDIC shuttered two more banks Friday afternoon. Just like the week before, one was in Florida, the other in Washington State. The number of failed banks so far this year is now 129 — just 11 shy of the 2009 total.

Pending home sales have risen for a second straight month. The National Association of Realtors’ index jumped 4.3% in August. Sounds good until you realize that compared to a year earlier, the number is down 18.5%.

Neither will all of these pending home sales reach closing. In fact, the number of deals that don’t go through is liable to shoot up, and soon, given the following…

At least one title insurance company has thrown up its hands after examining the potential fallout from the burgeoning “who-holds-this-title” snoozefest. Old Republic National Title Insurance has instructed its agents to stop writing policies on foreclosed J.P. Morgan Chase properties until things are cleared up.

In the meantime, Bank of America has joined Chase and Ally Financial on the list of lenders who are suspending foreclosures in states where a judge has to sign off on the proceedings.

If you’re new to all this, here’s a recap: 56,000 foreclosure proceedings were halted on Friday by JP Morgan Chase alone. Scads of mortgages are so bundled up in mortgage-backed securities (MBSs) it’s nigh impossible to tell who actually holds title now. Likewise, there are scads of instances in which supervisors green lighted their employees’ inspections of the foreclosure documents without looking at the paperwork themselves.

It’s a horrible mess. But not at all unexpected… it’s the flip side of the rush to cram NINJa (no income, no job) loans into mortgage-backed bundles so as to meet institutional demand for return on their investment.

We’re sure a few low-level flunkies will get probation for lying on official court documents… but these are exactly the kind of details that make up the detritus of a bursting bubble. As callous as this might sound, the details are headline worthy because scads of low-income folks are standing in line for pro bono advice on what to do next… all of whom make good interviews for local and national network news crews.

Our friend Nicolas Nassim Taleb is laying a chunk of the blame for the above mess on the posh doorstep of the King of Sweden.

In an interview that appeared on Reuters this morning Taleb said he gained an audience with the king and asked him to stop giving Nobel Prizes to economists in the econometric school of thought, which includes the noted pair Robert Merton and Myron Scholes, architects of the business model followed by the late LTCM, deceased 1998.

“I want to remove the harm from these economic models,” Taleb told Reuters. “And the Nobel is not helping. They should be held partly responsible, if not largely responsible, for the crisis.”

“There are a number of mistaken ideas about forecasting and measuring risk,” Reuters paraphrases Taleb, “which all contribute to events like the 2008 global crisis. The Nobel Prize has given them a stamp of approval… Universities then compound the problem by teaching these Nobel-approved ideas as orthodoxy.”

Nassim reserved a special mention for Federal Reserve Governor Ben Bernanke, whom he called “a true charlatan.” Bernanke’s idea of a “Great Moderation” made “the world more dangerous because it masked underlying risks.

“He got us here. He crashed the plane,” Taleb told Reuters. “I say it literally, he doesn’t know what’s going on.”

Taleb allegedly made a fortune trading mispriced risk before and during the Panic of ‘08. He says, he’s “using the money now to finance the destruction of the economic establishment.”

Amen. And good luck.

The Midas metal might just give the Black Swan a hand. Spot gold bounced off a record $1,320 early this morning and returned to merely near-record territory of $1,315 as we write. Silver sits at $22.10.

U.S. Silver Eagles just got more expensive. As of last Friday, the U.S. Mint jacked up the premium over spot that its “authorized purchasers” (or wholesalers) have to pay. It was $1.50 per 1-ounce coin. Now it’s $2.00 — a 33% increase.

The last two increases — October 2008 and February 2009 — amounted to only 20% combined. The Mint says it must cover its costs and operate at no net expense to the taxpayer… why start now, we can’t help but asking? No other branch of government seems to care much about that mandate.

In the collectibles market, Australia’s Perth Mint has just minted its first Kangaroo Silver Dollar:

Our friends at First Federal have locked in a significant portion of the collector-grade proof issue. The story of these Kangaroos is as unique as the offer First Federal has cobbled together for readers of The 5. Read more from Nick Bruyer here.

[Ed. Note: The usual caveat applies. We’re able to bring you this unique offer by virtue of a business relationship we’ve forged with First Federal. But that also means we’re likely to get compensated if you take them up on it.]

“Why not prop up Social Security coffers with the retirement accounts of all federal, state and municipal employee funds?” a reader asked last week. “That’s our money in their retirement fund account.”

To which another reader responds: “Why don’t you take the pension from 3M employees? That money is yours too, every time you buy Post-it notes or Scotch Tape.

“Better yet, why don’t you lay claim to the outrageous severance pay to Carly Fiorina at HP or Bob Nardelli from Home Depot. After all, if you are a shareholder or own an S&P 500 index mutual fund, that is your money too.

“Granted, elected officials aren’t good stewards of our tax dollars, but that is not the employee’s fault. Screw them on their pension so you can have a better pension yourself? Do you really call that a solution? If you are going to spend your time looking for someone to blame, at least blame the right people.”

“We recently cashed in my wife’s Illinois teacher’s pension,” writes a reader replying to a mention of state pensions last week. “The Illinois Teacher Retirement System’s investment portfolio is down 10% this year, and it’s the best off of the Illinois pension plans!

“She couldn’t start collecting regular payments for another 15 years, so we figured it was better to take a lump sum payout now, even if it does come with a big tax hit.

“Thanks for the great daily dose of reality and common sense.”

The 5: Good luck. We wish you the ultimate success… managing and growing that stake on your own.

Cheers,

Addison Wiggin

The 5 Min. Forecast

P.S.: Oil silently crept past $81 a barrel over the weekend. With grains and rice itching past two-year highs, a renewal of the secular bull market in commodities looks well under way.

We’ll be detailing many of the clear opportunities such a frothy market is likely to uncover this week, but if you’d like to get a jump on them, by all means, call John Wilkinson at (866) 361-7662 and ask what discounts from your account apply to our Resource Reserve lifetime offer.

rspertzel

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