All Wet

Share prices have come alive in recent weeks, aided by a number of ostensibly positive developments.

Providing a big boost, of course, has been sell-off in crude oil and other commodities. To the optimists, the moves are a clear sign that the inflation bugaboo has gone away. That means the Federal Reserve can once again drop its guard and open up the monetary spigot, enabling the long-term bull market to reemerge.

Then again, maybe not.

In fact, evidence suggests that what the Fed does no longer matters. It was almost a year ago, for instance, that Bernanke & Co. began to ease policy, with fed funds having fallen by 325 basis points since then. Yet credit market conditions have worsened, 30-year mortgage rates have ticked higher and the S&P 500 has lost more than 12 percent.

So much for the power of the Fed.

Nonetheless, optimists will insist that falling prices for raw materials means that corporate America can look forward to another round of bottom lines being bolstered by fat margins. But is that likely?

Given that energy and other commodity markets have supposedly been buoyed by growth outside our shores, logic suggests that the recent sell-off in those markets indicates activity in Asia and elsewhere is softening -- just like in the U.S. If that is the case, how long will it be before gluts and competitive pressures force businesses around the globe to cut prices at a faster pace than costs are falling?

Ignoring that, some are insisting that the run-up in the dollar indicates that investors are seeing a light at the end of the tunnel for the beleaguered American economy. That means domestic consumption can pick up the slack as demand softens overseas.
But is that really why the dollar is rebounding? Or does it reflect something else? Arguably, the trigger for the recent turnaround is a sudden recognition that growth is faltering in places like Europe and Asia. In other words, currency markets are signaling that the rest of the world is poised for a bit -- or, perhaps, a lot -- of downside catch-up with a weakening U.S.

That’s still not enough for some. Diehard bulls also point to the recent turnaround in the financial sector. To be sure, the one-month recovery in the shares of banks and brokers has bolstered the broader market. Indeed, given the role that financial shares played in undermining investor confidence over the past year or so, it’s not surprising that some investors would view hefty gains in the financial sector as a reason for optimism.

But why are financial stocks doing better? Is it because the bad news is fully factored in? Or, as is more likely, is it due to technical factors? No matter how you slice it, it is hard to ignore the fact that the sector bottomed following a July 15th "emergency order" from the SEC barring naked short-selling in the shares of Fannie Mae, Freddie Mac and 17 large investment banks. Many of these stocks have also seen their short interest ratios drop over the span.

But starting on Wednesday, that ban is set to be lifted. And investors will have to focus, once again, on the fact that this critical sector has yet to come to grips with a surging tide of red ink and a litany of legal and other woes.

All in all, then, it seems that many of the reasons why investors have become more optimistic lately don't hold much water. In fact, it won’t be long before they discover that their bullishness is -- shall I say -- all wet.

Comments

Are you kidding me? Yes, bad things have happened. I don't agree with everything the Fed has done...but as bad as things are imagine how much worse it would have been if they had not stepped in to prop up the banks. Avoiding negative outcomes was never going to happen, but it does look like they avoided a systemic meltdown of the banks.

[Michael Panzner]

They avoided a systemic meltdown temporarily, which was all they really achieved. When the meltdown does come, it will be all the worse because of the actions they have taken before now.

[roger]

I agree w/Michael Panzner its going to get worse.
The first signs of trouble appear when the activity of the Financial sector rise above the production sector when this happens sharp minds will begin to send warning signals(usually ignored by the herd)understanding ahead of time how this unavoidable process takes shape is not given to the average economic "expert" because it requires some very painful adjustments to our way of life,lets ignore it it will go awAy

[Foo]

> how much worse it would have been if they had not stepped in to prop up the banks

Well, I'd probably be getting 7% in my savings account instead of being screwed over with negative real interest rates. Also everyone else in the U.S. who have spent years saving up their earnings wouldn't be getting screwed over either. Also I'd probably be able to pick up a lot of stocks for very cheap. Also I'd be able to purchase my first house.

Michael,

Understood and I do believe the financials are in very deep trouble. I'm fairly certain that the Fed understands that throwing money at the problem has inflationary effects. I'm guessing they weighed that problem vs the consequences of widespread panic (meltdown) and decided it was worth it. Leaving aside the correctness of that decision I was merely stating the feds actions did indeed matter. All the large institutions are currently raising capital are already doing so on pretty rich spreads.

Besides, think of how much cheaper it is for us to help them this way than having the taxpayer directly take the first loss piece on a buyout!

[Boom2Bust.com]

I don't know Michael... CNBC's Jim Cramer declared the bear market in stocks officially over back on July 15.

"Quote For The Week"
http://www.boom2bust.com/2008/08/04/quote-for-the-week-26/

[Tom]

Given the following:
Subprime & alt a continuing to default, bankrupting banks
Global tensions: US & Israel about to attack Iran, USSR in Georgia and the endless Iraqi quagmire
The economic impact of high oil prices still tumbling through our economy
Food shortages
Generally, high commodity prices
Global warming
And the amazingly incompetent leadership in the US

I am inclined to think recent increases in the DOW, Dollar Index, and loses in the POG/POS/POO are only for short-term phenomena. The continuing demise of the US is ordained by leadership ineptitude and compliant sheople.

Tom

[David]

Ladies and gentlemen we are long past the date of optimistic hope.
There will be movement to the upside in the interim
For the markets never move in a straight line.
But the numbers are bad from all sides.
the over all picture is one of a Harlem tenant who has spent all his money on dope.
The debts can never be repaid the Union is fading.
China is rising out of America's ashes using America's
business. It is as if someone gutted America and brought it all to China, then America said it is ok we will buy the products from you.
Whats wrong with that picture!
1)which country would allow this to take place without slapping taxes on the products ti discourage this practice.
2)who benefits from this
3)where will Americans work if the jobs are going?service jobs only?
4) why was this done.
5)when will Americans wake up to their impending doom

Someone in America has to start asking questions,and they had better do it soon.
the days of gunboat diplomacy and war as foreign policy to cover bad economic choices can no longer continue.The rest of the world is beginning to stir.
They no longer accept this paradigm .

[sierra]

"See No Evil" and "Hear No Evil" is complicity of both major parties and political leadership as regards the disastrous economy.
People loosing jobs; not only sub-prime but PRIME mortgages are slipping badly in arrears. When that happens you know you have problems.
Our currency is worthless; our savings are nil (and what savings we have we get peanuts for thanks to the economic elite like Robert Rubin et all over the years that have crushed the little people.....with all their theories of de-regulation and "free markets."
Oh, we will pay, and dearly.....
Most of these people should go to jail.....