We continue counting down the weeks anticipating the death of this bull. Could the turn already have started or is this just an adjustment before the final blowout?
Last Monday stocks fell about 1%, as expected, on very low volume in reaction to the bad employment report released on Good Friday.
Stocks tumbled in the morning and continued selling off through the rest of the day perhaps anticipating a disappointing earnings season but also reacting to soaring Spanish and Italian bond rates—both knocking at the door of the unsustainable 6% level for the 10-year bond and reopening the festering sore of European financial malaise. Volume ramped up to a respectable level for the day adding credibility to the conviction of this sell-off.
After the bell Tuesday Alcoa reported net income of $94 million in the first quarter of 2012 compared to the same quarter last year of $308 million. That’s nearly a 70% decline. Earnings were reported down 64%. In spite of those abysmal numbers, after-market trading rewarded the stock with a 5% gain from the closing 3% down (2% net positive for the day) because the performance was “much better than expected.” With those kinds of expectations, if all the stocks can do 60% to 70% worse than last year, it looks like we could be in for a bang-up earnings season.
After six months of relentless gains in the stock market, the grousing over five consecutive down days seemed a bit inappropriate but quite in line with the “tantrum” mentality we’ve come to expect from Wall Street. It’s interesting that Wall Street has finally conceded that monetary easing is the sole engine for this bogus bull move.
The question now is, how fast and how far must the stock market fall before Bernanke jumps in to rescue with QE3? My guess is it will have to fall at least as far as it was before Jackson Hole (QE2 pronouncement), 1050 on the S&P 500 Index. If that’s true, we have a long way to go. We know the Fed was getting antsy when U.S. Treasury rates started to rise a few weeks ago. Could it be that they’re either assisting or at least not stopping this downturn to repair the damage to Treasuries and create the cover they need for QE3?
Of course, we don’t know, but we do know that as the election draws near, the severity threshold for the crisis will increase dramatically. From the bankster’s standpoint, the sooner they crash the market, the easier it will be to get away with QE3. Of course, if they want maximum effect to blow Obama out of office, they will likely want to have a 666 crisis of March 2009 or just the 850 variety that got him elected three and a half years ago.
While the fear index moved up to 20 Tuesday, the spike of 105 back then says we have a very long way to go. For reference, the fear index was around 30 during the Jackson Hole days and the S&P dipped to 1070 early last October before Bernanke and his European counterparts promised further action to support the banks—launching the the six month run we have just endured.
Wednesday stocks broke the five-day losing streak rising 0.7% on the open apparently on a statement from ECB member Benoit Coeure that they could begin buying Spanish bonds. Of course, Germany would object to any move like that. Regardless, it was enough to stop the assault on Spanish and Italian bonds at least for the day. The stock market flatlined on low volume.
Here’s a good article that supports the idea that we’re near the end of the cyclical bull within the long-term (secular) bear.
Thursday the stock market rebounded strongly (albeit on low volume) on hope—hope for “better than expected” news from China Friday, hope for “better than expected” earnings reports Friday, hope (against hope) that the Fed will institute QE3, and hope (against hope) that the slight drop in Spanish and Italian 10-year bond rates will continue to improve.
At least, that’s what we were being told. All of this euphoria was in spite of negative news on the unemployment application front. The CME is lowering silver and copper margins effective April 17th. That could help explain some of the big gains in those sectors.
Perhaps more relevant is that this Monday is the last day for 2011 IRA contributions. Funds could surge into stocks Monday, but then we should see headwinds growing stronger. Note too that the U.S. Treasury is trying to dump some of their TARP stock holdings. There may be an effort to keep things riding high to help them ease out of their positions before the downturn.
On Friday (the 13th), Thursday’s speculation of hope unraveled. China’s economy grew less than the rumored 9% and even less than consensus estimates. JP Morgan raided reserves and used “one time charges” to put lipstick on a pig. In spite of all of the doctoring, JP Morgan’s earnings were down compared to the same quarter a year ago. And oh yes, Spanish and Italian bond rates turned up as their CDS rates soared.
The cost of insuring Spanish debt against default jumped 16 basis points to a record high on Friday of 492 basis points, according to Markit data. Italian CDS also rose 10 bps to 428 bps. (Source)
The day turned out to have erased nearly all of the bogus gains made yesterday with stronger but light volume. The fear index is now flirting with 20 while investor sentiment made a strong move from neutral to strongly bearish. Since the peak two weeks ago, the stock market now has declined just 3.5%.
A week ago, the Fed central bank dollar swap window report showed a drop from $65 billion to $46 billion as most of the expiring ECB contracts were not rolled over. This week’s report showed a further drop to $32 billion—primarily on expiration of BOJ contracts.
Fed Speak
Have you noticed all of the speaking going on these days by the Fed? It seems like there are at least two speakers every mid-week business day. There was one on Monday, three on Tuesday, five on Wednesday, five on Thursday, and one on Friday. That’s a lot of hot air!
Why has the Federal Reserve undertaken this blitz of the airwaves? Is this part a new wave of “transparency”? I doubt it. Rather, it’s a PR blitz in an attempt to shore up its very battered image. Frankly, I’m getting tired of all of this talk. It’s becoming reminiscent of the daily banter we endured from Europe at the end of last year. There’s also an interesting shift in rhetoric at least reminding those listening that there may be a point that the drain to the ocean of liquidity will have to be opened.