RebelTraders

I’m very afraid for the millions of investors who are being suckered into the market believing that the economy is improving. But, that is what creates bear market rallies in the first place.

Bear market rallies take place like passing ‘eyes of a hurricane’. There is an initial storm, then the skies clear and people come out believing that all is well, and then get caught outside in the hurricane when the next part passes overhead. Just like in a real hurricane, many deaths occur when people venture out thinking it is all over. In the stock market when people see a clearing in the sky they start buying stocks again, but when the storm picks up again they are caught and have to sell all over again as they start taking on water.

As history has shown us many times over the past hundred years, when the next part of the storm passes overhead people can’t get out fast enough and take on more and more losses. It is not until there is a complete acknowledgement that the economy (and the stock market) is in danger that the down trend becomes firmly planted.

Over the past 8 months we have had one heck of an economic hurricane with the financial system nearing a complete collapse. With the lull in the financial implosion the market is coming out of their bunkers thinking the storm has passed completely. But has it really passed?

May 15 (Bloomberg) — The Federal Reserve’s direct loans of cash to commercial banks climbed to the highest level on record in the past week, a sign of continued stress in financial markets that threatens to curtail credit for households and companies.

May 15 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke pushed banks to keep raising capital in the aftermath of losses from the credit crisis to avert deeper damage to the U.S. economy.

“Firms are hunkering down,” Bernanke said at a conference in Chicago today. “They have at least partially replaced the losses with new capital raising, but not entirely. They are being rather conservative in making new loans, which has implications for the broader economy.”

Ben Bernanke keeps pounding the table for banks and financial institutions to keep raising capital. If the crisis is over than why the urgent need to keep pressing them to raise more and more capital? Ben knows what is coming down the pike and it is not going to be pretty.

The housing market will continue to deteriorate, perhaps not bottoming until 2010. This is, and will, have large implication to the broad economy as consumers will be pushed further into personal hardships. One thing leads to another and you have another hurricane bearing down on us. I see the global economy as one hurricane after another, with brief clear skies to give people the sense that all is well. My own personal belief is that people need to be paying off debt as quickly as possible, protect their capital at all costs, and reduce the risk of loss in the markets by keeping tight stop loss levels on any long term investments.

Are you outside under the clear skies thinking all is over? Or are you simply restocking your storm shelter so you are prepared for the next phase of the hurricane?

How about some charts and graphs…

This chart is a comparison of industrial production of the United States vs. the S&P 500. While I acknowledge that the industrial complex of this country has been declining as more and more work is being shipped to foreign countries, it remains a valid indicator of ‘general’ health of the economy. If the market is relying more and more on foreign growth then we may very well be in for a very big storm. For many high growth nations are topping out.

(Small Business - Earnings growth - Data Source: Moody’s Economy.com)

(Internet retail sales - Data Source: Census Bureau)

(Job Availability - Data Source: Moody’s Economy.com)

(Commercial Paper Market - Data Source: Moody’s Economy.com)

Asset backed paper (mortgages) continues to deteriorate on the open market

(Jobless Claims- Data Source: Moody’s Economy.com)

People on unemployment still deteriorating.

And tonight we have this:

FANNIE MAE IS EXPECTED TO ANNOUNCE ON FRIDAY THAT IT IS ENDING ITS POLICY OF REQUIRING HIGHER DOWN PAYMENTS ON HOME LOANS IN AREAS WHERE PROPERTY PRICES ARE DECLINING - WSJ

Ok, the housing crisis began with the sub prime mess. Now Fannie Mae is going to lower their lending requirements in the hardest it areas? This is desperation on part of the Government GSE’s, plain and simple. Fannie Mae (and it’s brother Freddie Mac), are going to implode at some point as their losses will grow to unsustainable levels.

And the last chart I want to show you tonight is one that we have shown many times before… But, it is worthy of reminding people of just how bad the financial system is in this country.

Just look at how much money banks have had to borrow from the Government. Never has it been this high.

And one final bit of news tonight:

UN says world economy will only grow by 1.8 percent
Thursday May 15, 10:26 pm ET

United Nations says economy is ‘teetering on brink’ of severe downturn.

UNITED NATIONS (AP) — The U.N. says the world economy is "teetering on the brink" of a severe downturn and will grow by only 1.8 percent in 2008.

That’s down from a global growth rate of 3.8 percent in 2007.

The U.N.’s midyear economic projections released Thursday blamed the downturn on further deterioration in the U.S. housing and financial sectors in the first quarter.

The U.N. said the U.S. problems are expected to continue to be "a major drag for the world economy" into 2009. It forecast global economic growth of 2.1 percent next year.

But developing countries won’t suffer as badly. The U.N. said they should reach 5 percent growth this year, compared to a robust 7.3 percent in 2007.

This entry was posted on Thursday, May 15th, 2008 at 10:03 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.