Traderbill's Financial Markets Weblog

 …there are an increasing number of signs that there will be a rough road ahead. On Jan. 2, WSJ C-1 had an article titled: “Stock Bulls’ Five Cheers”. It went on to discuss five events that could make the bulls look good and surprise the bears this year (in an entire year, surely some of them must come true:

1. Stocks rally – cites the decline in the 4th quarter for the first time in 10 years as perhaps indicative that they should now rally. With the Nasdaq now -10.7% from the Oct. highs (8.3% ytd alone!), and the overall market is now down for three straight weeks that seems doubtful…especially as we begin a slate of earnings reports from financial stocks…and please don’t see that rally on Thursday as indicative of anything other than short covering…Merrill did the best getting back to its 40 day moving average but that is meaningless but at least the assumption is that all is now behind them…except one thing that no one has answered to TB’s satisfaction for any financial stock: where will the replacement revenues come from? Any ideas? By the way, the stellar Goldman is the best performing overall (except for Schwab which was not involved in subprime or derivatives  …the best financial stock of ‘07 and it is trading between the 40 and 200 day) but its 40 day is right on the 200 day now ($212) and will be below it by today’s close…a technical negative.

Bank of America will be watched closely and has a triple whammy, dealer operation with subprime hit, retail with mortgages and other loans, and the shocker credit cards (MBNA)…yet they are buying Countrywide…which as one reader explained may be a good thing but it won’t be in time to help now.

Wells Fargo too is under pressure do to home equity portion of subprime loans they originated and sold. Citi indicating they will need more capital and rumors of a cut in the dividend…is this a positive?

2. The housing market stabilizes…you decide…TB thinks that is a far-fetched idea. Only bright spot is loan applications but that is due to multiple apps being filed. True some areas like Manhattan, SF, Chicago are still fine but they do not make up the US economy…they just think they do.

3. Consumer spending remains solid…don’t even go there  …unless Sir Isaac Newton was wrong!

4. Corporate profits accelerate…no one expects that to happen and Barron’s Roundtable was the most bearish TB can recall…in fact one participant said they might be too conservative – it could end up worse.

5. Economic growth accelerates…if even the concept of the rest of the world being able to carry the US at best we would avoid recession…did you pay attention to the trade deficit?…in spite of a weak dollar? 

At the beginning of 2007 you couldn’t find a bull…in fact even on the Feb 27 selloff that gave volatility a record one day increase…and augmented by computer failures at the NYSE, but we quickly recovered and rally almost through July hitting numerous new highs on all indices, then sold off until we had a selling climax on Aug. 16 and then rapidly rallied to another set of record highs in mid-Oct…except Transports which peaked way back in June! Then down once again until 11/27 when we staged a low volume rally  thru Dec. 10, down again till the 18th, then the Christmas rally that culminated on Dec. 24 and since then it has been all down and we are frittering away the returns of 2007. Meanwhile, the number of bears is increasing. TB would argue we should never have seen the Aug-Oct rally given what was happening to housing but we ignored it…generally believing that since subprime is 6% of the mortgage market…who cares…of course about 40% of the originations in 2007 were subprime and then it was levered up with derivatives based on faulty assumptions.

Faulty assumptions are around again: if the Fed eases stocks will rally, bond yields can’t go lower, the bad news is behind us, banks will get all the bad news out this quarter, stocks rally in election years. While each of those may be true in certain circumstances, no investor today has seen a market like this, only read about it…how else does one explain the worst January in history?…taking out even 1931…in dollar terms it dwarfs it.

Election year could well turn into a nightmare as each candidate panders to the voters…and that is just what it is. John Mauldin put out an excellent piece on this over the weekend…you won’t agree with all of it…TB didn’t…but this isn’t a popularity contest…it is about making people think for themselves. Here is the link…it’s free…and informative: http://www.frontlinethoughts.com