From MoneyWeek.com today:

Why we are so bearish about the recovery rally

Why are we so bearish about the current rally? It’s a question that was put to me in an email yesterday and it’s a good one. So let me explain.

The global economy was always going to rebound at some point. This recession has already been massive, although it may not feel like that to anyone who has managed to hold on to their job. In the US, it’s easily been the worst since the Great Depression. But even the Depression wasn’t a bottomless pit – you had recovery and relapse all the way through that.

However, we haven’t fixed any of the problems that led to the financial pile-up in the first place. Our route out of trouble has been exactly the same as it’s always been. Pour more cheap money on the problem and reward the banks for failure. Quantitative easing, or money printing, or whatever you want to call it, is just a turbo-charged version of the “Greenspan put”.

Let’s remind ourselves of why this collapse happened in the first place. It’s really not complicated, though many would have you think it is. Banks were allowed to operate with impunity in a consequence-free environment. On the one hand, they weren’t effectively regulated. That would be fine, but for one thing. There was an implicit promise that they couldn’t fail either. Alan Greenspan had already amply demonstrated throughout his time as head of the Federal Reserve that he would do anything in his power to bail out Wall Street.

It’s exactly like being taken to a casino, given a never-ending supply of chips, and being told that you can keep the profits and the house will take care of the losses. The result was that banks took the biggest bets they could, and with the aid of the credit ratings agencies, made a lot of money by selling their clients high-risk products masquerading as low-risk ones.

None of that has changed. Bank reform is becoming bogged down in the mud of reports and committees on both sides of the Atlantic and meanwhile, the champagne is flowing and the guaranteed bonuses (an oxymoron if ever there was one) are back.

So what, you might say. That’s the way the system works. Banks pay plenty of taxes, and we all benefit from the trickle-down effect, everyone from celebrity chefs to Polish nannies.

The current system doesn’t work

That’d be fine – if it did work. Our problem is that it doesn’t work. All cheap money does is blow up fresh bubbles, which then explode and cause terrible damage. The tech bubble was bad, and the property bubble was far, far worse. Remember, at one point last year people were genuinely afraid that cash-points would stop paying out and we’d have riots in the streets. If we don’t deal with this – and it looks like we’re not going to – then it’ll happen again. Only this time, our economies are even more fragile than they were then.

If banks are too important to be allowed to fail, then we have to split out the function that makes them too important to fail – the retail banking function, basically – and regulate it to within an inch of its life, like the utility companies.

And this isn’t just about the banks. If central banks are going to persist with the notion that they can somehow control the economy, then they’re going to have to start paying attention to asset bubbles too, rather than washing their hands of all responsibility for them as the Greenspan Fed did.

But it’s unlikely that any of this will happen now. As the ‘recovery’ continues, any impetus for reform will vanish. And politicians will be too scared of withdrawing support from the financial sector in case it upsets the apple cart and ruins their chances of getting voted back in. So we’ll stick with the current system until it blows up in our faces again.

Rising commodity prices are bad news for the economy

Already we’re seeing a “recovery” bubble building. I said yesterday that the current markets felt uncomfortably like early 2007, when everything was rising and no one could find any reason for it to stop. In today’s Financial Times, John Authers compares it to a different time period – last summer. “The rally in risky assets is painfully reminiscent of the behaviour that preceded last year’s crash. Then, as now, commodities, emerging market equities and high-yielding currencies validated and supported each other higher.”

Meanwhile, the dollar has been taking a kicking as investors abandon “safe haven” assets. In fact, the greenback has “now given up half of its gains since it hit bottom last July, just as the bubble of commodities and emerging markets was about to burst. Then, as now, the advance of relatively risky assets has been uniform, and undiscriminating.”

Whatever the reason behind rising commodity prices – cheap money, “stimulus” packages, or demand from China and India – they are bad news for a fragile global economy. Higher raw materials prices hit profits and raise costs for consumers just as they need the money most. But they also put pressure on central banks to raise interest rates to combat inflation. With cheap money the main thing keeping the global economy afloat right now, any hint of tightening could bring the rally to a very rapid end indeed.

The Short View
By John Authers
Published: August 4 2009 03:00 | Last updated: August 4 2009 03:00
Almost everywhere yesterday there was a landmark. The S&P 500 traded above 1,000 for the first time since election day, November 4. The FTSE emerging markets equity index reached above its close on September 12, the eve of the Lehman debacle. And the US dollar dropped to its lowest against a basket of currencies since Congress shocked world markets by voting down the first version of the bail-out for toxic assets on September 30.

Such optimism found support in the latest economic data. The ISM supply managers’ survey in the US found manufacturers’ sentiment almost back to its level of August last year, and far higher than at any other time since Lehman. The same was true of a similar survey for the eurozone. The guts of the ISM survey also helped the optimists. New orders exceeded inventories to the greatest extent since 1975, strong argument for the belief that the US will now see a “restocking boom” as production is stepped up to replenish inventories. But there is reason for disquiet in that the rally in risky assets is painfully reminiscent of the behaviour that preceded last year’s crash. Then, as now, commodities, emerging market equities and high-yielding currencies validated and supported each other higher.

Then, as now, the dollar was the chief victim. Even though the latest news is good for the US economy, the dollar sold off heavily as investors left it for opportunities to take part in the global “recovery” trade. The inverse relationship between the dollar and risky assets is as strong as ever. It has now given up more than half of its gains since it hit bottom last July, just as the bubble of commodities and emerging markets was about to burst. Then, as now, the advance of relatively risky assets has been uniform, and undiscriminating.

As the late Sir John Templeton said, “to buy when others are despondently selling and sell when others are greedily buying requires the greatest fortitude.” He wisely added, however, “and pays the greatest reward”.

From Prosperity Dispatch today:

Most panics start when everyone has gone “all in.” For instance, when it comes to stocks, panics happen when everyone is all in and there is no one left to buy stocks. That’s why stock prices fall so quickly. Panic buying is a bit different in that the panic buying is what gets everyone to go all in.

That’s the part of the cycle we’re at right now – getting everyone in.

The signs are all there.

One of the most obvious warning signs comes from the Washington Times. Today, a headline declared “A New Bull Market” has begun.

The economic euphoria has gotten so strong, two of the President’s key “money men,” Larry Summers and Tim Geithner, even brought up the possibility of tax increases to offset government deficit spending. This kind of talk would be unthinkable a few months ago.

Finally, the big money is starting to move in. The State Street Investor Confidence Index, which tracks the buying and selling decisions of institutional investors like pension and mutual fund managers, has been soaring. The index recorded a very positive reading of 119.4 last month. This is a huge upswing from last fall’s market sell-off when the index fell to 82.1.

That’s everyone – the mainstream media, the government, and the big money.

Clearly, the herd is still getting in on this rally. And each day the market rises, which seems like every day lately, we get closer and closer to the point of maximum optimism.

Looks like we are headed to 10,000 before we correct. There are quite a few players out there that still have room for growth which will pull the DOW and S&P500 up. A few worth looking at that either have to rally up from here or crash are:
C CIT FNM FRE and Banks like BAC or WFC still have room for further gains. GS, JPM and MS got a lot of TARP money from the Government and from what I see now is that the funds from the last stimulus package are still sitting on the sidelines and until those run out we won’t be heading down before that. The balloon won’t pop until you over inflate it first.

Ed Note: I think this a very foolish strategy – anything could bring the market down now, and it will!

On Friday August 14, 2009, 10:24 am EDT
Buzz up! 0
Print
NEW YORK (AP) — Stocks fell sharply Friday as investors worried that nervous consumers will short-circuit the economic recovery.

Traders were disappointed by media reports that the Reuters/University of Michigan index of consumer sentiment fell sharply in the first part of this month, a sign that consumers may continue to curtail their spending as they worry about losing their jobs. Consumer spending is crucial for the economy to emerge from recession as it accounts for two-thirds of all U.S. economic activity.

The discouraging reading came a day after the Commerce Department reported an unexpected decline in retail sales. Investors were able to shake off that reading, but Friday’s consumer sentiment number had them bailing out of stocks and moving their money to the relative safety of government bonds. Treasury prices rose sharply, pushing their yields lower.

The Labor Department said the Consumer Price Index was flat in July after a slight increase in June. Inflation is bad for bonds because it eats into their fixed returns over time.

Meanwhile, the market shrugged off a report showing a bigger-than-expected increase in industrial production. Investors have come to expect an improvement in manufacturing activity; their concern now is the consumer.

In early trading, the Dow Jones industrial average fell 137.55, or 1.5 percent, to 9,260.64. The Standard & Poor’s 500 index fell 15.35, or 1.5 percent, to 997.38, while the Nasdaq composite index fell 32.47, or 1.6 percent, to 1,976.88.

Buy Sep Calls and Sell Oct Calls for a same stock or Index……

A severe correction coming which shows to the zero level in my system and that could happe if there is WAR…..

Peace

RBS today – and they got it right last summer as reported on this website at the time… now:

I have yet to see ANY meaningful evidence of self-sustaining private sector demand, which I have said for many months is the key to a sustained/secular economic recovery and asset price recovery. All I see is growth and asset price gains driven by the willing and reckless destruction of government and central bank balance sheets. This is NOT sustainable IMHO. I continue to see a private sector that wants to pay down debt, increase savings, cut costs, take less risk. And I see the period of government and central bank driven boom times as rolling over very fast from here on in. Why? Because I think balance sheets and sustainability – govt, central bank AND private sector, MATTER. If they no longer matter, I will be WRONG, and I will have to accept that the policy of ‘Print/Borrow/Spend on Rubbish we don’t Need’ is a limitless phenomena, without consequences, which means there should never be a bear market ever again….I hope this sounds as ridiculous to you reading as it did to me when writing…..