Saturday, September 10, 2011

State of the market, September 10Th.

Going in to the week, the bullish camp had hoped that we might somehow, some way, avoid having September turn into one of those historically hysterical Septembers, where everything unravels. The booming rally on Wednesday lost its luster as the week wore on, and Friday's drubbing only made matters worse. The last thing the bulls wanted was a weak close on Friday, but sadly enough, that was exactly what we got. Uneasiness in Europe topped the list, as did an earnings and revenue warning from Texas Instruments. Throw in Thursday's 400K-plus jobless claims number, and it was not a surprise that stocks finished lower for the week.

It was not all that bad of a week, though, but it still worried the bulls since we keep getting so many red lights and warning signals from Europe. Rumors of an official, pending default by Greece circulated on the Internet, but the Greek version of our own "Powers That Be" assured Greeks that all was just fine. Yes, all is just fine as long, as the Germans foot the bill for Greece's mismanagement of its own domestic economy. The problem is what happens when the majority of German people get tired of paying Greece's never-ending bar tab, and decide to cancel the party's credit card. That is what is rattling global markets right now, and it is what is pitting the German people against the European Central Bank.

The buzz on this whole standoff is that if Greece is jettisoned by Germany, a whole, huge house of cards could collapse. For some reason, all of these European banks seem to hold a boatload (or two or three or four boatloads) of every other country's debt. In some ways, it seems even more leveraged, stupid and crazy than the whole sub-prime mortgage debacle in the U.S. (if that is even possible!). The scary thing about this whole EU mess is the fact that it MIGHT give cover to the "Powers That Be" and the biggest banks if we do see a European meltdown. Whatever does happen, though, is one of those outcomes that no one can predict. Markets dislike uncertainty, and that is exactly what we are getting now.

Friday's 300-point plunge in the Dow reminds us that volatility is back in action, and it also suggests that September and October will not be as placid as most of us had wanted. July and August are historically calm, cool, low-volume markets, but that was hardly what we saw. August in particular, was exhausting, and after this week’s big UP and big DOWN, it is clear that we might not be in tranquil, calm Kansas anymore (to quote Dorothy in the Wizard of Oz). The "Wizards" in the Central Banks around the world are pulling levers, puffing fire and steam, and screaming and yelling as best they can, but the broader economic landscape still seems weak at best. That was probably why U.S. stocks faded this week, and it sets up a big tug of war between the bulls and bears for next week.

What was strange, though, was that while we had more triple-digit volatility, we still finished out the week only modestly lower, with the Dow off (for the week) just 2.2%, the Nasdaq down 2.4% and the S&P 500 down 1.7%. All eyes are on that S&P 500, mainly because its 500 companies really represent the "real" economy, and it was a plus that it held above the1120 level that many technicians keep mentioning as a "must hold" level. We saw three double-bottoms at that level in August, and you can bet your bottom dollar that the bulls (and the Powers That Be) will be hoping for that level to hold should we see more weakness next week.

Chairman Bernanke and the Fed meet on September 20-21 and the growing buzz is that it will officially launch some program known as the TWIST, in which they sell short term Treasuries and buy longer term Treasuries. There are lots of economists that say it will not work, but as we have seen for the last three years, the Fed is not overly interested in "what works," but rather what lets the big banks live to fight another day. "Kicking the can down the road" or "extend and pretend" seem to be the themes of global central banks, and it looks like that is what we will continue to see. Again, this is NO WAY to run a vibrant, free market economy, and it is also no way to run a country. The bill for this extended party is growing, and there are still few signs that any "grown ups" are stepping in to shut down the music or close the bar.

There will be a day of reckoning, though, and the can-kicking and pretending will end. When that day comes, the bulls will be off to the races. The problem is in what has to happen for politicians and industry leaders to "do the right thing." Time will tell, but in the meantime, enjoy the weekend.

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