Market Talk

So, the Times is starting to get it. It’s got a story in the business section today on China, warning that the Middle Kingdom could be headed for a stall next year, given high inflation, government debt and asset bubbles.

That’s what Frank Veneroso of Veneroso Associates told listeners of The John Batchelor Show back in November, warning that the nation had not only an inflation problem, but two historically massive bubbles. Since then, the evidence has only mounted. Most disturbingly was the revelation, via WikiLeaks, that even senior Chinese officials don’t believe their own “official” data.

So if, for instance, the Chinese government tells us over the weekend, as they did this weekend, that its CPI rose 5.1%, do you believe that, or not? Try not. You can bet China’s inflation is higher than it’s letting on, and you can bet GDP is lighter than it’s letting on. What might have kept the Chinese from raising rates over the weekend isn’t the inflation issue, but the hot-money issue.

If you want to know what’s going on in the Chinese economy, you have to look not at the official stats, but at secondary stats like power output. That’s what’s Veneroso’s been eyeing, and what he sees has given him pause.

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This market needs its head examined.

What I’m about to relate is actually beyond anecdotal, because it’s an anecdote the source of which and the majority of the details of which I can’t even remember. But today’s stock market, the rally, the reaction to a literal cavalcade of bad news, reminded me of this quote I’d heard a few years ago.

“Why isn’t the Dow down 1000 points?” That was the reaction of one analyst back in 2008, before Lehman, before AIG, before the panic set in and everybody threw in the towel. It was a day like this, where the news was uniformly bad, but the market was holding up surprisingly well. It made no sense whatsoever. Now, I read that in a market comment from one of the folks I follow regularly, but I can’t remember offhand which one it was; either Art Cashin, or Joan McCullough, maybe it was even Barry Ritholtz. I can’t remember. But I remember the line.

It came back to me today, because this is one of the flat-out just silliest stock sessions I’ve seen in a couple of years. The news is uniformly bad: GDP was revised down sharply. Intel cut its revenue outlook. Boeing delayed the Dreamliner, again. Consumer confidence fell. The ECRI’s weekly leading index remains deep in contraction territory. Ben Bernanke said the Fed’s prepared to go “all in,” but he doesn’t think the Fed will need to go all in. In other words, he said nothing he hasn’t said before.

The market rallied off all that, in one of the screwiest rallies I’ve seen since before the recession started. When you see trading like this, the market rallying sharply on, forget for no good reason, rallying against very good bad reasons, it’s a sign that the “market,” the collective group of traders, speculators, investors, brokers, has lost its collective mind. When you see trading like this, it’s a bad sign, and it makes me think that September, which is historically the market’s worst month, is going to especially bad this time around.

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Stock traders have been laser-focused on two goals lately: 11000 on the Dow and 1200 on the S&P 500. The march toward these goals has been relentless; the general thinking seems to be that crossing those barriers will finally force the proverbial sidelines back into the game.

To the extent, mind you, that Mr. Market has a game plan. While the media often characterize the market as a singular entity, it obviously is nothing more than a large collection of subjective players, each focused on their own goals rather than any collective goal.

Yet it certainly seems  in the last month or so the market has moved in lock-step. This march higher has taken on a life of its own, in the press at least, where it’s being painted as bona fide evidence that the economic recovery is here. After all, the market is the world’s greatest predictive machine, as we’re so often told (except for, say, in 2007; but never you mind that.)

I’ve said a few times, however, that this is an insider’s market. I’m not so sure the market is telling us anything about the wider economy. Profit growth has been more a function of cost-cutting than top-line growth. Despite Friday’s jobs report, the economy is not adding jobs at any kind of rate that will drive real, lasting growth. The market reflects mainly the cheery optimism of the sell-side crowd.

Volume has been meager. The wider populace, many of whom got flat-out crushed, has not come back to the stock market, leaving it to the pros. This, of course, makes it easier to drive the market where the sell-side wants it, higher. And it’s not like they’re even really trading their own money: the Fed pumped more than $1.5 trillion into the marketplace. At least a couple of bucks worth of that “found money” found its way into the stock market.

So who’s driving the tape? Gluskin Sheff’s David Rosenberg said he suspects it’s the pig farmers. “Who are they pray tell? They are the prop desks at the five large banks. They buy and sell securities, with leverage … to each other.” But there are ramifications to this kind of thing, he pointed out:

Of course, it is always difficult to predict the future, but so many investors are caught in the moment and are being told “not to fight the tape” and simply play the momentum game. They do not see that the current rebound in the economy is a statistical mirage orchestrated by record amounts of monetary and fiscal stimulus that are simply unsustainable and actually risk precipitating a very unstable financial and economic backdrop in coming years.

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We could use a good Stoic right now.

Let’s not waste time. What gives with the stock market not rallying off the best GDP report in six years? For one thing, it was a total sell on the news play; the whispers for some time had GDP coming with a “5″ handle.

But for another thing, even that hot, blistering number can’t obscure the fact that the economy remains stagnant, and the administration, rather than spending its first year stoically addressing this nation’s problems, wasted it propping up connected banks and dithering over its pet project.

When this crisis began, more than two years ago, I opined that the only true solutions were time and open markets. I still believe that. But we are wasting time, and we’re shielding connected players from the vagaries of open markets. That is making our open markets, the deepest and most liquid anywhere, and the envy of the free world, less open and more rigged. And only a fool doesn’t see it.

It’s not just the 10% unemployment rate, as bad as that is. It’s not just that wages for everybody else that aren’t keeping pace with even slight inflation. It’s that as those two situations persist, as the overall state of the consumer continues to stagnate and decompose, it drains demand, which keeps the lid on corporate profits, so companies are reluctant to ramp up new operations. It keeps state and federal tax revenue dropping, straining already strained budgets, especially on the state level. Something eventually will burst.

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They thought the worst was over in 1930, too.

Last week was frenetic. From the special election in Massachusetts Tuesday to Friday’s closing bell, more stuff came out of left field than anybody’s seen in a while. So today, on a quiet (and here in metropolitan New York dreary) Sunday, it’s a good time to step back and try and get the view from 30,000 feet, so to speak.

The mantra for 2009 was recovery. The White House chanted it, the Fed chanted it, Wall Street chanted it. And, of course, in a way it’s true: the worst of the downturn is surely over (and we better all hope that’s true.) Anything that happened or happens afterwards is part of the recovery. But the unspoken implication has been that everything is going to start getting better in a steady line upward. That’s proving to be not quite as true.

Briefly and most obviously, unemployment remains a major problem. The government’s “official” unemployment rate is 10%, and effectively it is most assuredly higher. This is dragging the entire recovery downward. Consumer spending and demand is down, which drags down corporate sales, which drags down hiring, which exacerbates the unemployment problem. This vicious circle has not been broken, despite government efforts.

Fourth-quarter GDP, of which we get our first look this week, is going to come in at a number we’ve haven’t seen in a few years. Most people peg it somewhere around 4%, but quite a few sober observers think it could be higher, even in the 5% range. This will surely bring about another chorus of “the recession’s over.”

From a technical standpoint they may be correct, but it will still be a long time before everything’s better. It could be years, in fact. Continue reading…

A rush to the dollar won't be pretty.

US dollar’s three-week-old rebound comes amid fresh debt worries abroad, which has triggered another rush to safety.

Dollar rally could continue picking up steam as traders who had been shorting the currency start bailing from those bets, Tom Petruno writes at LA Times’ Money & Co blog. But he doesn’t expect the trend to last long term.

“There still are plenty of people on Wall Street who believe the dollar is going lower longer-term,” he says. “But they may be happy to wait until January to try to make that case again. And between now and then, thin holiday trading seems likely to favor the trend already in motion – which is dollar strength.”

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Amid all the wailing about sovereign debt downgrades and such, you may have missed yesterday’s jobless numbers from the Bureau of Labor Statistics. No, you didn’t miss the monthly jobs report, or  even the weekly initial claims. What you missed (if you did miss it,) was the Job Openings and Labor Turnover Survey. Or, the JOLTS report.

The BLS reported there were 2.5 million job openings in October, with the opening rate at 1.9%, a level that has held steady since March. That means hiring has not picked up at any pace since the stock-market rally – and the purported recovery – began, and the ratio of more than six unemployed for every job opening remains steady.

So even if you buy into Friday’s jobs report, the fact remains that hiring has not picked up, which is confirmed by the fact that long-term unemployment continues to rise.

And if you don’t buy into Friday’s report, well, you’re not alone. Like I wrote Friday, I’m skeptical. And certainly Fed Chairman Ben Bernanke didn’t think it was strong enough to get him to even hint that he might lift interest rates off the floor. And other folks are still deconstructing it.

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