Churning and Getting Nowhere Fast

The lack of volatility this week after the most volatile year on record is quite amazing. However, I'd say the action is more bearish than bullish. I am hearing a lot of chatter about how on Jan 1, 2009 suddenly the banks shall unleash their loads of capital. While it is indeed true the Federal Reserve is pumping a massive amount of money into the system (remember our economic equation - we have both the amount of money and the velocity of money; how quick it turns over) it seems too "Wall Street thesis" like that suddenly all the risk aversion ends and banks were just trying to fool people by holding Treasuries until Dec 31st... I mean who are they fooling by that action? And suddenly on Jan 1 a great light shall come upon them and they will resume their lending activity. Gosh, even some pundits I respect are on this bandwagon.

• I noted recently the massive increase in the amount of excess reserves held at Federal Reserve banks by the nation's banks, money that basically is just sitting there, earning practically nothing.
• Excess reserves are monies held at the Fed in excess of the banking sector's reserve requirements. In the week ended December 17th, banks had $774 billion in excess reserves, gigantically more than the customary total of just a few billion dollars. The money is the result of the Federal Reserve's massive liquidity injections.
• In Friday's release, cash balances held by commercial banks topped $1 trillion for the first time, reflecting cash balances held at the Fed. Pre-Lehman, cash balances tended to hover around $300 billion, with an annual growth rate of less than 1% per year.

I guess this thesis would be reliant on banks assuming that returning nothing is worse than lending to people and potentially losing much. Again, for us economists out there - this is just a fascinating experiment... if the bulls are correct it will be like a dam bursting at some point as more and more dollars are pushed into the pot by the Federal Reserve and in theory the levees are washed over... and capital will come running down on us all.

I will go back to the other part of the equation - people need to want loans. Other than those who desperately want to refinance their bad loans (see refinancing boom) is there really some unmet demand to buy new boats? cars? homes? In this economy with this uncertainty with a staggered consumer. The punditry seems to believe so. The Japan experiment would say otherwise. I guess the ultimate question is how Japanese our consumers will become (shun risk? avoid more debt - create savings). I find this situation inprobable since I've deemed early in 2008 that 2009 (and 2010) will be the year of the personal bankruptcy in America. But hey, with the way this government is acting even the bankrupt might be entitled to these new 4%, no appraisal, just buy a house PLEASE! 30 year loans.

As for the market - we are churning, but not in a good way. I'd argue the S&P 500 and in fact many individual charts show a propensity to roll over. The index and many stocks bounced off traumatic November 2008 lows (snapped the rubber band back to the mean - to some degree) but now are simply marking time and in a range for 3 weeks. Again the longer the sideways action the bigger the ensuing move. There just seems to be an absolute lack of buyers outside of the heavy short covering from a few weeks ago. I don't blame people - the market is absence of effective regulators; the day to day action is random and chaotic and we get nonsense 2% moves in 20 minute increments almost every day (ex-this week), et al. Who has faith in this system? And who knows what the rules will be 1 week out? 1 month out? 6 months out - the government changes them. Who gets the next bailout? Both CIT and AXP got "theirs" in our "free market system" this week. A complete lack of transparency in our banks (many years in the making), and our government propping up the banks (recent) is another. So we have a lot of big picture issues outside of "are stocks cheap?" and "when will this recession end?"

All that said, this remains to me a technically driven market, since fundamentals have been abandoned for many months, so we need to see some key moving averages regained soon to have any faith in a further move up. On the S&P 500, the 50 day moving average is now down to S&P 920 which ironically was (or near) the intraday high hit Nov 8th, 9th, 16th, 17th and 18th. So it's quite the line in the sand - we'd happily drink Kool Aid and push our sturdy cash chips onto the long side if we can regain that. But judging by the action of late - it seems doubtful. (if we do rally to 920 don't get too giddy, it's certainly possible to push this market around in a thin tape) For technical types, this looks like a double top to me (first half of Dec and second half of Dec) I've been using S&P 840 and 820 as downside supports but 840 seems to have been replaced by 850 as that's the downside line in the sand the last 3 weeks. 820 is the low we hit repeatedly intraday the first week of December. If that blows, I believe we're set up for the next leg down...

Always trying to respect the flip side (pandas) is the above mentioned "release the dogs!" of lending dam bursting scenario and "good times are here again, Obama will have a patriotic inspiring speech on Jan 20th" and "nearly $1 trillion in promises coming to you from Congress". So I expect early 2009 to be no different than much of 2008 - dominated by hope, false or otherwise - and reliant on the nanny state bailing out "free market capitalists". If you noticed since the Federal Reserve promised said free market capitalists everything they could ever want (free money! to all!) a week ago Tuesday, the market has given back all it's "2004 is here again! Greenspan money is free once more!" gains.

Back on the realistic side the horror that was Christmas 2008 shall soon be reported by retailers (but there is still hope! gift cards will make up for December! - not), I believe the next employment report comes our way Jan 9th, and we start a new earnings season in January which will be full of disappointment and PULLED guidance by company after company (i.e. things have degraded so quickly we cannot give you any clarity on 1st half 2009, or in fact any of 2009)... hopefully Obama has the speech of the century lined up to make our "social mood" better.

You can see a lot of the same action as the S&P 500 in many of the name stocks (or early cycle recovery issues) which one would assume would be breaking through resistance areas if the market as a whole is going to change its character.


I want to err on the side of caution, protect capital, and be ready to pounce on weakness (revert back to heavier short exposure) when the time comes - as there really is no great reason to buy on the long side other than "the market is ignoring bad news on hopes of a turnaround.... in 6 months". I've heard that one for over a year now.

I continue to believe many are in a state of denial of what the US is going through - judging all the denial through 2008 this is not surprising. 25 year cancers are not solved in 1 year, no matter how bad of a year it was. There is only going to be one time when the trend truly turns from bear to bull; and it will be ok to miss the elusive "turn" since a real bull will last years. Every rally until that "one time" must be doubted and sold. We'll bottom for real when the serial bottom callers have finally quit and express unmitigated digust with the stock market (as in late 2002) - they still have no shame making the same calls they've been repeating for a year now. One market in full bull mode is the supply of pom poms; they need to make an ETF for cheerleading outfits so I can go long.