understanding the psychology of behavior

Despite the decline, the market is still waiting for approval of the bill.  Not a collapse, but a sizeable decline none-the-less.  (Most likely because financials can not be shorted.)

The market is acting like a repricing of equities is upon us.  MA and AAPL, to only name a few… but the general commodities as well, suggest a global slow down is upon us.  At the very least US recession that will cause much slower growth abroad.

I am causious here, but I must say stocks are looking juicy, even when repricing for lower growth.

Unfortunately we have still not hit a market bottom.

MER gets taken out, and if I were a BofA shareholder, I would be a bit upset. No doubt there will be an obvious hit to BofA, but ultimately benefitial for the long-term holders… still, the price of the buyout was too pricey. MER would have opened in the low teens, and probably headed for bankrupcy next, yet gets bought out for Billions. BofA did MER shareholders a HUGE favor.

The markets will be seeing some major declines… major declines as the futures indicate. Do not know if capitulation will take place until we are open, but tomorrow may be a good time to get back into JPM (with an initial position). I will be in a conference all day Monday and Tuesday, away from a computer, but will put a limit order at 36 or so.

Do not forget, this financial crisis is taking place within a consumer led recession, and until the American consumer flushes out its negatives (ie… higher income growth, job creation, allowing for some savings… etc), the true market bottom may not take place.

The only real uncertaintly left with respect to major financial institutions is AIG. Once they get flushed out, the landscape looks a lot better.

(PS… I do not like the idea that the Fed will take equity as collateral)

The Government will bail out housing with the Paulson Bill. (Annoys the hell out of me that my tax dollars will be used like this.)  Then (IMO) a rise in interest rates.

I am under the strong impression that rates have not risen because of housing. (its okay to call me a genius with that extremely obvious assumption … weak economy be damned.)  Negative rates have lasted for far too long, and with stability in housing and the credit markets I think the Fed will get the green light to raise rates.

What will this mean for the markets?  I am not sure.  After the White House said they will not Veto the Paulson Bill, markets rallied.  The bill will solve one of the major economic issues, but the consumer slow down is still with us and most businesses are not growing profits as quickly.  And until the VIX sees aroud mid 40s or so, I do not think the bear market is over.

(FYI… Brazil raised rates significantly, and are planing to do so again soon. The economic drivers… BRIC… are acting on inflation, and we will too, once housing is taken care of.)

“Soaring commodity costs are denting manufacturing activity in Asia and Europe and the outlook looks bleak as new orders drop off in the face of rising prices, surveys showed on Tuesday.” (article)

I don’t know… maybe its just me, but when I see the stock markets around the world decline to such levels, I get really cautious on Oil and other commodities.

When crude is being rejected by buyers, and then we see reports like the one listed above, anyone with a straight face wanna tell me oil at current levels is due to fundamentals?

I keep thinking about the Fed meeting and what the minutes will say.  The minutes will have to speak to a more tough stance toward inflation, and they will either lie and say the underlining economy is moving well or blame the recent flooding in the mid-west for economic softness.

Either way, rates will have to go up as inflation is too out of control, while the economy is soft.  A reaction to this anticipation will be a weaker market (generally speaking), stronger dollar and lower commodity prices.

The more I keep thinking about the current economic situation, the more I like the short trade on the USO. (Even Globally… India is now faced with 11% inflation.  China will see a huge inflation jump because they removed the subsidies on gas. China just put an 18% tax on their consumers. Anyone that does not think the price hike will not have an impact is simply kidding themselves.)  Global inflation can no longer be ignored. Rates globally will have to rise somewhat or continue being innovative in how they handle inflation (like china’s gas hike).  If not, the central banks are being careless.

(I would say to short the SPY, but it is really oversold and I do not like shorting when something is too oversold despite my approx. 1280 price target. We should see some intermediate, techincal, bounces coming soon in the market.)

The CPI number was worse than expected coming in at 0.6 vs 0.5, however the pre-market action suggest the money men do not care.

Foreclosures up by 48%, CPI indicating the Fed has to raise sooner or later, probably going to cause more foreclosures and yet the market finds this positive.

Obviously I missed something, but the markets are oversold and with the positive reaction I will close my SPY protection.

Around the world the BRIC countries are raising rates, China is being more aggressive with two bank reserve requirement increases in a month.  But the US and EU have not because of the credit crunch.  Recently Bernanke hinted inflation was a concern and rate hike maybe coming sooner rather than later. Short term yields spiked on the news.  The ECB head expressed similar news a short time ago.

We are at a point in time where interest rates must come up. The world is not dealing with 4-5% inflation the government data is suggesting. Its much higher.  That is why in Spain there are protest that is now affecting the supply chains of stores, and WILL impact the general economy.

Global economic growth is very much alive, but the Fed will have to make some really tough decisions.  The Fed will have to raise rates.  Food and energy costs are at a level where alternative are being introduced to the market, and will continue to do so even with rate hikes from the US. (The US saw 6% decline in gasoline usage during its busiest season, and Crude and gas prices only went UP!)

In this type of environment, NLY will be perceived as negative, despite its nice yield, as I indicated a few weeks back to lighten up because of the potential rate hikes. So becareful there. (Although I am expecting a dividend increase for this quarter.)

Some stocks for this environment: 

PWR, IMO, is still a solid play due to the alternative energy push. And should do well in whatever economic environment, so long as it is not a severe recession (which we are not in).

AGO is also interesting in this environment.  I am a bit cautious as to what the banks and IBs have to say within the next few weeks, and may drag AGO down. But the credit markets stabalized, and business is good, taking market share.  So long as another IB does not go under, AGO should rise from here especially since they guided to a worst case scenario last quarter.

The government posted that Gasoline prices declined by 2 percent for the month.  ARE THEY F-N SERIOUS?!?!

AAA National Ave. Gas prices shows an apporximate rise in gas cost to be 11%.  YES… +11%. (And the Labor Dept. has the audacity to state it declined by 2%!)

from (AAA) The site currently lists ‘current price’ at 3.75 and last month’s price at 3.37. Whatever the actual numbers are for April, there is NO WAY it declined by 2%.

What we have here is a serious, and blatant manipulation of the data.  Never have I seen it so obvious.  (article)

Anyway, the number is giving the market an excuse to continue its rally that I pointed out the other day. So enjoy it… I guess.

The consumer took on approx $15B in loans. (article)

I am concerned by it.  Only because the expected rise was $6B, and wages are declining (when factoring inflation).

The rebate checks are a nice bump to the system, but imo, the market already discounted the spending.  I will be actively looking to short the RTH after today. Wal-Mart should give it a boost, but after the rebate checks get flushed out of the system or allow less (or delay) defaults to occur, I do not know where the consumer is going to get more money. Especially with declining wages, and jobs contracting.

I wish an economist would be so inclined to connect the Inventory build of the recent quarter to the recent surge in the Service Sector. Then correlate this to the rise in the transports (and maybe even adding to the rise in the entire market.)

This is my superficial theory, but I aint no economist.

Sorry… just re-read this post, and I realized I stated no conclusion to it… the point is that the ISM number was already known via the GDP and factored into the market.