Monday, March 16, 2009

Stock Market Review - 3/13/09

Wow! Check out the beginning of a bear market rally that started promptly on Monday morning of this week. The chart, here, is the Dow year-to-date and you can see the nice reversal off the lows of the year with clearly stronger volume. Nice job, PPT! All the bulls see the obvious double top in all the major indices and they are all rushing frantically into all asset classes to turn the markets higher. Maybe we are getting a playable rally. Maybe we are getting a real turn in direction. Maybe for the first time ever, printing gobs of money really works. If so, it is obvious that central banks should constantly flood the economies of the world with freshly printed money and simultaneously buy down bonds to keep interest rates low. Maybe that is the secret. Maybe Bernanke and company are on to something.

Maybe. Maybe the central banks are simply following the lead of Zimbabwe. They flooded their market with money and their stock market responded by bulling higher. It may be because stock markets reflect real inflation but who cares? The market went up. Isn't that all the whining American public wants? We used to build wealth in the US through manufacturing but now all we have left is our investment portfolios. The truth is, they can be saved. The stock market can be saved. Like Zimbabwe, we can print money and flood the streets with ink. That makes the stock market go up. But, so too will the cost of living. Extra dollars devalues the currency and in turn, prices of everything we buy goes up. Our government will continue to deny this, of course, and they will continue to put out benign inflation numbers. But this weekend I ordered a take-out meal from a local restaurant from a menu that I had at home. The price on the menu for the dish that I ordered was $5.99. I was charged $7.65. How much? Are prices rising that fast? Let me calculate that percentage increase to see what my inflation rate is at the moment. Well, as it turns out, that is only a tenth of a percent increase. How can that be? Oh, wait a minute. My calculator was issued by the US Government Department of Commerce. Let me get my pencil and paper in on this. Oh, there we go. That is a price increase of 28%. Whew! We not only have inflation - we have massive inflation. And that tsunami is just getting started.

Well, I hope all the bankers and insurers are happy that the government is saving them with a flood of ink. They are drowning the rest of us in the process. It is curious, however, that Treasury Secretary Geithner recently said he needed a couple more trillion in savior dollars for the banks but yet Citigroup said they are now making a profit. Bank of America said they don't need anymore bailout money. Well, at least until they need to 'buy' another company. Then of course, they will no doubt do it with 'bailout' money. Oh, I'm sorry. The new administration likes to call this 'rescue' money. 

So, the stock market rallied this week on the good news from the banks. Of course, the economic news continues to be rather depression-ish. Now we have to decide if we want to play the bear market rally or not. I think we have to watch the dollar very closely. It is showing signs of rolling over. This process will accelerate as the countries of the world follow our lead and lower interest rates to zero while 'stimulating' their banks. At some point, no one's money will be worth a share of AIG's stock. It's funny but when someone 'gives' you something without an expectation of return, there is in turn no obligation of collateral on the receiver. Usually, this means the gift is rather useless to the giver. Money is the same way. Money with no or very little interest coupon signals its uselessness. It has very little value. The issuer receives very little or nothing in return. The receiver has very little incentive to return given money. For an economy to be truly strong, the currency of that economy has to carry real value. At some point, we must understand that the current trajectory of monetary printing worldwide will eventually destroy the value of all of our assets. In particular, our intangible assets like stock portfolios will experience the brunt of this devaluation. Oh well, at least the banks will have plenty of money! Enjoy the rally while it lasts. Weeeee........

Stock charts courtesy

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