The market has made its biggest rally since 1933 – as investors have seemed to have gotten tired of bad news and after seeing the market sell off over the last several months. The perception is that recession has ended (or close to over) and the saying in the news “the worst is behind us!” seems to be making the rounds again.
Even with the job losses remaining very high – many point to that data as a lagging indicator. Banks are also getting a free boost from a new accounting standards (while lax they do “seem” to make the toxic paper not look that bad). There will certainly be more government funding coming to banks and lending institutions.
However – what these last 4 weeks have shown us is that perception and hope can out weight any amount of data. Obama is bringing optimism to the table both aboard and domestically – that is a much needed feeling for the citizens in this country (and around the world) – but beyond the perception and feeling “good” – some seriously math muscle needs to be applied. Let’s keep focused – a sharp rally on perception doesn’t mean we are out of the woods yet, while euphoric optimism is good – it is imperative to remain cautious.
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Bank rally?
We got a phenomenal rally on Thursday in the financial sector, much of it has been building with the combination of the following items:1. The stocks had sold off in this sector significantly
2. The companies had received 100s of billions in bailout – to curtail concerns of failure
3. New accounting methods will allow them to hold toxic assets
Wells Fargo’s news – lead the charge with brief statement of One Number – their Net Revenue. This was NOT their earnings reports – it was just a brief peak of some “good” news. What we do NOT know is their balance sheet, debt structure, etc – since that has NOT been reported yet.
It’s as if everyone has just forgotten these banks have taken 100s of billions and one bank can pre-release one number of expectation and the market can rip to the upside. No doubt (for those that tracked the short-interest) saw massive short covering which fueled the rally.
It was only just a little over a week ago that not only a couple of banks, but two reports (Bloomberg and WSJ) – reported default risk on commercial paper had doubled and that foreclosures rates have not bottomed. Additionally – jumbo loans are on a trickle as well as any creative financing. What got some analyst scratching their head on Thursday from what Wells Fargo’s CFO (which assumed Wachovia and its massive debt and risk – becoming the 2nd largest lender in the U.S.) – said in his brief statement about the revenue and that mortgages were strong. What? Wasn’t it Wells Fargo just a month earlier that stated it was concerned about both residential and commercial paper going forward and it wasn’t going to see growth in that market until possibly the end of 2009 or early 2010 – which was pointed out on Bloomberg.
No doubt it is rather confusing and after the announcement on Thursday many are trying to get more resolution as to this single piece of data that Wells Fargo released. We all “hope” that is a reflection of the end of the recession – but one number from one bank (not even its earnings report) – really doesn’t mean the economic landscape has changed. Let’s hope they are right.
Ironically, even after Wells Fargo’s run and announcement – Keefe, Bruyette, & Woods downgrades Wells Fargo today from market perform to underperform. They stated that, despite their announcement on Thursday, they maintain their earnings estimate for 2009 and 2010 – with their price target of $12. (I guess that is a sell rating since WFC is at $19.60 as of Friday.)
It was also only a couple of weeks ago that Moody’s lowered their rating on Wells Fargo.
I guess we have to wait until April 22nd for their earnings release to take a serious look at the details.
The big news I think is this new accounting method and what does it really mean for other banks?
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Boeing reduces production
Boeing cuts production of their 777 aircraft to five from seven for 2010. They are also having their debt reviewed by S&P for a possible downgrade. Expect pressure on the stock.
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Futures Pre-market
We are seeing the futures slightly off after the massive rally on Thursday – spreads are in and if they remain we should see arb traders short the basket against the futures at the opening.
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Support / Resistance
Wow – what a rally – but are we there yet?
INDU 8000? (We could and probably will revisit the 8000 line – the question is do we close above it or below it. That should determine support or resistance. )
NDX 1300 / 1400 (We are in a open area right now after breaking through resistance on Thursday – a revisit is in the cards – watch the close.)
SPX 825 (850) 875 (A pivot point to 825 or 875)
RUT 450 / 475 (It would seem the 470-475 area is resistance.)
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Gold 850+ (Gold is getting a little wedgy in the 875 area – move to 900 or 850?)
Silver 12+ (Still holding)
OIL 50+ (We are coming off this morning but still in the 51+ range)
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Conclusion
The market was poised for a rally – even if predicated on faith. Faith is important – it is what gives our dollar value. Obama is selling it well – but we need more than just faith. Because faith does not get the wheels turning – people need jobs, people need to save, people need to spend, companies need to be profitable. Sure faith can rally the market 20-30% - but for it to maintain that rally it needs fundamentals. The market also rallied a couple of times in the Great Depression (one of the greatest bear markets).
One good rally does not mean the economy is fixed and one number prior to earnings from one bank doesn’t mean the banks are fixed. This is not about being bearish or bullish, optimistic or pessimistic – I have a family and a son – I don’t want the system to break and I (just like everyone) want to see this great nation recover and move forward. The problem is I am not convinced that after tossing a trillion dollars and changing the accounting standards (as more people lose jobs and companies continue to cut) that we have fund a bottom or on the road to recover. Call me a skeptic – but optimistic euphoria as well as doom and gloom does not equal math.
Stay frosty!
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