Real Opportunity Search Begins

Money funds yielding nothing is being written about these days as there seems to be some surprise to the notion of stubborn low yields despite the rise in stocks since March. It should not be a shock that most of the profits from yields are being spent on expenses by the fund managers since little profit margin is left after the returns in Treasuries, the generating instrument of the money fund investments. Further, despite the draw down in money funds over the last couple months, there is still about 500 billion more in balances than there was in 2008.

Low yields and a 'creeping out of the storm cellar' have contributed to the rally in stocks as re-investing occurs. This along with substantial foreign purchases has put a bid in the markets. However, there is clearly a reluctance to chase perceived price discount value opportunities aggressively, leaving continued large balances in money funds. Ultimately this will limit upside momentum but does not eliminate the creeping bid side necessarily.

Though money funds are just a part of the investment environment, they do reveal the problems for the bulls. How does the market move substantially higher in a dramatically altered world on attitudes of acceptable risk? One where a primary sector for leverage, real estate, has been substantially reduced and may not return as a contributor for years. What is the substitute? Job growth? No. New risk opportunities based on cheap stocks? Not likely once the major indexes claim a 50% retracement from the March 09 / Oct O7 range,(which the Nasdaq100 futures completed today). No, the low fruit has been picked since March and now the real search for opportunity will begin.

Few Reliable Measures

This one hundred plus day rally for the index markets has seen the DJIA rally over 43%, with the SP500 and NQ100 exceeding over 50% gains. The particular migration back to 10,000 DJIA will continue with enough downside bend and turn activity scary enough to make many stop looking up. But this current rally is one of investors and traders returning to purchases based in part on perceptions of bargain values, short term opportunity, and finally, top quality risk investments. The first two seem to fit the stock indexes, while the latter is a bit tough on the return side since few AAA short term investments exist that do not return near zero.

Finding bargain values in stocks is a game filled with few real reliable measures. Those actually getting paid to analyze stocks are constantly fooled by gamed data, while the upside bias of business news coverage remains a function for the simplest of minds. Buying large percentage breaks in price does work, but it usually remains a short term play. The determination of real value will have to be played out in the balance of this trading year as to whether low prices are really value opportunities. I suspect many will be disappointed and will discover that value is the price you sell at below your purchase price.

Market Weather

As we enter the last week in July, stock indexes continue the climb at a pace where Bears are finding great discomfort. The half way back retracement to 10,000 DJIA could come a bit faster than many had thought, but of coarse timing is everything. Pricing of stocks from outside the US has been a major factor as purchases are made against the belief in a Fed Put. Articles claiming revisions on earning estimates may contribute to further gains are also abundant. They are always based on revelations that analysts have once again been fooled by their corporate targets having been duped by a combination of what little analysis they actually do and the gamed numbers the corporations they cover have shown them. Like weathermen, analyst's work is not science, but a form a guessing based on conditions someone else witnessed.

So all the Bulls have to worry about is a sudden bit of news which would kick apart the somewhat fragile coalition they have with low volume rallies. Like the stock analysts, it will be a surprise.

China Schmina

A story about China but an example of a bad habit of continuing to rely on or even believe the strength of China stories. China is on a slippery slope, dancing on top of a rolling ball, injecting funds to pump an economy in order to keep the masses from turning ugly. Another prop job.

The Goldman Test

The Obama administration's economic intervention efforts unfortunately have a litmus test for gauging whether or not the world economic order is stabilising, Goldman needs to be able to continue making huge amounts of money using the old models. The Goldman test is of course Geithner's plan for using public subsidisation of trading capital for Goldman and others, resulting in wider profit margins helped by being able to look at all the stimulus cards. While the fools in the Republican party complain about the inevitable middle class becoming slaves to socialism, the financial industry, a Republican stalwart, keeps applying the old model skills. Now this test will confirm Goldman is healthy and the credit lines between the rest of the lower economic forces are moving, but ultimately will provide little life for the general population as jobs stagnate and their assets dwindle.

Obama's recent statements explaining the need for patience to allow the stimulus to work is a clear sign it is not having any effect on the larger economy. The velocity with which Goldman has recovered under direct subsidy by the G will become a greater problem as Goldman disappears over the greater wealth horizon, leaving the rest to scolded by Republicans that those rewards are not meant for us.

Economic Recovery Map

The economic recovery map pushed by most forecasters is probably a bit rosier than it should be but certainly a more realistic view than those who point to the inevitable path to economic destruction. The most bearish have impressive examples of ailings; real estate losses of five to seven trillion dollars, retirement and savings losses of close to 10 trillion dollars, and staggering losses around the globe virtually mirroring the U.S. disaster. Issuance of corporate bonds at an ever growing pace at extended maturities suggests more hunkering and less spending as such debt instruments reveal the pursuit of returns pointed towards savings rather than investing in growth.

The bulls exhibit some of the same mindless tendencies which has always been apart of the efficient market crap. And when all else fails, they always will have China saving us all of by providing market opportunities through a notion of a rapidly growing totalitarian state immune from severe downturns and social upheaval.

The love hate by conservative thinkers over the pledge of over 10 trillion dollars by the G to remedy financial disaster is entertaining when viewing swings in the underlying markets from which the have become glued. Since the recovery in March, they have almost claimed the whole economic collapse was just a bump in the road to greater market performance. Of course they will be the first to cry and extend their hands should another rout appear.

Bad Trading Strategies

Looking for driving forces in this summer's trade has been one of deciding whether to play off the 'bottom is in' strategy or rather on sideways rolling opportunities as they appear. Few think new lows are in the offing so those who love volatility explosion bets can play there.

Views of the world's economic future being saved by developing countries is getting some press, as in today's NYTimes article. China, India, and Brazil are apparently going to drag the rest to safety although there seems to be absolutely little evidence of it. Decoupling again is mentioned, but stopping the reemergence of bad trading strategies is impossible. Oil's recovery to $70 from $33 is provided as proof, but developing country demand rationale drove the price to over $140 with idiots guaranteeing $240. This type of thinking has every commodity trade strategy ultimately resting on the China's consumption of all things consumable. China, unfortunately for all of us, is a pending economic disaster. Totalitarian make-up artists can print economic data from a typewriter in Beijing and the decouplers and commodity folks would believe up is the only power. Unfortunely, when all the developed big dogs are not eating as much there are plenty of leftovers which have to be virtually given away.

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Inflating The Bull

The DJIA, SP500, and NQ100 remain in the confusing zone between price mechanics and value. They are related but can produce price patterns which may not match what various economic performance measures of the general economy. The rally from the March lows are a part of the mechanics of running out of panic selling and the natural betting on prices as a function of comparison shopping.

There is a vague uncomfortable feeling running through the markets which stem from a determination not be fooled again and the ability to identify a low risk opportunity with traction. The thought of enduring the break and missing the rally is almost to much to take, let alone watching the Fed and Treasury insure the wealth of the likes of Goldman and Morgan. The boomers know that this time they cannot simply apply rally lotion to these markets after the thundering losses suffered by investors across the board. The financial health of state and local governments have an appalling smell which can only be compared against a particularly unpleasant historical period. These real dilemmas make the notion of bull market anew difficult to inflate.

Squeezing The Bear

Markets as of this AM continue to squeeze the bear as selling remains light despite intraday sell programs. These are uncomfortable ranges for the most bearish of traders as their warnings for the' worst is yet to come' is being mowed over by cheering bullside perennials. The same technical weaknesses which led to the downside free fall of earlier this year have some of the same elements present in this rally. So for traders, it is alright to be bearish, but don't be stupid. The sell opportunities will be less prevelent, but available. This market, as pointed out in a recent post , as measured by the DJIA, is headed on the half way back trail (10,000), and parts of it may feel like it is going straight up. The jobs picture will be the overpowering force this week and in the months to come. Downdrafts will appear.