In Bed With Fed

Markets trying to breakout of a trading range that has had the feel of a rally but simply more of a transactional spin to it. The big banks which used to be big brokerage are arbing the welfare elements from the G and those conditional opportunities that leverage brings in the forms of informational edges and transactional income. Both Goldman and JP Morgan, each having taken $10 billion and $25 billion respectively, are doing well as cousins of the Fed, their prowess as traders contingent of being wired directly to the inside and taxpayer cash.

Credit Value Adjustments

Spinning straw into gold has hit bank financial reporting. Earnings of the major banks reflected changes in income by use of Credit Value Adjustments. Believing any data from Citigroup or Goldman is much like the old Wood Allen joke. A man speaking to a doctor confesses, "Doc, my brother is crazy, he thinks he's a chicken. The doctor says " why don't you turn him in?" The man replies, "we would, but we need the eggs." Here is how Citigroup needed the eggs as reported by Eric Dash of the NYTimes;

"Citigroup posted its first profitable quarter in 18 months, in part because of unusually strong trading results. It also made progress in reducing expenses and improving its capital position.

But the long-struggling company also employed several common accounting tactics — gimmicks, critics call them — to increase its reported earnings.

One of the maneuvers, widely used since the financial crisis erupted last spring, involves the way Citigroup accounted for a decline in the value of its own debt, a move known as a credit value adjustment. The strategy added $2.7 billion to the company’s bottom line during the quarter, a figure that dwarfed Citigroup’s reported net income. Here is how it worked:

Citigroup’s debt has lost value in the bond market because of concerns about the company’s financial health. But under accounting rules, Citigroup was allowed to book a one-time gain approximately equivalent to that decline because, in theory, it could buy back its debt cheaply in the open market. Citigroup did not actually do that, however." Full Article

The banks and the markets want to believe and with the stress tests coming up on May 4th, an all out effort is being made to spin the accounting.

Pump and Dump Week

Indexes have continued to find modest pricing and short covering in sadly thin advances. While the numbers look strong in terms of percentage gains , the technical price characteristics are dismal. This week has all the elements for a 'pump and dump' top as professionals begin to liquidate, preferably on new highs, portions of trades accumulated over the last four weeks. Bulls who have successfully been fighting off repeated attempts to break these markets recently will roll over as the big dogs begin to exit.

For all the praise given to the efforts of Geithner and Bernanke, it is clear the end result will be the healing of banks/insurance with little success in tackling the economic stresses of the general population. They will still be stuck with the losses of a generation with little upside. But what is new. Whether it be Republican or Democratic power thrones, they always end of up serving the same vested interests which are in the pants of those less influential souls who are stupid enough to believe this time will be different. It is the same trickle down idiocy wrapped around the flag promoted years ago which resulted in real gains for a few and a declining standard of living, with increasing debt, for the rest.

Same As It Ever Was

Markets will try to move ahead this week in the midst of earnings reports and other data. The liquidity stew is brewing thinly traded ranges created in large part by the panic liquidations of Feb and March. As posted before, it does not take much to rally these markets as pricing appears. Collective technical price action remains bad and will result in some sharp down drafts that are scary, but probably not sustainable.

The Bernanke/Geithner plans are adding all the elements needed to enrich the wired ones, which is of no surprise. Like Greenspan before them, they ultimately dance to the crying choruses of banks, brokerage houses, and managers. While this time the Fed/Treasury intervention seemingly has greater urgency and enough massive force to kill the economic demons, all hope what is going on is not just more meaningful enrichments for the same financial fraternity whinning melodies to which Greenspan danced.

Ugly Rally

Market rally is seeing the buying of weak hands by those not willing to pick a bottom earlier in the last week of Feb and first week of March. This is exacerbated by the lack of selling environment and news of easier mark to market rules for banks. These types of rallies are ok when no selling is the market makeup, but could become a falling knife if liquidation programs appear. Price internals we watch remain horrible and have not been this bad since last August. Unemployment numbers on Friday will provide volatility enough for everyone.

Summary

Despite Friday's sell-off, bears are pressed to get traction. Not that the price action has been very sound, it has not. But as mentioned before, a market made up of fearful liquidation in early March left little selling when the bids showed up. Nasdaq has performed the best but is also consists of those stocks which find the least resistance.

The greasy crowds of Goldman and JPMorgan have benefited nicely from the Washington workings. There are some growing questions about how AIG relief and subsequent performance on its CDS's found a way to make those two 100% on the dollar. This along with other TARP funds the insiders have received clearly demonstrates the path of politics and money are paved with the same bricks.

Back To The Future

Reading

The Free In Free Markets

Market pushing off the consolidation lows and unless the bears can turn this around very hard, very quickly, the distance shall continue to increase between the lows of March 6th and the rest of the trading year. The Treasury finally caught up on the learning curve by introducing a 1 Trillion bad asset deal which before its unveiling, had all the vital ingredients needed and of course had been pre-approved by the private equity players. They will have to bid against each other with a wink and a nod, but it is better than having the pathetic hand wringing of talking heads and the absurd notions about a world wide depression. The same folks will end up with all the good cards after imploding late last year. In the real world of ' save us ', the players get the free part of the ' free market ' and everyone else gets to go to the market and pick through what is left.

Fed Never Say Die

Fed has indicated it will stop short of nothing to accommodate recovery. There is a danger in this strategy in that while it does reiterate the ' never say die ' attitude of the Fed, it is also evident just how severely the capital system is reeling. It is not a stretch to say market confidence is highly fragile and that it knows in a peculiar way the Fed is not sure what will work. Reacting to an economy where companies are clearly lowering their debt and cashing up is not a recipe of higher stock prices. The retail end of investment is dead and all that is going on, although considerable, is the massive repositioning of sector exposure. That is good for a bottom but not much for a sustained bull trend. The technical price picture for the indexes remains shaky and subject to reversals as more price work needs to be done.

Rally Roll

Indexes rose again on Tuesday continuing to recover ground from the new lows of Feb. While the technical structure of the rally is bad, do not underestimate the power of rallies such as these.
The biggest test will be avoiding reversals after new rally highs are attained in the next few days. These markets do not need news to move up despite mindless reasons given for the recent upside. Lack of selling is the main feature and that will not change until the market stalls and, if then, begins to draw in those who believed they had missed liquidation levels earlier.