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Sunday, May 24, 2009

When Optimism Trumps Bearish Momentum

Policymakers have been spreading optimism around like manure in a farm field. And apparently it isgaining considerable traction amongst consumers whose expectations about job prospects 6 months fromnow have improved dramatically.Moody’s. Economy.comCome October 2009 Obama’s fiscal stimulus kicks in and should spur aggressively hiring. This is indeeda bullish input. Still, job losses in the real economy are expected to more than offset any job creation thegovt does under the Obama program. As put by Moody’s Economy.com:“Assessments of labor marketconditions are firming, but they are likely sending false signals… The labor market details point towarda decline in the unemployment rate—a stark contradiction of the data on initial and continuing claimsfor unemployment insurance benefits.” Still, as market participants, we can’t argue with the tape, i.e. - we can’t argue with forward looking perceptions and with what is. “We are confident we are in a bull market,”as Birinyi said last week.Confidence and optimistic forward expectations may trump some very active bearish momentum in theshort and intermediate run that will likely run through the Q2 financial earnings season and into 1H2010 when consumers’ job prospects and y-o-y earnings comps amongst financials take a nosedive. The bearish momentum we will detail towards the end of this report.The daily E-mini SP500 “monthly consumer confidence” chart below shows rising consumer confidencelows since Feb 24 2009 consumer confidence report. Market participants should be aware that a risingstock market is a bullish input for the Michigan Consumer Sentiment Survey but not for the monthlyconsumer confidence report. For the Michigan sentiment survey this is a self-reinforcing mechanism thatfeeds on itself. The fact that the stock market has rallied nearly 40% since March has been a bullishinput for the Michigan sentiment survey in May. The next Michigan consumer sentiment is this week Friday May 29.Between now and next Friday’s NFP report, the bias should be bullish with all trade above today’sconsumer confidence low at 877. The June NFP report out at the end of next week will be bearish particularly with big revisions to the April jobs report that added in way too many new jobs based on the birth/death model and seasonal adjustments. A June swoon following the June NFP report would presumably be brief however, as consumers are expecting the job front to improve by Oct. The pullback will also be brief too because by end of month their will be a two-day FOMC meeting which the stock market will most likely go bid into. After the June FOMC meeting, the stock market will likely falter

briefly again into the July NFP report, before staging another rally into the manipulated financial earningseason. The govt has already given the bad banks a wink and nod to manufacture earnings over the nexttwo quarters so as to not have to raise as much capital as the govt is requiring banks do based on the stresstest results. They are giving bad banks a way to “earn” their way out of meeting the capital requirementsof roughly $70 billion. In fact, today’s most intriguingly headline from Bloomberg today was

JPMorgan$29 Billion WaMu Windfall Turned Bad Loans Into Income:

Wells Fargo & Co.,Bank of America Corp.andPNC Financial Services Group Inc.are also poised to benefit from taking over home lenders Wachovia Corp., Countrywide Financial Corp. and National City Corp., regulatory filings show. The deals provide a combined $56 billion in so-calledaccretable yield, the difference between the value of the loans on the banks’ balance sheets and thecash flow they’re expected to produce.

“The banks will wring revenue from the wreckage

,” saidformer Lehman execRobert Willens,The

purchase-accounting rule

, known as Statement of Position 03-3, provides banks with anincentive to mark down loans they acquire as aggressively as possible, saidGerard Cassidy, ananalyst at RBC Capital Markets in Portland, Maine.

“One of the beauties of purchase accountingis after you mark down your assets, you accrete them back in

,” Cassidy said.

Daily E-mini SP500 “Consumer Confidence Chart

In short, market participants are being coaxed back into the stock market through self-reinforcingMichigan sentiment and consumer confidence reports, manipulated earnings reports from the financials,upwardly biased jobs reports from the BLS, not to mention the bank stress-test results and TARP buyback

applications. All of these inputs can push the stock market considerably higher going into the peak financial earnings season in mid-July with all trade above today’s low at 877 and trump much of the bearish momentum from 2008-09.The stock market climbed the wall of worry surrounding the bank stress-tests and set a short term high onMay 7. The pullback off the May 7 high ended with the announced TARP buyback applications on May18. The TARP buyback rally ended on May 20 and sold off into Consumer Confidence Tuesday, May 26.The stock market, we have repeatedly noted, tends to set short term lows on Consumer ConfidenceTuesdays. Bullish responses from investors to a consumer confidence report are a short term bullishindicator.The consumer confidence rally this week may mimic the TARP buyback rally last week. If that is the case,the short term price targets are 914-917 and 925. Support above the CC Tuesday low should be 894-898.The week and month will taper to a close with a bullish input from the Michigan Consumer Sentiment.The month will end contra-seasonally on a high note. After yet another bullish input from the ISM indexon Monday June 1

, the first week of June could be sideways to lower ahead of the bearish June NFPreport.Since the March 2000 high to the May 2009 high, the price action of the SP500 has been fairly welldefined by the nine month 39 and 78 week moving averages. These are nine and eighteen month movingaverages. The price action is negative when these averages are bearishly sloped and positive when bullishly sloped. As of May 2009, the stock market is now facing its second challenge of the shorter 3