Just as soon as I was sure the divergence of the stock markets and the economy had peaked, the DJIA pulls another fast one, smashing through record territory on Monday. Yet the data coming out show that the situation in the housing and credit markets continues to worsen. Guess what is driving this stock rally? Speculation! So if it's speculation, you should be cautious to observe that this may indicate a miniature stock bubble. The recent stock rally the past two weeks, for instance, was on BAD news, thus the Bernanke/Greenspan Fed (considering Greenspan has basically continued to play the role of Fed Chairman by strongly influencing Wall Street with his almighty words of wisdom.) But what happens when "good news" comes out that the credit crunch's worst may be over? Stock bust, because there would be no Fed rate cut? Nope! Pure bacchanalia! This was hardly surprising. I expected stocks to breach the record level either last week or this week. It met at mid-point, conveniently enough.
Two hundred point rally. 200. 2x100. 100+100. What was even the basis for this? Greenspan mutters something about the worst of the "credit crunch" being over, and the DJIA fuels a speculative bubble. You may recall on February 27th when the DJIA tumbled a dramatic 416 points after Greenspan said the odds of recession were 1/3 and the bubbling Shanghai Composite experienced a mini-crash of 9%. Wall Street, in all its myopia, seemed to passively continue its rally in short time. Again, for the past two weeks, the stocks were acting as though we would have a recession, because of the poor credit conditions among other things. This was enough to stoke a rally based on the idea the Fed would again cut rates later this month. It appears Wall Street has declared itself complacent, yet again, and is so manifested in its irrational, unsustainable 200 point rally today.
Among the other worrying news that should contradict this rally:
•Leveraged Buyout is Abandoned
•Citigroup is reporting its earnings may collapse 60% for the third quarter. Wall Street has spun this to mean that the losses were from "last quarter" and all that matters is "next quarter."
•Swiss based bank UBS said it has lost a minimum of $500 million in pre-tax earnings in the third quarter.
•Manufacturing grew far slower than expected in September. Nevertheless, with 46,000 manufacturing workers having been laid off in August when manufacturing was supposedly growing even faster then than September, this doesn't present itself in a very upbeat manner.
•Economists are predicting a gain of 97,500 jobs in September, which still trends well below population growth. All I can say is, especially after August's horrendous numbers, be cautious. The lack of layoffs as of recently is not countered by much good news either, as there appears to be a hiring freeze as well, which is minimizing job growth while keeping jobless claims steadily low, the latter case being misleading.
In spite of this sharp disconnect between earnings and the economy, it would seem that, based on the somewhat weak buyout conditions that fueled stock rallies over the past few years and even weaker earnings reports, stocks are moving with an arrogant smug that cannot be protected. Either that, or it is far more worried than it is admitting and is playing a game of reverse psychology. An interest rate cut, the one race horse Wall Street is willing to gamble all its chips on, is poor at preventing recession, however. This happened in early 2001, such that after the interest rates were cut in the winter months, stocks rose while the recession was in full swing only to lose all gains. We had a recession anyway and its toll was the loss of 3 million manufacturing jobs an 600,000 in information technology. If the overenthusiastic stock rally keeps up, be very worried about it masking economic concerns. This kind of rallying after weeks of volatility (like the one we had this summer) has happened several times before, in 1929, in 1987, in 1997, in 2001. It is already moving at a rate of 800 points a month going back to the end of August. The sell off this summer may have been short, but this rally may be just as short, if not shorter.