Friday will be THE key day for the markets

Thursday, April 14, 2005

After feeling a little proud to have correctly forecasted that the FOMC relief rally of Tuesday would only be a flash in the pan - the Dow having fallen almost 250 points since, please be prepared for an ever bolder forecast for the last trading day of this week.

In my opinion markets have begun to be purely psychologically driven. Market participants have every reason to follow their gut feelings when even the high priests of ever expanding credit at the various Federal Reserve banks don't seem to base their words on economic data only anymore. That should not come as a surprise when one sees that the price facts do not correlate with the data the countless state agencies aggregate these days.
A few observations: Did you notice that the final revised data sets in almost all cases tend to come out weaker than the first preliminary sets? This is a reason to get cautious as markets move almost exclusively on the preliminary data while most revisions are ignored.
With a US government that has lied in so many cases (WMD, Iraq's uranium deals with Niger, inofficially authorized torture in Abu Ghraib and Guantanamo, disappearance of the black boxes of the 9/11 flights, just to name a few) one has to begin to wonder about the accuracy of their data that drives the markets. Senate speaker Tom DeLays payments to family members on the state level and the boardroom wars at Morgan Stanley, one of the five biggest banks in the world, point to deeper problems then this leadership will ever admit.
A look at the corporate level darkens the outlook even more. With more than a handful of the blue chip companies (AIG, Fannie Mae, Freddie Mac, Citigroup) entangled in a web of greed, corruption, power wars and falsified audits the desk of Eliot Spitzer disappears under a mountain of suspicion that the fish stinks from the head.
Add record deficits and the diresome conditions of the labour market, throw in the forecasts of lower growth and sinking profits, sprinkle it with the war for oil that is likely to engulf Iran soon, and you end up with a potion that might be poisonous enough to terminate the easygoing party of the last 23 years.
Can one trust employment figures that are not calculated like in European countries, but are only projections based on telephone interviews with 60,000 households? Show me an American who will not tell you that he has the feeling that his personal contacts/friends all fare worse than in the past, pressured by an ever growing mountain of debt and a lack of employment opportunities.
I have elaborated about the all-important inflation figures in a previous post which are to highly doubtful in my view. Years ago I almost enjoyed analyzing US data publications because of their clarity, nowadays most data are presented in a way that you need a huge staff and lots of computers to make any sense of it. The "executive summaries" have disappeared from most data sets.
The Bush's administration obsession with keeping ever more government records under a tightly sealed lid, especially if its about security, the environment or military operations, completes the bleak picture I cannot avoid to paint.
Mainstream media have become outlets of pro-government propaganda and those in the journalist sector who do not comply get ousted (Dan Rather and many others). The president prefers to limit his public appearances to Republican-only flag-swingers so he can avoid direct questions of his critics. Remember his Europe visit. In the so called "press conference" with German chancellor Schroeder only two questions from European journalists were allowed before GWB left the room. A meeting with ordinary Germans was cancelled as soon as the American delegation found out they would not be able to pre-screen the audience and their probably highly critical questions.
As government policy defines the exogenous factors for the people they are supposed to serve, it is no big wonder that these policies lead to a diminishing confidence.
Every economist believes in the centuries old gospel that the markets are the best barometer for confidence. Investors obsession with forecasting the markets by technical analysis of historic data stems from the fact that charts always have been showing the true state of conditions in the past. They are still no indicator for the future as technical analysis foregoes the fact that charts do not immediately react to external catalysts which are always the base for a change of trends.
The loop is completed here. With no more facts that can be trusted a 100 percent, human beings are given away to their emotions. Logic gives way to emotions when we feel that the rationale is clouded by factors beyond our control.
Let's get back to the markets:
It is only logical that the market ignored Apple's megabuck profits. An industrial economy cannot be based on Ipods only. I' d rather rely on IBM and this is where the sad picture continues. The once leading computer company - now in the process of selling its PC division to China - fell more than five percent in Thursdays afterhours trading once it released disappointing results for the first quarter. Remember the most recent Fed minutes that said the economy will accelerate on higher investments in technology!?
Seeing materials companies leading Wall Street's decline on Thursday I doubt that Fridays figures on industrial production will change the downtrend that has led the markets to their absolute lows year-to-date.
I am not so sure what the TIC (Treasury International Capital) flow numbers will bring. The surprisingly solid bond markets, thanks to liquidity levels seen never before in history, point to a rather good number. Foreign central banks can be relied upon to have continued gobbling up all those debt-papers the US treasury issued in the recent past. As the educated market watcher will know by now, they have no other choice as they are still in the game of trying to avoid a confidence crisis in the backed-by-nothing $. This game cannot go on forever. Remember, it was a small kid that brought down the emperor by saying, "look ma, he wears no clothes."
Let's not feel to certain about Friday's market behavior: We could see one more "relief rally" on the consumer sentiment index. If it has not fallen all the way from the ground floor into the basement, traders might use it to squeeze the growing number of shorts. The flash in the pan comes to my mind again. But economic reality will catch up with false market moves rather sooner than later.
Do not get carried away by the fact that we are in a bear market. Whereas in a bull market only the bears lose out, a bear markets feeds itself on both bulls and bears because upward corrections tend to be much faster and stronger and will squeeze out the shorts who tend to see their pessimism become reality faster than it actually will.
But never forget, the Fed as the so far almighty power in directing the markets has far less room to maneuver than it wants us to believe. Higher interest rates will burst the housing bubble and lower interest rates will lead to a cave-in of the $. This leaves them only with the option to stay put. That's what they did in the 1930's as well. The result can be studied in numerous history books.

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