Morning Update: Market Thread 6-3-2009

Futures are down fairly steeply this morning, the /ES is sitting at 935.

The MBA Purchase Index rose for the last week in May, but mortgage applications tumbled 16% in that WEEK alone due to the fact that the average mortgage interest rate climbed .44% during the week. Still think interest rates in the bond world don’t matter?

But the Challenger Job report and the ADP Employment report both indicate improvement in announced firings and in the number of new claims. The ADP report in particular has been very unreliable. And, although they show slight improvement, the numbers are still awful and those without jobs are still not finding them elsewhere. Also, the GM job losses and ripple effect have yet to really hit.

Also, it was reported yesterday that there are, get this, 35 million Americans living on food stamps! Hello? That’s 11.4% of our entire 306 million population! Bread lines? Who needs them, the government will just tax everyone else, or borrow, or print to pay everyone else.

Hey, I know I sound like a broken record, but the math just doesn’t work and it’s getting far worse, not better. Every step along Failure Road over the past year and a half has seen failure after failure and “the problem” gets “solved” when the government intervenes and transfers more corporate failure onto its citizens. The saying is “as General Motors goes, so goes the U.S..” How true, and how sad…

Factory orders and non-manufacturing ISM come out at 10 eastern. Don’t be surprised if the greenshoot tokers come back out.

Technically the market is still living in Wonderland. The VIX is still in the middle of its declining wedge, it produced a hammer yesterday so keep watching it, a break above that upper trendline will be bearish for the markets. The dollar is up this morning, reversing trend in gold and oil, while bonds are up but only slightly.

Hey, whenever I see that Alice is running the markets in Wonderland, then I know it’s time to whip out Minsky’s 7 bubble stages as I wrote about in my book. Let’s start by examining Stage Four:

Stage Four – Over-trading/Prices Reach a Peak:
As the effects of cheap and easy credit digs deeper, the market begins to accelerate. Overtrading lifts up volumes and spot shortages emerge. Prices start to zoom, and easy profits are made. This brings in more outsiders, and prices run out of control. This is the point that amateurs, the foolish, the greedy, and the desperate enter the market. Just as a fire is fed by more fuel, a financial bubble needs cheap and easy credit and more outsiders.

Stage Five – Market Reversal/Insider Profit Taking:
Some wise voices will stand up and say that the bubble can no longer continue. They argue that long run fundamentals, the ratios and measurements, defy sound economic practices. In the bubble, these arguments disappear within one over-riding fact – the price is still rising. The voices of the wise are ignored by the greedy who justify the now insane prices with the euphoric claim that the world has fundamentally changed and this new world means higher prices. Then along comes the cruelest lie of them all, “There will most likely be a ‘soft’ landing!”

The true professionals have found their ‘greater fool’ and are well on their way to the next ‘hot’ sector, like the transition from real estate to commodities now. Those who did not enter the market are caught in a dilemma.

Stage Six – Financial Crisis/Panic:
A bubble requires many people who believe in a bright future, and so long as the euphoria continues, the bubble is sustained. Just as the euphoria takes hold of the outsiders, the insiders remember what’s real. They lose their faith and begin to sneak out the exit. They understand their segment, and they recognize that it has all gone too far. The savvy are long gone, while those who understand the possible outcome begin to slowly cash out. Typically, the insiders try to sneak away unnoticed, and sometimes they get away without notice. Whether the outsiders see the insiders leave or not, insider profit taking signals the beginning of the end (remember who has sold their rental properties?).

Stage seven – Revulsion/Lender of Last Resort:
Sometimes, panic of the insiders infects the outsiders. Other times, it is the end of cheap and easy credit or some unanticipated piece of news. But whatever it is, euphoria is replaced with revulsion. The building is on fire and everyone starts to run for the door. Outsiders start to sell, but there are no buyers. Panic sets in, prices start to tumble downwards, credit dries up, and losses start to accumulate.

All I can say is that we are somewhere in this spectrum of bubble development right now with the equity markets. Where do you think the bond market is? There, the answer is in stage 7, revulsion! Seriously, keeping these bubble stages in mind and coupling them with your knowledge of exponential curves and parabolic blow offs will keep you an outside observer of Wonderland instead of an inside participant!

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