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Market Notes (March2010)

 

March 9th, marked the one-year anniversary of the elusive bottom of the most brutal bear market since the 1930’s. At the time, job losses were running in excess of 700,000 /month, and fear was rife that the US-banking system was on the verge of being nationalized. American factories and miners were using 68% of industrial capacity, the lowest level since records began in 1948. Corporate profits fell sharply for the seventh consecutive quarter, the longest losing streak since the 1930’s. The second coming of the “Great Depression” looked imminent.

In a final act of desperation to stop the carnage, the infamous “Plunge Protection Team,” (PPT) unleashed the most powerful weapons in its arsenal, resorting to accounting gimmickry, and nuclear-QE, – injecting $1.75-trillion into the coffers of the Wall Street Oligarchs, in order to turn the bearish tide. Bankers were set free of mark-to-market accounting, and instead, were allowed to value their toxic assets at “mark-to-make-believe” prices, leading to a strong recovery in the financial sector.

Over the course of the next four-weeks, the Dow Jones Industrials climbed 1,500-points to close at 8,083 on April 9th, 2009. Still, there was great skepticism about the sustainability of the so-called “green-shoots” rally, – the third such rally since the horrific crash of Sept-October 2008 that followed the default of Lehman Brothers and the bailout of American International Group (AIG).

Before hitting the ultimate bottom at 6,500, previous Dow rallies ended-up as “bear traps,” that fizzled out, before the market turned sharply lower again. There was a 1,500-point run-up during the week that culminated in the election of Barack Obama as US president, after which the Dow lost 2,000-points over the next-three weeks. The Dow Industrials staged another 1,500-point gain in December, triggered by Obama’s selection of Wall Street favorite Timothy Geithner as Treasury chief, before plunging 2,500-points during the first two-months of 2009.


However, since the Dow Industrials hit rock-bottom, US-stocks have staged a $5.3-trillion recovery, amid the biggest percentage gain since the Great Depression. Yet when viewed through the prism of Gold, measured in “hard money” terms, one can see that the performance of the Dow Jones Industrials was less than stellar. The blue-chip indicator has been locked within a narrow trading band for the past 11-months, fluctuating on both sides of 9.5-ounces of gold since April 2009.  

The “green shoots” rally is therefore, an Optical Illusion, simply reflecting the side-effects of the Fed’s hallucinogenic “quantitative easing” QE-drug. Utilizing the chart above, one could argue that the value of the Dow Industrials is artificially inflated by about 2,500-points, engineered by the Fed’s monetization scheme, and ultra-low interest rates. An ocean of liquidity is buoying the Dow Industrials above the 10,000-level, designed by the PPT to bolster household confidence, since the valuations of 401-k’s and investor portfolios can influence the propensity to spend.

Still, there are huge worries about unrelenting job losses, multi-trillion dollar budget deficits for years to come, and the “Volcker rule,” which could put the shackles on the Wall Street’s Oligarchs, and force the liquidation of widely held stocks and commodities. But for now, the market’s climb above the 10,000-level, means the possibility of a “double-dip” recession is more remote, and instead, trying to short-sell stock indexes, is like trying to push a helium balloon under water.


The S&P-500 Index has rocketed +62% higher over the past year, a gain that would normally take five-years to realize. The speed and strength of the stock market’s recovery caught many bond traders off-guard, and knocked US-Treasuries for their worst annual losses since 1978. Most notably, the yield curve, – the spread between short-term interest rates and government bond yields, rose to its widest level ever. The yield on the Treasury’s 30-year bond compared to the one-year T-bill rate hit +440-basis points in December, the widest in history.

Traders reckon that the size of the US-national debt, now exceeding $12.3-trillion, is weighing on bond prices, and a huge avalanche of debt still lies ahead. The Treasury is expected to issue $1.6-trillion in new debt in 2010, and $1.3-trillion the following year. Chinese central banker Zhu Min has warned it would become more difficult for foreigners to buy Treasuries, when the US-government has to fund its deficit by printing more dollars. China slashed its holdings of Treasury securities by $34.2-billion in December, after months of complaining about the Fed’s QE scheme.

full article link http://www.financialsense.com/fsu/editorials/dorsch/2010/0311.html

By Gary Dorsch

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