The Markets “Doth Protest Too Loudly”

So, have you enjoyed the greatest monthly rally in our lifetimes? Maybe the best defense is a good offense and in its defense, markets have gone on the offensive.

The speed/velocity/percentage movements in the major indices and individual stocks has been record setting and yet has been confusing to Bulls & Bears alike. Most of the news has been Euro-centric as market around the world were awaiting to see if half the worlds banking system would have to declare bankruptcy or be Nationalized. Luckily for us, politicians on both sides of the Atlantic know where their bread is buttered. They know that asset prices hold the key to both inflation and/or deflation and that “saving” even mal-invested capital keeps the game going regardless of the rules or consequences. “Markets By Central Bankers” is not the kind of market that I know, but it is what it is.

The major market indices and commodities had barely corrected the excess unjustified and unsustainable prices set throughout QE1 & QE2 before most except the most perma-bullish became cautious, lightened up from being fully invested and hedged some risk and exposure. We were on the verge of what many believed were markets selling at a discount to historical norms with little regard to the fundamental situation. Apparently any deflation of asset prices are not allowed by Governments, Politicians or Central Bankers.

The “rescue” from falling prices was again greeted with the brute force of promises to create “money” in order to satisfy investors and banks needs to stay solvent regardless of mis and mal investment that cannot be made liquid or even valued. The rules were again changed and the markets were outright manipulated through the monetary policy force of “buying shit” from banks. Plus, under the threat of not “doing what must  be done” in Europe, our Central Bankers blatantly and shamelessly promised QE3. I guess nothing matters in the name of levitating asset prices to keep the banking and financial system happy and solvent.

The equity markets response to this dire situation was to correct about 10% from the highs and holding for several months. Then, when the going got tough, markets corrected another 10% at the end of last month when investors realized that there was no free QE3 presently. But that scared Them and the Jawboning began. Markets moved on every headline, both up and down. And then, like clockwork, someone pulled the switch on October 4th, the second day of the quarter, and concentrated and concerted buying began in earnest in almost every one of the world’s Bourses.

So began the seasonal end-of-the-year clockwork rally based on Euro solvency and what we are told is a pickup in the domestic economy. Remember, the fourth quarter usually packs in two quarters worth of activity, so the slight uptick we’ve had is probably worse than expected. And the Jawboning of Mortgage-Backed buying and more QE has sent traders into the usual Pavlovian frenzy as they attempt to emulate last years QE2 induced gains. In fact the rally is equal to the half dozen or so massive Bear market rallies in 1937-38 and in 1974, both times were at the nadir of economic activity. Have we just reached the lowest point of this cycle?

And no, I did not turn bullish even though I had forecast the bottom accurately. I did not foresee the speed and force of the recovery as I was thinking rationally in this circumstance. That was clearly a near-term mistake.

As you know, we live in a time of very speedy market movement. If you blink, you miss. Combine that with the over-reach of HFT and momentum trading and you’ve got a frustrating brew. We’ve agressively reached levels where technical types get excited and follow the bullish cabal. But by moving in the way it has, it is working very hard, perhaps too hard, to mask the reality of near insolvency for an entire continents worth of banks and what looks like a worldwide long-term economic morass.

The end-of-the-month is upon us and many bearish bets have been closed out. Few “investors” have the gumption to short in the midst of the ultimate in “Markets by Central Bankers”. And who can blame them? The Wall Street Complex spends most of its time winninng and when they are not, it is terror for most investors. October’s move won’t die so easily because we need to enjoy our holiday season. Unless something bad happens. And a weak economy or bad banks don’t count.

 They say the stock market has discounted 10 of the last 4 recessions. The flip-side is also true. It has also discounted 10 of the last 4 recoveries.

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