More market rally, it's getting interesting!

This is my favorite title for my posts, and I have used it quite often for the past few months. Basically, every time there are many bad news, markets rebound, on the assumption that we have reached the bottom and that things will get better from this point. That could be a fair assumption, if we were in a rational world. But markets are not rational, and make lots of false calls and dead-cat bounces, as one of my friends call them.

Look at the action today:
- 9% of all mortgages in the US are in delinquency or foreclosure. ALL MORTGAGES, not just subprime, alt-a, and other exotic and toxic ones:
More than 4 million American homeowners with a mortgage, a record 9 percent, were either behind on their payments or in foreclosure at the end of June, as damage from the housing crisis worsened, the Mortgage Bankers Association said Friday.
- Unemployment figures were disastrous and the previous month data has been revised downwards:
Nonfarm payrolls fell 84,000 during August, bringing the unemployment rate to 6.1%, according to the latest government statistics. Payrolls were expected to decline 75,000 after shedding 60,000 jobs in July. The unemployment rate was expected to be unchanged at 5.7%. Manufacturing payrolls fell 61,000, which is more than the 35,000 decline widely expected by economists.(Briefing.com via Yahoo Finance)
- The USD dollar is still rallying, which is very bad for major US companies which have been making as much as 40 to 60% of their profits outside of the US, thanks to the falling value of the dollar.

Things have been getting worse and worse, and not sign of improvement has appeared yet, as a couple of Fed chairmen stated this week (Fisher and Yellen). So when will we hit the bottom? I can't know, but one thing is for sure, we will not hit it as long as any of these statement is still valid:
  • The market's PER is at 26 (or negative EPS for the Dow).
  • On every bad news, the market rallies. This means that lots of managers are still very bullish. The bottom will be hit once everybody thinks this is the end of the world, and that nothing can save us anymore. Not when the market rallies several percents on bad news.
  • Volatility as mesured by the VIX or the VXO are at intermediary levels instead of near all time high (typically between 40 and 50).
My guess is that the market might have rallied on beliefs that the USD rising, commodity prices falling and US unemployment at very high levels will force the Fed to reduce the rates and that the US Government intervention will bail as much people as possible.

Just yesterday, Bill Gross, manager of the biggest bond fund in the world turn from free-market capitalist to socialism by begging the government to come and bail all the people on Wall Street:

Sept. 4 (Bloomberg) -- The U.S. government needs to start using more of its money to support markets to stem a burgeoning ``financial tsunami,'' according to Bill Gross, manager of the world's biggest bond fund.

Banks, securities firms and hedge funds are dumping assets, driving down prices of bonds, real estate, stocks and commodities, Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., said in commentary posted on the firm's today.

``Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami,'' Gross said. ``If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury.''

The government needs to replace private investors who either don't have the money to buy new assets or have been burned by losses, Gross said. Pimco, sovereign wealth funds and central banks are reluctant to fund financial firms after losses on investments they made to support the companies, Gross said. The world's biggest banks and brokers have raised $364.4 billion in new capital after more than $500 billion in writedowns and credit losses since the beginning of last year.

One other sure thing: Tresories holders and USD holders will be the big loosers while a handful of extremely wealthy people will be bail out. The irony resides in the fact that the poor lower and middle classes will be grateful and thank their "saviors" Paulson/Bernanke. I am wondering what the Chinese and Japonese (who are the major holders of to the US 'junk' treasuries) reaction will be, because they are going to be the big loosers. Japan has lent about $580 billion to the US while China a bit more than $500 billion (figures are as of June 2008).

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