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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Ganging Up on the Stock Market!

Stock-Markets / Stock Markets 2010 Jan 22, 2010 - 01:47 PM GMT

By: Sy_Harding


Best Financial Markets Analysis ArticleI wrote in last week’s column that “the next few weeks could be a testing time for both bulls and bears”.

To my way of thinking too many influential participants decided to take part in that testing this week for comfort.

Early in the week the National Association of Home Builders (NAHB) reported that its Housing Market Index, which measures the confidence of home builders, declined to 15 in January, its lowest level since June, indicating that only 15% of builders have confidence in the housing industry going forward. The NAHB’s chief economist said the housing market recovery is tenuous as foreclosures continue to rise, the jobs recovery is slow, and builders are having trouble getting construction loans.

That was followed the next day by the report that new home starts unexpectedly fell 4% in December.

Banks got into the testing of the market by reporting fourth quarter earnings that were again produced mostly from their investment trading departments and investment-related fees from customers, while their credit-card and loan losses continued to pile up.

The World Bank then got into the act, releasing a report on Thursday saying that global economic recoveries will be tepid at best in 2010, and may even stall if consumer and commercial demand doesn’t pick up sufficiently to replace government stimulus efforts as they are withdrawn.

The report and remarks by the World Bank’s Arthur Burns also added weight to recent monetary policy announcements in China, one of the world’s most important and most stimulated economies, that it has begun preliminary moves to reverse its stimulus efforts. Burns said, “We can already see signs of bubbles and tension in the Chinese economy.”

As if there was not already enough pressure in China to cool off its blistering economy or face potential runaway inflation, China reported on Thursday that its economy (GDP) spiked up 10.7% in the 4th quarter.

To add to the confusion and uncertainty, Warren Buffett chimed in with well-publicized remarks that he still doesn’t know when the economy will recover, and seemed to express the need for more stimulus efforts from the government, saying, “The government came through, and overall I give them high marks for what they did  . . . . . . But we need to get money in people’s pockets, and the first stimulus plan did not do that very well.”

So we had the World Bank saying the global economic recovery will be tepid and may even stall, but that China, so important to global economic recovery, may be in a bubble and needs to take more steps to cool off its economy, with China agreeing, while Buffett is saying the economic recovery in the U.S. is still questionable and needs more government stimulus.

Meanwhile, one of the bright spots in the U.S. economy has been the fast recovery of the major banks, their return to significant profitability, and repayment of the TARP bailout money earlier than was expected.

However, as I noted above, their earnings are coming from their investment activities, while their losses from credit-card and commercial loan losses continue to pile up.

But what the heck, earnings are earnings, and their investment and trading activities have certainly been a prime support for the stock market. As I noted in last week’s column “The absence of public investors has not prevented a strong new bull market, rising on very low volume, the participants primarily being professional traders, and professional investors at hedge funds, banks and other institutions. In fact, banks have been reporting large profits due primarily to their trading and investments, even as their loan losses pile up.”

With those factors already testing the market mightily, President Obama then piled it on, giving a very tough televised speech spelling out proposed measures to reign in the power of banks, including banning them from numerous forms of investment trading, from having hedge funds of their own or providing financing to or investing in hedge funds of others, and so on. Probably good intentions, aimed at preventing the kind of risk-taking and greed that caused the recent problems in the banking system.

A good idea for later. But for now, investment activity by the banks has been a major support of the stock market, and the new bull market has been a major support for the economic recovery.

I didn’t have quite this degree of piling on in mind when I said last weekend that the market would likely be in for testing of its staying power.

Sy Harding is president of Asset Management Research Corp, publishers of the financial website, and the free daily market blog,

© 2010 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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