Tuesday, April 7, 2009

Go ahead dream of the bull market rally!

We are experiencing a strong rally in the last couple weeks, this is the 6th attempts to move higher and every time bulls said "that was it, that was the bottom." this time is no exception.
There is no fundamental to support this rally , market was over sold and it was due for a rally. The new changes by FASB to relax accounting rules from Mark-to-market to "Mark-to-fantasy" (as I call it) ; just made the situation worse. Relaxing the accounting rules is in an absolute contradiction with P-PIP (see my article "The end of the Mark-to-market accounting rules, the end of transparency era"). Our government knows that banks will not be able to raise any capital from private sector at these levels, therefore they loosing up the accounting rules to let the Zombie banks live for a longer period. They hope by cooking banks balance sheets and hiding their losses they can trick the average investors and cause the market to rally that give insolvent banks the chance to raise capital by issuing new stocks.

Back in 1973 The Securities and Exchange Commission (SEC) designated the FASB as the organization responsible for setting accounting standards for public companies in the U.S. ;History will know FASB as the destroy of U.S. economy. The recent change will be the end of transparency in corporate earning, and help insolvent banks to manipulate their earning and destroys investors trust. In the time the SEC should tight the regulation to kick out the Wall ST impostors they just did the opposite. Unfortunately we are headed the same road that Japan did back in 90's. They may success to fool investors for a short time ,but market is smart and sooner or later would read bankers hands.

S&P could rally as high as ~1000-1228, but my long term target for S&P500 would be ~400 in coming years.
S&P500 from 1930 to 2009. The tick black line is my prediction of market moves in coming months.

Democrats has failed to deal with the banks issue. Instead of nationalizing "too big to faille" financial institutions, Bernanke kept printing dollar and continue to bail out his friends in Wall Street. Last week Huffington post published an article about Barack Obama's chief economic adviser, Larry Summers, he received hundreds of thousands of dollars in speaking fees last year from firms that have direct financial interests before the government or are intimately involved in the White House's bank relief programs*1. The irony is President Obama is using some of those crooks who are responsible for this mess to solve the problem!!!
I need to mention that Larry Summers was the architect of deregulation of banking system and CDS(Credit Default Swaps) back in 90's. As long as corrupt people like Larry Summers, Senator Christopher Dodd, Congressman Barney Frank and Ben Bernanke are running this show and the special interest groups are coming ahead of taxpayers, you should not hope for government to solve the economics problems.

The key to recovery is housing market. Bear market started because of housing market. Lets face it, we won't come out of this ditch until housing market recovers. Everyday +10,000 houses go foreclosed. when a house go foreclosed bank would loss 6o cents on a dollar and this s staggering number. We need to see the rate of foreclosures declines, but so far it keeps increasing. Just wait to see the second waves of foreclosures, it is coming in 2010 and 2011. I have news for you "option arm " tsunami is on the way. It will hit us by mid 2010-2011. This time is different; banks are weaker compare with the first wave foreclosures hit them . Write it down 666 in S&P500 is not the low. Please note unemployment,retail sell and ISM are the indicators to watch. They could give you a hand if we are getting better or not. We didn't fall in this ditch overnight and we will not come out it in couple weeks, it takes time. On the other hand if S&P500 moves above 1200-1228 and stays above it for a couple weeks, it means my analysis would wrong and march 2009 low is the bottom. Note that 1228 is the level who many analysts including me watch as conformation of bull market rally. It's hard to think we could get there anytime soon, but I had to mention point out 1228 resistance level because it is the most important resistance in coming years.

*1. "http://www.huffingtonpost.com/2009/04/03/summers-received-hundreds_n_183058.html."