A 'Rebubble' Attempt

The rally is on! The Dow rose another 246 points yesterday.

Enjoy it while it lasts…but keep those trailing stops tight.

The “End of the Rally is Nigh,” says Barron’s.

Our old friend, Marc Faber, says he expects a 10% drop in the stock market before the rally resumes.

Maybe. This rally is going to end sometime. But it probably has a ways to go. There are still a lot of suckers who haven’t been drawn in.

Another old friend, Rick Ackerman, thinks the problem with this rally is capitulation…or rather, the lack of it. There’s been no capitulation, says he. And you can’t have a real bottom without it. No capitulation, no bottom.

The news from the economy is bad and getting worse.

Credit card debt has just taken its biggest plunge in 32 years…maybe ever. Credit card balances fell at a 9.7% annual rate. And the number of open credit card accounts is going down too.

What happens when people can’t pay down their loans?

“Mortgage delinquencies soar in the US,” says a Reuters article. Remember, delinquencies are the beginning of the process. Then come foreclosures and auctions – all eventually driving housing prices down further.

And when property prices fall, so does the collateral behind the banks’ and other financial institutions’ assets. So, their troubles aren’t over. The worst is still ahead of us, not behind us.

But despite the bad economic outlook, investors think the worst is past for the stock market. Markets look ahead, they say, beyond the immediate economic forecast. True, but they have an adorable habit of seeing only what they want to see.

“In January 2008, when the S&Ps were in the early stages of what was to become a devastating collapse,” explains Rick Ackerman, “domestic equity mutual funds were worth about $6.5 trillion. Lo, a little more than a year later, in February 2009, we see that the value of these funds had fallen by about 48%, to $3.4 trillion. But guess what: Over that time, net redemptions totaled only 2%, or about $100 billion! What that means, explicitly, is that mutual fund investors have stuck with this bear market throughout the decline.”

Investors didn’t give up on stocks – despite the huge decline in stock market prices. What that means is that there’s still a lot of selling to be done.

“This bear market will end,” he continues, “like every other bear market in history, with a wholesale dumping of stocks at prices that will make current values seem exorbitant in comparison.”

That’s why you use trailing stops. You want to be sure that when the selling begins your stocks get sold first – long before most investors finally capitulate.

More news on how to play this bear market from Addison and The 5:

“If you’re shorting stocks, this might be of use,” writes Addison Wiggin. “Now that the easy targets are long gone (big banks, homebuilders, AIG) and the bear market rally is in full swing, short sellers are setting their sites on some more diverse organizations.”

“Hmmm… pretty all over the board, eh?” Addison notes. “There’s a mobile tech biz, several real estate players, home healthcare, a bank and a popular chain of sandwich shops. What’s the connection?”

“Most of the stocks on this list,” answers our resident short seller Dan Amoss, “are characterized by at least one of these three facets: Shorting the stock is a current fad, the company is using ‘creative” accounting methods that traders think is fraudulent, or the company is a high risk for insolvency.

“Regardless, bulls beware… when you see short interest that high (as a % of outstanding shares), you rarely see sustainable short squeezes.”

And back to Bill with more thoughts:

It’s amazing how much credibility some people have. Seems almost infinite. No matter how bad their advice…or how little they understand…people still ask their opinions.

Or, to put it another way…it’s amazing what most people will believe.

You’d think – after $50 trillion in losses – that people would be careful whom they listened to. Who would take Alan Greenspan’s thoughts seriously, for example? Yet, the newspapers still report his remarks with a straight face.

And what about all the economists who claimed that since the “U.S. has the world’s most flexible, dynamic economy” you couldn’t go wrong buying U.S. stocks? And what about the market timers who urged investors to buy “bargains” when the Dow was only 10% below its peak? And how about the regulators – such as Tim Geithner – who completely missed the biggest Ponzi scheme of all time, taking place right under their noses? And the economists who thought derivative debt made the financial world safer by “distributing risk more widely?” And those, such as Hank Paulson, who thought the sub-prime crisis was “contained” at $100 billion in losses? (Current cost of the bailouts – $12.8 TRILLION!)

As our friend Nicholas Taleb says, it’s as if these guys had wrecked a school bus – while they were driving drunk.

But instead of putting them in jail – they’re given a new school bus to drive!

Kevin Phillips, author of Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism warned of a the pending explosion of a 25-year “multibubble.”

The bubbles began in the 1980s, he says, when the financial sector accounted for 10 percent to 12 percent of the U.S. economy had grew to an “arguably crippling” 20 percent to 21 percent of GDP by the middle of this decade.

Who’s to blame? Henry Paulson, he says…and Ben Bernanke…and Alan Greenspan.

The Reuters report: “Phillips calls Paulson a Wall Street insider who was looking out for his own, and Bernanke an academic misguidedly trying to refight the 1930s Great Depression. Together they formed the wrong team at the wrong time whose ad hoc approach threw away hundreds of billions of dollars and more than doubled the Fed’s balance sheet, he says.

“What you’re seeing Bernanke do is he’s trying to create a bailout reflationary bubble, which he can’t describe as a bubble, just as Greenspan couldn’t describe the housing mortgage bubble as a bubble. What we’re seeing by Bernanke is a covert attempt to rebubble,” Phillips told Reuters.

Meanwhile, Nouriel Roubini – who’s been mostly right about the crisis – says that [Jim] “Cramer is a buffoon.”

“He was one of those who called six times in a row for this bear market rally to be a bull market rally and he got it wrong. And after all this mess and Jon Stewart he should just shut up because he has no shame…He’s not a credible analyst. Every time it was a bear market rally he said it was the beginning of a bull and he got it wrong.”

Roubini warned two years ago that the United States faced its worse recession in four decades. He points out that the current rally on Wall Street merely follows the pattern of other major downturns.

“Once people get the reality check than it’s going to get ugly again,” he says.

Finally, as promised in yesterday’s issue: What can we learn from Argentina?

In the ’30s, Argentina suffered along with the rest of the world. Until then, it was roughly as rich as Europe and rivaled America in some ways.

“As rich as an Argentine,” was an expression in England. Marrying one’s daughter to an Argentine planter was the dream of many down-at-the-heels English aristocrat.

But something went very wrong on the pampas. Instead of Franklin Roosevelt’s New Deal, the Argentine’s got a raw deal from Juan Peron. Both programs were frauds. Both made things worse. But Peron’s program stuck. Americans soon came to their senses and forgot Roosevelt. Between Franklin Roosevelt and Barack Obama were Eisenhower Republicans and Carter Democrats. But Peronist politicians have dominated the Argentine political landscape since the ’40s.

Every problem demands a government solution. And every Peronist solution makes things worse.