The Rally Takes a Breather

No word from Bill again today, so we will power through without him.

Today, the markets had another big bank surprise…Bank of America joined the ranks of Wells Fargo, JP Morgan Chase and Citigroup – all banks that reported earnings that went above and beyond Wall Street’s expectations.

The Charlotte, North Carolina-based bank, which received $45 billion in government assistance, reported a first quarter profit of $4.2 billion, after logging a $1.8 billion loss last quarter. The bank attributes their results in part to the purchase of Countrywide last year, saying that they were better able to capitalize on the latest surge in mortgage lending and refinancing activity.

However, despite the positive growth for the first quarter, Bank of America’s stock fell sharply this morning after BoA’s chairman and CEO, Ken Lewis, noted that the bank’s credit division was facing growing problems…imagine that.

“We understand that we continue to face extremely difficult challenges, primarily from deteriorating credit quality driven by a weakness in the economy and growing unemployment,” Lewis said in a statement.

Investors are growing increasingly wary of BoA’s – and the other major banks’ – earnings. Worries about the sustainability of these earnings are weighing heavily on the financial stocks.

After a six-week rally, stocks fell this morning, with all of the major indices down around 2%. The AP reports: “Investors are looking for signals that a rally from 12-year lows in March can continue. Wall Street has been emboldened by early signals that the economy could be stabilizing, but after a 24 percent surge in the Dow, some investors are asking whether the market has risen too quickly.”

Strategic Short Report’s Dan Amoss tells us he believes the rally is “getting tired.”

“In most sectors of the stock market, I see signs that buyers lack conviction. Volume is weak in most rallies, and heavily shorted stocks are going up the most. Who in their right mind owns Citigroup as an investment at $4 (other than short sellers covering)? Especially considering the low odds that Citi stock will survive 2009 without going to zero in a restructuring or getting diluted by billions more common shares.

“Even the CEO of NYSE Euronext, Duncan Niederauer, was quoted in the Financial Times opining that this rally ‘was driven by short-term traders trying to take advantage of high volatility, and not by large institutional or other long-term investors.’ You’d think the NYSE would be biased to be bullish, so this says a lot about the sustainability of this rally.”

And now, we turn to our friends at The 5 Min. Forecast for a closer look at the sucker’s rally on the NYSE:

“In spite of the end of the world as we know it, consumer sentiment is improving,” writes Addison in today’s issue of The 5 Min. Forecast.

“The Reuters/University of Michigan measure of consumer feelings registered a preliminary score of 61.9 for April. That’s a notable bump from 57.3 in March and far better than the 57.5 score the Street expected.


“If you’re curious why, look no further than the sucker’s rally on the NYSE.

“But a strong word of caution from Rob Parenteau, now dean of The Richebächer Letter:

“‘To be sure,’ Mr. Parenteau writes, ‘the larger theme we believe will dominate consumer attitude is the need to reduce leverage, which will require a higher savings rate than households previously achieved.

“‘We recently made the case that $1.2 trillion of household debt would need to be paid down over the next three years to return the household debt-to-income ratio to pre-housing bubble levels. French banking group Societe Generale, however, estimated that a return to the trend of the past five decades would require nearly twice that much… over $2 trillion.

“‘The key point: American consumer’s contribution to any future recovery is likely to be muted, regardless of the fiscal and monetary stimulus coming from Washington. Stock investors using the regular playbook and running into companies that rely on consumer spending should make sure their long-run earnings expectations reflect this new trend.”

And back to Kate in Baltimore:

The Conference Board’s Leading Economic Index – which is seen as a key gauge of future economic activity – fell for the third month in a row, and has not risen once in the last nine months.

An economist at the Conference Board said the “The recession may continue though the summer, but the intensity will ease.”


And today, the government released more negative data, this time in the form of unemployment numbers. The national unemployment rate rose in March, up to 8.5%. The data showed that unemployment rose in 46 states – and in Michigan and Oregon, it pushed past 12%.

The high unemployment rate is pretty self-explanatory in Michigan, where the long, slow death of the U.S. automakers has clearly taken its toll. And in Oregon, employment relies heavily on the lumber industry, which has taken a major hit because of the decline in homebuilding…especially in California.

“We produce a substantial amount of wood products used for residential construction, so many of our lumber and wood products are shipped to California for the housing market,” said David Cooke, economist for the Oregon Employment Department. “California’s economy is so large – it’s 10 times the size of Oregon – so anything that’s happening in California has a direct impact on the state.”

As Bill pointed out a couple weeks ago: As California goes, so goes the rest of the country.

But not if Obama has anything to do with it. His stimulus package intends to save or create 3.5 million jobs through 2010.

Outstanding Investments’ Byron King says, “Here’s what’s going to happen with a lot of that stimulus money. The state and local governments and agencies will get the federal money. Then they’ll put out bids and ask for proposals to build or repair roads, bridges, government buildings, etc. They’ll get back lots of bids and proposals, and for surprisingly low prices.

“And in relatively short order, the work will start and the steel and concrete will begin to move. OK, that’ll stimulate things. Welding rebar and pouring concrete will help the economy and put a lot of laid-off construction workers back on somebody’s payroll.

“But will government spending rebuild and strengthen the private sector? It will take a lot of private investment and spending to build out the economy of the future. I just don’t see that private investment happening on a large scale.

“It gets back to why I don’t trust this stock market. I don’t see some critical fundamentals, especially private sector investment.”

And finally, before we let you get your weekly dose of the Mighty Mogambo, we have one last word from Addison, on Obama’s most senior economic advisor:

“For better or worse,” said the octogenarian Paul Volcker yesterday, “we are at a point where the Federal Reserve Act is going to be reviewed.”

“None of us has seen a decline in economic activity at the rate of speed seen late last year,” he stated the former Fed Chair in a speech at Vanderbilt University – a noteworthy observation from the guy who was credited with slaying the rampant inflation of the late ’70s.

“Volcker was one of the few members of the Nixon administration who argued that dismantling the Bretton Woods exchange rate system in 1971 – effectively removing gold as the guarantor of the dollar’s value and replacing it with ‘the full faith and credit’ of the U.S. government – was a bad idea,” said Addison.

“Now, it looks like the powers that be are openly discussing, not just the dollar’s role as reserve currency of the world, but the role of the Fed as set forth by the Federal Reserve Act of 1913 itself.

“Our late friend Dr. Richebächer was an outspoken critic of the Federal Reserve throughout his 40-year career as a credit and currency analyst. ‘Sometimes I think it’s the role of the chairman of the Federal Reserve to prove Kurt Richebächer wrong,’ Paul Volcker once said.

“Kurt was hot on corporate America’s lack of attention to their own balance sheets, too. They’d become a ‘cult of shareholder value’ he decried. Many of Kurt’s own critics, including Volcker, cautiously dismissed Kurt’s work as gloom and doom… and yet, he was right on so many levels.

“We only wish Kurt were here to participate in the cleanup.”

In meantime, we aim to honor the man by doing our best to uphold the high level of critique he labored over.

Until tomorrow,

Kate Incontrera
The Daily Reckoning