Yawning Through the Market Rally

A Canadian poll determined that only 12 percent of Canadians think yawning during sex is embarrassing, compared with 30 percent who thought yawning while exchanging marriage vows was worse.

It’s a tough call, but your California editor, who is not Canadian, imagines it would be better to yawn during “I do,” than to yawn during “Oh yes, yes!”

Here at the Rude Awakening, we never yawn during sex. We might change the TV channel on occasion, but we never yawn. If we suffer from any form of narcolepsy whatsoever, it would be the sort that causes us to yawn or snooze during bear market rallies.

The whole spectacle is just so boringly repetitive. Bear market rallies are always sired by extreme despair, then nourished by continuing anxiety and apprehension, then ultimately vanquished by excess optimism and complacency. That said, we would never frown during a bear market rally. Fleeting moments of delight arrive so rarely in life that we always try to enjoy them…even if we were expecting something sexier.

Yesterday…yawn…the Dow Jones Industrial Average slipped 1.43 points, thereby erasing…yawn…the 1.36 points it gained the day before. That’s pretty darn boring. In fact, the stock market has been pretty darn boring for more than a month. The Dow has gained less than 200 points during the last 30 days…and has closed out the last seven trading sessions inside a very narrow 90-point range.

Perhaps the Blue Chip Index is marshalling its energy for another blast to the upside. Or maybe it has no energy left to marshal…despite all the “good news” that flashes across the newswires each day. We are referring to good news like less-bad- than-expected housing sales, less-week-than-expected economic reports and less-high-than-expected unemployment readings.

The potpourri of “good news” also includes nonstop blather from the Treasury Secretary, finance companies CEOs and Wall Street strategists about “signs of recovery.” Thus, there is almost no investor left who does not believe the economy is on the mend. After all, didn’t ten of the nation’s largest banks obtain permission yesterday from the U.S. Treasury to repay their TARP borrowings?

Yes, it’s true; JP Morgan Chase, Morgan Stanley and eight other large financial institutions won U.S. Treasury approval to repay the $68 billion they borrowed last fall.

“These repayments are an encouraging sign of financial repair,” Treasury Secretary Geithner declared. We see it a little differently. We see these repayments as a discouraging sign of resurgent greed, and of the triumph of clubby capitalism. The banks are repaying their TARP funds because they do not need the money TODAY (even though they might need the money desperately tomorrow). But since the Obama Administration has already announced that it would not allow any of America’s 19 largest banks to fail, what’s the risk of repaying the cash today, while waiting to see what tomorrow brings? Why not give the money back, resume the dangerous, but lucrative speculations that created the crisis in the first place, and hope that everything works out okay?

Does anyone doubt that the Fed will be standing at the ready with Band-Aids and Bactine the next time these big banks fall down and go boom?

Therefore, dear investor, we do not see these repayments as “an encouraging sign of financial repair,” but rather, as a possible sign that market psychology has become dangerously overconfident. “No one ever rings a bell at the top,” as the old Wall Street saying goes, but maybe someone does repay their TARP money at the top…or very close to the top.

Please don’t misunderstand us; your editors are not “calling the top,” they are just “calling B.S.” on the notion that the credit crisis is over. As our colleague Chris Mayer, noted in yesterday’s Rude Awakening, the American banking system is still hiding something like $5 trillion worth of impaired assets in “off-balance- sheet” entities. That’s scary.

What’s also scary is that many of the assets that still sit squarely ON bank balance sheets are continuing to degrade. Delinquency and default rates are accelerating in almost every loan category. Seems like this fact might cause a problem on down the road for somebody.