4/9 Weekly Commentary

Friday afternoon the stock market marked time, but a breakout occurred at 3:25, which caused me to exit 5% SDS because the amount of backing and filling suggested new highs.  This did occur and all indices ran up.  DJI hit 11,000 which I would expect to be resistance.  I1 low is due either at the close Monday or into Tuesday.  The momentum of the rally since 4/5 (the I1 high) has been stopped.  If DJI does not fall sharply Monday to trade below 10,800 I will exit at the close.  200 points is not that much in this environment.  Hugh Albany reported that the stock market has not had a 1% down day in 32 trading days.  That is the longest stretch since May, 2007.  This rally is long in tooth.
Carrying 7.5% short position over the weekend. 

One reason I am stubborn about holding to the last minute is the SPX 150-month M/A which is at 1190.

So, I am only sticking my neck out while I1 is declining.  Here is current I1 chart:

I am a bear for several sterling reasons:
1)  I1 goes into long-term bear mode starting 4/29/2010 and ending 5/??/2015. 
2)  The derivatives collapse of 2007-2009 has not ended, but has been interrupted by stimulus.  There is an ocean of bad debt remaining in the financial system.  More on this below.
3)  The bear market of 2007-2009 was a 5-wave structure indicating new lows in the future
4)  America is undergoing secular adjustment to debt burdens so extreme that they cannot be inflated away without explicit paper money printing, which will be the desperation play years from now.  Within the current system loans must be made in order to multiply reserves into money supply.


The following is the current FDIC (Dec, 2009) bad loan summary graphic:

This is a picture of disaster being papered over by ignorant Americans (allowing politicians to fabricate deceit as policy). The U.S. has a two-tier banking system,

1) the too-big-to-fail banks benefitting from government largesse and
2) everybody else.  Real estate is crushing 80% of the banks in America.



The large banks have proprietary trading using Uncle Sam's free money and derivatives packaging supported by Uncle Sam's money. They don't need anything else to make the kind of money they desire. They don't need deposits, they don't need to make loans, they don't need to manage investment accounts for clients.
All they need to do is:
a) create and trade derivatives without a worry about markdowns (see below)  and
b) play momentum on standard exchanges during the quarter and disguise it at quarter's end. This is one reason that all markets are driving together, because Uncle Sam is funding momentum trading (without even realizing it).


In addition, the large banks are pospering because the FASB changed the accounting rules to allow mark-to-fantasy.  Large banks were being slowly ground to powder during the 2006-2009 crisis because they were forced to mark-to-market their derivatives holdings.

• Oct, 2008 Section 132 of the Emergency Economic Stabilization Act of 2008, titled "Authority to Suspend Mark-to-Market Accounting" restates the Securities and Exchange Commission’s authority to suspend the application of FAS 157 if the SEC determines that it is in the public interest and protects investors. 
• On March 16, 2009, FASB proposed allowing companies to use more leeway in valuing their assets under "mark-to-market" accounting, a move that could ease balance-sheet pressures many companies say they are feeling during the economic crisis. On April 2, 2009, after a 15-day public comment period, FASB eased the mark-to-market rules. Financial institutions are still required by the rules to mark transactions to market prices but more so in a steady market and less so when the market is inactive. To proponents of the rules, this removes the unnecessary "positive feedback loop" that can result in a deeply weakened economy.

• On April 9, 2009, FASB issued the official update to FAS 157[20] that eases the mark-to-market rules when the market is unsteady or inactive. Early adopters were allowed to apply the ruling as of March 15, 2009, and the rest as of June 15, 2009. It was anticipated that these changes could significantly boost banks' statements of earnings and allow them to defer reporting losses. The changes, however, affected accounting standards applicable to a broad range of derivatives, not just banks holding mortgage-backed securities.

MARK-TO-MARKET IS BACK IN EFFECT BUT BANKS (i.e., big banks) ARE BEING ALLOWED UNTIL 2012 TO ACCOMPLISH IT.  Banks are a wonderful short, regardless of size, but timing has to be employed to prevent fighting this rally.  How many people have gone broke holding shorts into this thing?