Wednesday, May 6, 2009

General Market Commentary: April 6, 2009

It seems that Monday was a big day for the S&P500:

Not only was my price target reached for the end of the week already (894), it was surpassed by about 1.2%. Prices yesterday subsided probably on covering gains, or perhaps this is alluding to something bigger?

Tomorrow is a very big day for the big banks with the stress test results being announced. Perhaps that yesterdays move was not only in part gains taking, but people heading to the short side due to uncertainty of the stress test results.

All in all it seems that the markets are poised to move higher. Despite a decline of bullishness from the 1st to the 4th of may seen on the cboe vix put/call(0.28 to 0.63, which maybe have been a good indicator of markets moving down on the 5th), markets have become extremely bullish as seem from the move from 0.63 to 0.1 (cboe vix put/call).

As follows, we are seeing Asian markets heading towards there close with strong gains, and with a strong start with the FTSE today.

Stress test results:

Scenario 1:

Considering, Bernake comments yesterday, I would assume the stress test results are quite positive, unless it was Bernakes devious desire to correct the markets in face of all the blatant discounting of poor economic news.

Considering the latter seems unlikely, it quite possible we will be seeing my call on 934 on the S&P500 within this second quarter, quite possibly by the end of this week or by the end of next week depending on tomorrows stress test results.

Scenario 2:

It is possible Bernake played up the recovery story in order to soften the blow of mild/to poor data from the stress tests. If this is the case markets may move more adversely to such results on the banks. I would be then looking to support at 870 and 877 my former Resistance levels (S&P500).

Summary/Thoughts on Economic Situation:

All things considered, I don't see how these stress tests can come in good, other than the fact that the government is backing all these banks hence the reason for good results. All this "capital" the banks can get is due to the governments ability to keep printing more money.

It really surprises me that one of the biggest drivers for a banks bottom line is not being emphasised. Lending I would argue is more important and whether lending improve depends on many other various factors.

Sure the liquidity is there, but what about all the uncertainty of bad debt banks or other financial institutions are still holding? Are these new monetary policies enough to clean up the mess. In other words considering interest rates nearly at 0%, are these programs monetarily and fiscally implemented such as provision of Liquidity Directly to Borrowers and Investor in Key Credit Markets, Purchase of Longer Duration Securities, Financial Stability Trust or "stress test", Public-Private Investment Program, Expansion of TALF, Transparency and Accountability, Homeowner Affordability and Stability Plan, and small Business and Community Lending Trust; are these enough to really fight off this recession, or are we just throwing money into the never ending big black hole?

How about the consumer? The reality we maybe seeing a divergence in market sentiment and what the consumer is actually feeling, considering job cuts, many people are cutting back and focusing on savings.

Deflation seems to be the talk of the day, what the heck will happen with inflation once it starts rearing its ugly head again? If economic conditions don't recover + inflation, economic conditions can head further south.

With the consumer not spending, banks are probably not feeling comfortable enough to lend. Many of the retail sales employees of banks now have becomed salary based employees alone with no bonuses(wheres the incentive to grow these banks? no point in working more hours when you are not getting paid for it)... no reason to borrow => no reason to lend + no reason to work. I know is an oversimplification, but imagine this magnified over many banks and jobs, I'm sure it has some effect, whether it be in terms of economic rational and behavior (changing spending habits, consumer sentiment, willingness to do work or do business etc...)

It looks as if banks will still have to rely on FX/market/transaction opportunites and fee based income growth vs. organic growth of lending to grow/maintain financial health in this current business environment.

Which leads me to my last idea. Perhaps Asia maybe in a better position to lead strong recovery in the banking/financial sector after all. Considering a totally different consumer, a relativitly underdeveloped banking/financial sector in many of the Asian regions. Maybe it would be better for banks to focus on development in such regions in order to restore financial health, instead of trying to fixing this boom/bust credit cylce system "old capitalism" has brought about...



Considering the very bullishness I'm seeing across the board I think it is possible we will see a higher high at the end of this week, I will definitely say that tommorows stress test will be an event driver. If bullishness remains the S&P500 will defintiely be testing resistence at 934. If not, the S&P500 will have to see support at 877 to 870 to see how "fo real" these bulls are.

All in all I'll maintain to the bullish side for the end of this week and will re-examine this weeks performance on Sunday as I do every week...

As much As I would love to delve into the political implications of the Obama adminstration, this linear regression isn't going to learn itself for finals...

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