Where this Market Will Take Us; the Technical Case

by Anthony Jasansky

Like a medieval alchemist, Treasury Secretary Timothy Geithner keeps on inventing new formulas that may turn junk assets held in bank balance sheets into marketable securities. The latest concoction revealed publicly on March 23 under the catchy moniker “PPIP” (Public-Private Investment Program) has been enthusiastically embraced by Wall Street.

PPIP, expected to put premium marketable prices on trillions of junk assets held by insolvent banks, has everything Wall Street
rogues love. It would socialize any losses if it fails, and privatize big gains should it actually meet lasting success. Hedge funds, LBO artists and other usual suspects will be invited to bid for toxic paper.

As much as 97% of purchases will be financed and guaranteed by the government with private buyers’ risk reduced to as low as three percent. If the plan works out, private buyers will split profits with the government. It’s no wonder that, following the PPIP announcement, the S&P 500 gained seven percent, one of the biggest daily gains ever.


The Fed, in its all-out effort to resuscitate the financial sector, announced yet another money printing scheme on March 18. This time, the “quantitative easing” consists of buying $300 billion of U.S. treasuries. Following the announcement, the 10-year T-Notes gained 3.5%, again one of the biggest daily gains on record.

The two new massive undertakings by the Treasury and the Fed provided a further boost to a stock market already on a rebound from the deeply oversold conditions reached at the new bear market lows of March 6.

In contrast to the extended gains in equities, the ETF charts of T- Notes (IEF) and of High Grade Corporate Bonds (LQD) show that the gains in bonds have been short-lived. Bond investors, being a more rational bunch than equity punters, appear to be unsettled by the quantitative easing implemented by the Fed and the central banks of England, Japan and even Switzerland. Excessive money printing, regardless of the method used, has always tended to be followed by rising inflation.

Given the choice between inflation and deflation, the Fed and equity investors will go with the devil they know. After all, even the Zimbabwean market in the early 2000s and the market during the Weimar Republic market in the 1920s soared in the midst of hyperinflationary rates. Right now there are no obvious signs of inflation. The exception is the four-percent annual rise in the Producer Price Index of Finished Goods, excluding Food& Energy.

In past columns, I have repeated that the market will break 5.0%- 10% below the bear market lows of November 2008 to form the eventual 2009 lows. So far, the market has obliged on both counts. As for my guesstimate that this rally is not the start of a new bull market, I will wait and see how things develop in the coming months.

With the global credit crisis still unresolved, I err on the side of caution rather than shoot for the boasting rights of calling the new bull market. Investors buying the argument of a new bull market should realize that the market is short-term overbought, with the sensitive sentiment indicators at, or close to, their bearish limits.