The Overnight Markets

Posted by Ray on August 23, 2009 under Markets | Be the First to Comment

Japan opened up significantly higher today, up 320 points, which is sure to boost US stocks in the AM, barring anything happening overnight. The reason for the rise in the Nikkei was because of existing US home sales increase on Friday and higher commodity prices, copper in specific. While the tail does not wag the dog, it can influence its initial opening as optimism is contagious.

The irony is that the housing sales data was not that great when looked at against supply and the shadow supply that the banks are holding. The fact that most of the other economic data is also rather disheartening which, frankly, should not be having the effect on the markets that it is having. The rally has reached a point of being utterly ludicrous. Do not confuse my pessimism as being upset that I am missing out on returns as I have done very well this year, but my pessimism is because there simply is no reason for the rally to continue.

Unemployment, real estate, both residential and commercial, is still a mess and other economic indicators are still very negative. Even if the indicators did turn decisively positive the market has already priced in 4% GDP growth which is not going to happen unless you know of a different set of economic numbers that I haven’t seen or heard of. I have said for some time that 3Q09 GDP will probably be good, but good as in a 1-2% growth rate. Keep in mind that most are expecting 2Q09 GDP to be adjusted down to -1.4% later this week.

I happen to think that we will get a negative initial claims report this week and the revision on 2Q09 GDP will come in worse than expected. If that happens then we are indeed in for a strong dose of reality with the stock market. The largest part of my 25% equities is Asian holdings, so I am glad the markets are going up, but I see little reason for those markets to be reacting so positive to our barely OK data. Their economies are definitely sounder than ours right now and posting positive growth, which is good, but I am worried that even those markets are getting overextended now.

The irrational exuberance shall continue into the early part of the week, but one must remember that the longer we remain overbought the worst the decline will be. By the time unemployment claims, the GDP revision and consumer spending are released I expect we will see some volatility. Just look at the leadership in the markets right now, AIG and Citi Group, two zombie companies, are a huge percentage of daily volume and helping push the markets higher.

One of the few things really helping the market is the fact that banks are not loaning shares to be shorted, but other than that there is nothing compelling to make me buy stocks. As I said before, I might miss a few points, but when the next black swan event happens I am more than insolated. An investor should be guarded if they are contemplating adding new capital to this market. There is also nothing wrong with taking profits, no one ever got hurt by selling a winning position. Good luck and think defensively in the near-term.