by: Wall Street Strategies
July 07, 2010
Maybe it was the visit by the queen, maybe it was just time, or maybe value players sniffed out opportunities but the market staged an impressive bounce into the close. Granted, stocks were much higher and could have put in a truly memorable session, but for me it's the kind of session when towels are thrown and yet equities still stage a bounce that grabs attention. Beggars can't be choosers, right?
Well, there's the problem right there. It's not beggars that are looking for relief but producers and job creators.
Investors understand risks; they aren't asking for anything other than the right to invest without becoming pariahs.
There is no way deep-pocketed money managers watched the close and didn't salivate just a little. Man, if the coast was clear and there were guarantees that rules wouldn't change that much we'd see much more action at current levels.
Would-be investors are looking for a hands-off approach, and that's not begging. Other nations break into terms with no-confidence votes but we don't have that here, we have the stock market. Last year, stocks rallied on the notion that things would get better and also on the knowledge this nation has overcome worse circumstances. This year, stocks are on the ropes even as companies post amazing profits.
Yes, we are dealing with the oxymoron known as a jobless recovery and the ominous double-dip (also oxymoronic since most of the time the economy never bounced enough to author a new dip, anyway) recession. The market starts each session with knowing that even 171 points on the Dow could be erased in the blink of an eye.
This kind of action is an S.O.S. Not much changed yesterday mid-session but the market collapsed. It got back on its feet as bargain hunters finally pulled the trigger.
Make no mistake, this market is more about a message to Washington than anything to do with value investors, shorts, weak sisters and the unknown. I don't think we have to go into a double-dip but we could if the war against prosperity isn't halted immediately.
It is true that financial institutions and corporations want to put money to work. It didn't get any press or credit but I think the update on consumer credit helped the market move higher into the close.
Credit card debt (revolving) continues to sink like a rock but non-revolving credit was up enough to push the total into the plus column for the second time this year.
But it's not the total number the market has responded to during this turmoil, it is non-revolving credit increases that have helped the market along throughout its rebound efforts.
I've connected the dots and it's very interesting. Sure, some would say there is no cause and effect and often consumer credit is released on the same day jobs data is updated.
I see a few interesting things and know one immutable fact, this economy isn't turning until credit is available to individuals and small businesses. Total consumer credit has only been positive three times since October 2008.
Revolving credit continues to slide tremendously, partly because consumers switched to debit cards and have avoided using credit as well. The irony is revolving credit historically has been easy to access.
Let's face it, revolving credit was too easy to access for a while and helped to create a false sense of security in consumers that chose to ignore their own financial limits and laws of common sense. On the other hand, non-revolving credit, which can't be used once it's repaid, continues to flow. What's the deal with that, how can that be with financial institutions so worried?
One of the big reasons is the federal government. 
Government to the Rescue
The war on Wall Street has had a direct impact on the flow of capital. The result is the U.S. government is responsible for 90%+ mortgages through guarantees via FNM, FRE, and FHA. With the government kicking private money out of student loans, government has stepped up to fill the void from fewer and fewer securitized loans. In 2006, securitization of loans (loans no longer carried on the balance sheets of originators) reached $246.7 billion. That same year the government and Sallie Mae were responsible for $91.7 billion.
Not only is the government crowding out the private sector but this action is also adding risks to be passed onto taxpayers. It would be great to get securitization back into the game as I'm sure a jolt of an extra $150.0 billion through the private market would add a little spark to the economy.
So here's the market connection. The positive January 2009 non-revolving credit news was released on March 6, the Dow closed the previous day at 6,594 and finished the session at 6,626...and never looked back.
The positive number achieved in February 2009 was posted April 7 when the Dow was at 7,789. The market peaked at 10,725 and began to drift when the December news of positive non-revolving credit was released on February 5 of this year. The Dow came off 10,012 and got an extra boost on strong gains in the component reported on March 5.
We'll see what happens this time around, but I do not believe those previous moves were coincidences.