Great Depression Online Archive Issue:

Fattening the Turkeys for Slaughter

Great Depression Online
Long Beach, CA
May 08, 2009

Inside This Issue You Will Discover…

*** Buy the Rumor Sell the News
*** Stress Test Results
*** Fattening the Turkeys for Slaughter
*** And More

Buy the Rumor Sell the News

“To me, this rally has been more a recognition that maybe the end of the world is not at hand,” said Philip S. Dow, managing director of equity strategy at RBC Wealth Management.

The aptly named fellow was remarking on the stock market’s parabolic liftoff from its March 9th low.  In fact, following the DOW’s 101.63 point jump on Wednesday, it was down only 3 percent for the year.  And since the March 9th low, the market – as measured by the DOW – is up 32 percent.

Perhaps Phillip Dow is right…perhaps it’s not the end of the world after all.  Still we have some reservations about what’s in store for the stock market.  More on that in a moment.  But first, a little on Wednesday’s rally.

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“The word came a day ahead of the formal release of results from government ‘stress tests’ aimed at determining which banks need to raise more capital,” reported AP.  “Investors relieved to have assembled an initial scorecard scooped up shares of most banks, even those expected to have to come up with new money.”

In other words, rumors of the ‘stress test’ swirling about put some wind behind the sails of Wall Street.  Yet in classic ‘buy the rumor sell the news’ form, when the official ‘stress test’ results were released yesterday, the DOW fell 102.43 points…giving all of Wednesday’s gains back, plus one more point for good measure.

Stress Test Results

So what were the stress test results?

“Ten of the nation’s largest financial firms need to raise $75 billion more to withstand the losses that would come with a deeper recession, the government said Thursday in a report card that found the banking system viable but still vulnerable,” reported AP.

“The Federal Reserve, issuing the long-awaited results of its ‘stress tests’ for banks, found nine of the firms are stable enough that they need no additional capital.

“Among the 10 banks that need to raise more capital, Bank of America Corp. needs by far the most -- $33.9 billion.  Wells Fargo & Co. needs $13.7 billion, GMAC LLC $11.5 billion, Citigroup Inc. $5.5 billion and Morgan Stanley $1.8 billion.”

We were purposely avoiding this story because we found it so profoundly moronic…its absurdity flabbergasted us.  From first glance it appeared to be nothing more than a mockery and insult to anyone that schleps and slogs to earn their daily contributions.

What was the meaning of this charade?

“This is to make sure banks have enough capital to offset the losses we know are coming in the next couple of years,” clarified Federal Reserve Chairman Ben Bernanke.

Good to know, we suppose.  Though it wouldn’t be any of the government’s business if they had never bailed out the banks to begin with.

Now…what to make of the stock markets two month rally.

Fattening the Turkeys for Slaughter

Yes, the stock market has put on quite a show.  A 32 percent bounce in just under two months…not bad.  Still, even with this flashy rally, the DOW still stands about 40 percent below its October 9, 2007 high.

Are the good times here again for stock market investors?  What follows is a roundabout journey to an answer.

After a market crash it is inevitable that stocks go up.  For that’s what the stock market does.  As we’re fond of saying…it goes down then it goes up.  So, too, it goes up and then it goes down.  But sometimes times it goes down and then it goes down some more. 

Trading the market is a tricky endeavor.  For what’s absolutely the right time to buy at one time is spectacularly wrong at another.  And what’s spectacularly the wrong time to buy at one time is absolutely right at another.

From September 3, 1929 to November 13, 1929, the DOW lost 47.9 percent.  Then, as rarely noted, it rallied 48.1 percent through April 17, 1930…bringing good money, good optimism, and good people back to the market.  But alas, it was the bear trap of all bear traps…the market subsequently crashed 89.2 percent from its initial peak along with the hopes, dreams, and aspirations of a generation.

Sure the stock market could go up another 15 percent…and sure it could rally for another three months.  As you can see, it’s not without precedent.  But it may just be the market fattening up the turkeys for the ultimate slaughter.

When the day of the feast finally arrives, some will sit down at the table…while many others will be on the menu.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  Stocks bite.  Even with an amazing 32 percent increase from its March 9th low, the stock market’s still in the toilet…down 40 percent from its October 9, 2007 high.  What’s more, the recent run-up could be fattening the turkeys for slaughter.  Discover many secret wealth building opportunities – outside stocks – that could have you recouping all of your sock market losses before the end of 2009.  Learn more here: Liberty Street League.

 

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