Expect Nothing in December and You Won't be Disappointed

What is there to expect for December? The rules have changed, economic news remains dire, and yet the market has rallied these past few weeks.

In Matt Blackman's weekly newsletter, Matt really summed up well the problems of trading profitably in today's markets:

"
Mass market manipulation changing the rules

James Grant was interviewed this week on the Business News Network about his new book – Mr. Market Miscalculates: The Bubble Years and Beyond. Grant didn’t mention the word manipulation but that is exactly what is going on if you really listened to what he is saying (see Video of Grant’s interview below). The Fed, which exhausted its $800 billion asset base months ago, had doled out or promised something in the order of $4.74 trillion as of November 24 according to Bloomberg. And that doesn’t include any commitments made since. According to Grant, that works out to an annualized growth rate in Fed assets of more than 2000%.

In his zeal to play Robin Hood to Wall Street banks and brokers, Bernanke has effectively changed the rules for doing business in markets. Stocks that should plummet are soaring and those that should outperform but are not privy to special TARP or bailout benefits are getting hammered. Treasuries and bond performances are equally perplexing for the same reason. That Bernanke and company have refused to be transparent about who gets Fed money and the terms of the loans makes the bailouts as well as the massive amounts involved all the more suspicious (see article "Bernanke..." below). Neither the Fed nor government will tell us where this money is coming from but it isn’t hard to figure out the answer.

Trading rules will have to be re-written as long as the government and Fed play buyer of last resort bailing out poorly run companies at taxpayer expense. But the unintended consequence is that it will keep those investors and traders who normally jump in during a market correction in the hunt for bargains on the sidelines, at least until they understand how to play the game now that the law of market gravity has been repealed. "

With that in mind, I am still not convinced that the market rally from its November lows will hold. For one thing, the indexes (DJIA for example) are approaching moving average resistance levels. Second, economic indicators are all still weak. The two figures that concern me are unemployment figures and falling home sales / prices.

It is possible that there will be a "Santa Claus" rally or that we have already seen the "market bottom," yet these are just short-term technical trading opportunities. They are, at best, hopeful events at a time when the markets will keep falling well into 2009. Fundamentals do not support the market from continuing to fall as we enter 2009.

Investors and the media are also fixated on the pending big bailout news for the US automotive industry, but will 14B do the trick? These companies have huge liabilities and inefficiencies. $14B will only be the start of more money needed to save these companies. I do not disagree that something must be done to keep these companies running. After all, there is an obligation for the government to do what is necessary to avoid massive unemployment in this sector.

I'd like to end this entry with a bright note. At some point in time, the morale of people will improve. They will eventually regain optimism and confidence in the markets. They will realize that oil is no longer over $100 a barrel. Consumer goods will be cheaper than ever. Lending will start to loosen. Money will be available again for borrowing. The demand for housing will start to pick up again, and prices will stop falling. It is just that this won't happen this month.