Friday, January 22, 2010

This Recession is Not Over

The Big Picture commented on a recent National Bureau  of Economic Research statement by their Business Cycle Dating Committee in which they said, " In both recessions and expansions, brief reversals in economic activity may occur --- a recession may include a short period of expansion followed by further decline; an expansion may include a short period of contraction followed by further growth."  The Big Picture than looked at the St. Louis Fed tracking the recession indicators page and found the indicators clearly in conflict with each other.

Credit Writedowns cited the above article and then carried it further by going through a series of NBER member comments and statistical indicators throughout last year which were used to argue the recession is over.  Ed Harrison also continues his criticism of economic multipliers.  Despite when the recession may have technically ended or whether it is a real or fake recovery, Credit Writedowns still continues to point to a depression with a small "d" and a coming double dip.

Many commentators and economists have been warning about the possibility of a double dip just as we have for many months.  At the very least, given the over valuation of the stock market, we have yet to see a healthy 10% correction from this March 2009 rally which would shake out some of the over valuation.  A double dip is a 30%-50% correction. 

As we have reported on the Radio Show, there has been speculation the Fed or U.S. Treasury may be buying S&P futures each month and selling them each month which would inject a large multiple amount into stock market equity.  This began with a Trim Tabs report that could not account for all the sources of money invested in the stock market beginning with the March rally.  If the Fed or Treasury were buying equities or futures contracts to boost the market, this is not illegal.  At the same time, it has also been noted that there has been an informal 1989 agreement the Fed, banks, and stock exchanges to buy stock if there appears to be a problem.  We have commented that the March 2009 rally has moved forward without apparent reason on large volume increases towards the end of the trading day which do not appear normal.  We have also commented that this rally has been used by the banks to raise capital through debt and stock issuance.

It is now being speculated that the Fed is timing MBS purchases with options expiration week each month.  This actually appears to be a reasonable market timing method and not a manipulation.  Its primary impact will be when The Fed begins to sell MBS and how that will affect the market.

Of more concern, one Treasury trader has observed that there is a very well organized buying surge of U.S.Treasury denominations, driving the price up,  2 weeks to 1 week prior to the Fed making an announcement it would be buying that denomination at the inflated price.  The question is this front running and, if it is, who is doing it?  Is it a Fed tool to increase the price of Treasury denominations or is someone trading on illegal information?

As we have been reporting, there are a variety of unusual and repetitious market activities beginning with the March 2009 rally that have market analysts scratching their heads and trying to find rational explanations.  It makes this "bullet proof" rally all the more weak in a rational market context.

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