Bad News Is Still Good News: Weekly Stock Market and ETF Preview: October 10, 2010

Last week was all about “bad news being good” and the Fed and QE2.  The news was almost uniformly bad, and regarding QE2 the questions were about how much and when and how much is already priced into the markets? 

Everything else including mixed earnings reports, “Foreclosure Gate” and an almost unbelievably bad employment report on Friday was overshadowed by the promise of more “punch in the punchbowl” from Dr. Bernanke and his cohorts at the Federal Reserve. 

In a continuation of the “bad news is good news” theme, markets were able to rally up to significant resistance and remain vastly overbought while gold continued its tear and the dollar remained under attack. 

The only question that seems to remain is whether or not Dr. Bernanke will be able to offset the ongoing torrent of negative news and keep our economic ship afloat. 

Looking At My Screens 

On the technical front, markets certainly remain in dangerous territory.  RSI is at levels that typically precede significant corrections and prices are up against the May highs and significant resistance there.  We also see stochastic at overbought levels and investor sentiment at excessively bullish levels.

Contrary to prevailing popular opinion, stock prices can go down as well as up. 

The View from 35,000 Feet 

On a fundamental level, “bad news continued to be good” as the unemployment report was a disaster and “Foreclosuregate” threatens to freeze the entire real estate market and even threaten the financial system for some unknown period of time. 

On the employment front, the economy shed 95,000 jobs instead of a projected small gain and this fact alone has led to the market expecting a new round of quantitative easing coming out of the Feds next meeting.  The decline in non farm payrolls wasn’t the only bad news as U6 rose to 17.1% from 16.7%, indicating a higher level of underemployment than last month even as the overall unemployment rate remained static at 9.6%. 

There are now fewer people working in America than there were two years ago and for those working, the average workweek remained flat at about 32 hours, indicating no imminent change in hiring by companies. 

The other piece of almost unbelievable news was the announcement that many foreclosures are in jeopardy because they may not have been carried out correctly.  Allegations of fraud are flying and in response to the flap, foreclosures have been halted in many states including the suspension of foreclosure activities by Bank of America in all 50 states.  The crisis seems to be set to widen with the announcement that 40 states attorneys general are joining forces to launch an investigation into these allegations as early as Tuesday. 

This is a complex and murky issue but basically it seems to throw into question the validity of thousands of foreclosures that have taken place and present the possibility that this situation could literally freeze the foreclosure process for some unknown period of time. 

The ramifications go beyond a frozen real estate market in that it also could spread to big banks like Bank of America, JP Morgan and Citigroup which are highly active in this field and by preventing them from offloading these non performing loans from their balance sheets for some unknown period of time.  

Estimates of potential fines could range as high as $10 Billion in Ohio alone for one company being targeted by the Ohio Attorney General and one can only guess about how deep and black this hole might be. 

And finally, a couple of notes regarding QE 2 came from the President of the St. Louis Fed who said that its quite possible they could wait until the December meeting to initiate QE2 and a word of warning from the IMF’s chief economist who said on CNBC, “I don’t think we should fool ourselves.  We have used most of the monetary ammunition we have.”

What It All Means

So, all in all, this is a fine kettle of fish. 

The entire global equities market is betting that “Big Ben” can save the world yet again and that he’ll start in November.  Meanwhile we have a dramatically slowing economy that can’t generate even a small level of job growth and the potential for a massive implosion in the real estate and credit world involving a gigantic asset class, Residential Mortgage Backed Securities. 

I’ve said before that you can’t make this kind of stuff up and, unfortunately, that’s still true today as we face the beginning of what could be an almost irrelevant earnings season.

The Week Ahead 

Economic Reports:

Tuesday: 

1400:  FOMC Meeting minutes 

Thursday: 

0830: Initial Unemployment Claims, Continuing Unemployment Claims

0830: September Producer Price Index 

Friday:  

0830: September Consumer Price Index, September Retail Sales, October Empire Manufacturing Index, 

0955: October University of Michigan Consumer Sentiment

1000” August Business Inventories 

Earnings Reports: 

Tuesday: Intel (after close) 

Wednesday: JP Morgan (before open) 

Thursday: AMD, Google (after close) 

Friday: General Electric (before open) 

This weekend my young son and I drove to San Francisco to see Fleet Week and the air show with the Blue Angels as the final performance.  It’s a spectacular air show if you ever want to come to the City by the Bay in October as the planes perform over the Bay with the Golden Gate Bridge and Marin County headlands for their stage.

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Disclosure: SH, SEF, VXX, SPY Put Option

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