Consumer Spending Head Fake Fools Market

The supposed restoration of the American consumer to his throne was a fluke driven by Cash For Clunkers, as noted here:

Auto dealers benefited from the Obama administration’s incentive plan, which ended this month, while retailers such as Kohl’s Corp. and J.C. Penney Co. struggled to lure customers shaken by mounting job losses. Spending gains aren’t likely to be sustained as incomes stagnate and households pay down debt, casting doubt on the strength of the economic recovery.

Despite the distortion of the auto subsidy spike, investors have still bid up stock prices at the behest of Wall Street. This market is levitating on the basis of pulled-forward automotive purchases that weaken both future car sales and current retail spending. Investors, be warned . . . you're betting on nothing.

Bernanke Comment Spawns Dead Cat Bounce

The market coughed up a cute little gain today. Traders are so desperate not to lose their nest eggs in this depression that they'll seize on any idle comment as a bullish sign. They'll even convince themselves that an upturn is possible this year:

Bernanke told Congress on Tuesday the recession might end this year, and that regulators aren't planning to nationalize banks.

I am under no such delusions. That's the advantage of being beholden to no portfolio but my own. Both of Helicopter Ben's assertions above are very likely false.

First, the recession has further to run. Home prices are still dropping like stones. Consumer confidence continues to plummet.

Second, regulators probably do have some kind of plan to nationalize banks. They just can't talk about it yet. They're still putting the finishing touches on the Treasury Secretary's non-plan to shore up banks by, uh, you know, throwing another $60B at AIG, and, well, you can guess the rest.

I bought more gold this week. I know people who think gold is expensive now. They'll be even more convinced it's expensive when it's over $2000 by this time in 2010 (IMHO).

Earnings, Not Credit, Scare Bears Away

Some market analysts are pinning their hopes for a renewed bull market on historical analogies, according to this:

Patterns of previous crises in the past half century suggest interbank lending rates tend to reach extremes about two months after a major financial shock, some note. In the past week, incipient signs that credit conditions are easing -- albeit with the help of colossal central bank liquidity injections -- are starting to conform to this pattern.

Traders are counting on a rise in sentiment to push stocks higher when economic fundamentals are still clearly deteriorating. Wall Street expects excess liquidity and wishful thinking to inflate another asset bubble, just as they did after 2002.

Wait a minute. "This time it's different." It's different because U.S. households had a debt service ratio of 13.85% in Q208, according to the Fed. Paying down this debt ratio even to the 10-11% levels of the 1980s requires households to spend less than they earn. This huge hit to consumer spending will soon make its appearance in disappointing corporate earnings reports:

With little question the U.S. is in the grips of a recession, investors this week will lean on a stream of earnings and economic reports to help determine exactly how prolonged and painful the downturn might be.

There's certainly been fresh evidence the credit market has begun to thaw. But, that alone might not be enough to restore confidence in the stock market at a time when investors are clamoring for stronger signs of a bottom.

Good luck finding a bottom. We're just not there yet.

X Minutes to Midnight

Mr. Market had another one of his dead cat bounces today. Oil prices aside, this market can't rely on anything but hedge funds' program trades to generate a direction.

As long as these high-speed trades are based on price action, it's hard to say just when the true health of the U.S. economy will be priced in to the stock market.