In Bed With Fed

Markets trying to breakout of a trading range that has had the feel of a rally but simply more of a transactional spin to it. The big banks which used to be big brokerage are arbing the welfare elements from the G and those conditional opportunities that leverage brings in the forms of informational edges and transactional income. Both Goldman and JP Morgan, each having taken $10 billion and $25 billion respectively, are doing well as cousins of the Fed, their prowess as traders contingent of being wired directly to the inside and taxpayer cash.

Credit Value Adjustments

Spinning straw into gold has hit bank financial reporting. Earnings of the major banks reflected changes in income by use of Credit Value Adjustments. Believing any data from Citigroup or Goldman is much like the old Wood Allen joke. A man speaking to a doctor confesses, "Doc, my brother is crazy, he thinks he's a chicken. The doctor says " why don't you turn him in?" The man replies, "we would, but we need the eggs." Here is how Citigroup needed the eggs as reported by Eric Dash of the NYTimes;

"Citigroup posted its first profitable quarter in 18 months, in part because of unusually strong trading results. It also made progress in reducing expenses and improving its capital position.

But the long-struggling company also employed several common accounting tactics — gimmicks, critics call them — to increase its reported earnings.

One of the maneuvers, widely used since the financial crisis erupted last spring, involves the way Citigroup accounted for a decline in the value of its own debt, a move known as a credit value adjustment. The strategy added $2.7 billion to the company’s bottom line during the quarter, a figure that dwarfed Citigroup’s reported net income. Here is how it worked:

Citigroup’s debt has lost value in the bond market because of concerns about the company’s financial health. But under accounting rules, Citigroup was allowed to book a one-time gain approximately equivalent to that decline because, in theory, it could buy back its debt cheaply in the open market. Citigroup did not actually do that, however." Full Article

The banks and the markets want to believe and with the stress tests coming up on May 4th, an all out effort is being made to spin the accounting.

Pump and Dump Week

Indexes have continued to find modest pricing and short covering in sadly thin advances. While the numbers look strong in terms of percentage gains , the technical price characteristics are dismal. This week has all the elements for a 'pump and dump' top as professionals begin to liquidate, preferably on new highs, portions of trades accumulated over the last four weeks. Bulls who have successfully been fighting off repeated attempts to break these markets recently will roll over as the big dogs begin to exit.

For all the praise given to the efforts of Geithner and Bernanke, it is clear the end result will be the healing of banks/insurance with little success in tackling the economic stresses of the general population. They will still be stuck with the losses of a generation with little upside. But what is new. Whether it be Republican or Democratic power thrones, they always end of up serving the same vested interests which are in the pants of those less influential souls who are stupid enough to believe this time will be different. It is the same trickle down idiocy wrapped around the flag promoted years ago which resulted in real gains for a few and a declining standard of living, with increasing debt, for the rest.

Same As It Ever Was

Markets will try to move ahead this week in the midst of earnings reports and other data. The liquidity stew is brewing thinly traded ranges created in large part by the panic liquidations of Feb and March. As posted before, it does not take much to rally these markets as pricing appears. Collective technical price action remains bad and will result in some sharp down drafts that are scary, but probably not sustainable.

The Bernanke/Geithner plans are adding all the elements needed to enrich the wired ones, which is of no surprise. Like Greenspan before them, they ultimately dance to the crying choruses of banks, brokerage houses, and managers. While this time the Fed/Treasury intervention seemingly has greater urgency and enough massive force to kill the economic demons, all hope what is going on is not just more meaningful enrichments for the same financial fraternity whinning melodies to which Greenspan danced.

Ugly Rally

Market rally is seeing the buying of weak hands by those not willing to pick a bottom earlier in the last week of Feb and first week of March. This is exacerbated by the lack of selling environment and news of easier mark to market rules for banks. These types of rallies are ok when no selling is the market makeup, but could become a falling knife if liquidation programs appear. Price internals we watch remain horrible and have not been this bad since last August. Unemployment numbers on Friday will provide volatility enough for everyone.