Wednesday market update

The short sellers were scrambling to get out of short positions today as the financial sector exploded to the upside.

I mentioned this to you yesterday - we could see a short squeeze this week given the talk about relaxing the “mark to the market” rules.

Ben Bernanke discussed this in his comments today, suggesting that regulators need to examine mark-to-market accounting during financial crises.

In general, it is a good idea for banks to use mark-to-market. However, in periods of crisis, this accounting treatment can be misleading, he said.

I like Karl Denninger’s comments today, which explains in more detail the issues here.

Essentially, if the government relaxes these rules, banks will be able to revalue their balance sheets, just in time before the first quarter ends to save the S&P 500 benchmark from reporting negative earnings two quarters in a row.

Suddenly, Citigroup and Bank of America are now telling the world they are having a pretty good quarter, which sent these companies up dramatically today. Oh really!

It doesn’t matter whether there is a thread of truth in these comments as these banks are insolvent, but if they do relax the “mark to the market” rules, suddenly their balance sheets change. Suddenly, they show profits instead of losses.

The fact that they are talking about doing this just before the first quarter ends is just another example of smoke and mirrors, illusions and misdirection, which translates into mistrust. They can’t con there way through this.

The credit markets are worsening with the spreads widening dramatically again.

The Libor rate, which is what banks charge each other for overnight lending has widened to levels not seen since last December, suggesting banks are afraid of each other and each bank’s ability to hold on in this financial hurricane.

I want to draw your attention to something most people do not track.

This may come as a surprise to you but the money supply is falling! The weekly growth rate for M2 has dropped from +23.2% on 2/6/2009, to +20.1%, +16.6%, +13.2% and this week to +9.7%.

Could this be why the stock market and gold has been under pressure?

Gold fell another $22.1 an ounce today to close at $895.6, off a $110 an ounce in the last few weeks, peaking just when the Fed started cutting the growth rate of the money supply.

This could be the biggest reason why the major indexes couldn’t hold above their November lows.

This is a trend important to watch closely. Why would the Fed not want commodity prices ---gold, crude oil, food etc. climbing this summer? We all need to think about this one and what it implies with the economic wars being waged.

We certainly can’t expect much on the upside if M2 continues to descend!

Technically, we can argue for a short term bounce but nothing more.