Don't believe in the Fed

Market Commentary:

Investors took some profits today and postured ahead of Thursday’s bank stress test results and an expected poor jobs report due out on Friday. The Fed was out stumping today reassuring everyone that a recovery was just around the corner. Excuse me if I am a bit skeptical of their rosy assessment.

I am just about convinced that the Fed is a very good contrarian indicator. The harder they try to convince, the more we need to be on the look out.

I hope you understand I am trying to do right by you and that I deeply care about giving you good advice. My judgment is not always right and I fully acknowledge I have biases – as you well know.

I get a bit wacky in my ranting and railing, especially when it comes to what I see as outright market manipulation and deception.

There are people out to steal your money. Deception has always been part of this game and if you never figure this out, you’ll never be able to get your assets to work for you. You’ll lose your wealth to those out to steal it from you, who work by a whole different set of rules than you may have.

Ben Bernanke spoke today, attempting to reinforce the idea that the economic trough is in and to expect positive growth by the end of the year.

" We are hopeful that the very sharp decline we saw beginning last fall through early this year will moderate considerably in the near term and we will see positive growth by the end of the year," Bernanke said to the Joint Economic Committee.

Should we believe him? I am not ready to trust this guy.

Bernanke has consistently erred on the sunny side in this recession. Two years ago he downplayed the risk of housing and the threat it posed to the economy. He knew what was coming down.

As late as June 2008, he fostered the idea along with Henry Paulson that the U.S. was heading for a “soft landing” and would avoid recession. Hey, the economy is healthy, remember that?

“ Several months later, the slump was acknowledged to have started in January 2008, but we were supposed to see renewed growth by mid-2009, with unemployment peaking in the eight-to-nine percent range. A quick “shovel-ready” stimulus bag was supposed to set us back on the road to prosperity.

In January, recovery projections were pushed forward to late 2009. Today, the consensus is for a mid-2010 recovery, with unemployment peaking at just over 10 percent. Clearly, the mainstream has struggled to catch up to reality for well over one year. What are the chances that they finally have it right this time?” Seeking Alpha

Had you taken the bait on any of these rosy forecasts by the Fed, you would have been caught in a bear market trap.

Here is what I see wrong with this rosy scenario.

1) The money supply is dropping. Check it out for yourself.

So why is the money supply dropping and how is this going to create a robust recovery?

2) Housing prices are still falling. Check out this article from Business Week which points out that housing prices could fall another 10%.

Yes, pending homes sales are rising (lots of short sales and foreclosure distress sales), but it is falling housing prices that create bankruptcy and bank losses. How will another 10% drop in housing prices create a robust recovery in the next six months?

3) Unemployment is still accelerating to the upside and is expected to climb over 10% or higher in 2010. Outside of the good old USA, unemployment is now 15% to 20%, comparable to the Great Depression figures. If more and more people are still losing their jobs at this steady pace, why should we believe the consumer is going to turn this economy around soon with robust buying again?

4) Keep an eye on what the professionals are doing, i.e., insiders and CEO’s. This article tells us short interest for the financial sector is rapidly jumping. Given poor volume and rising short interest, going into May isn’t exactly a bullish signal.

The stock market is not out of the woods as our long-term indicators have shown.

I think the biggest danger is getting sucked into the Fed’s web, jumping too early and getting caught in a stampede out of the market when the herd realizes they are being set up again. I know that may be a skeptic’s way of looking at things, but I think we need to be skeptical as long as long-term indicators remain negative.

The stock market anticipates and then it adjusts to reality – for every action, there follows a reaction. I don’t know why we should expect something different right now.