Bullgasm? Watch The Birdie!

So the NFP (non-farm payroll) comes in down only 3xxk instead of the expected 6xxk.

The futures go on a tear, up 15 and change at the peak.

Everyone’s playing "Green Shoots" again.

I have just one question, and its expressed in these two charts:

See that nice bullish flag on the right side of the chart?  It targets this level.

4.3%ish.

Now let’s talk about what this means.

It means 30 year mortgage money in the mid 6s – about 30% higher than Bernanke and the Real Estate market were looking for.

What does this do to valuations in real estate?  It slams them.

How do we get a real recovery without defaulting all the bad debt in the real estate market (both commercial and residential)?  There is only one way to try to, and that is to force down rates on a stable basis.

But, as I have repeatedly pointed out, you can’t do that when the problem is excessive debt, because risk premiums go up and as a consequence prices for bonds go down and yields rise – the exact opposite.

"Quantitative Easing" has failed to produce the claimed result – just the latest in a long (indeed, nearly unbroken) series of failures of Bernanke’s thesis.

The equity market today is trading on a GAAP P/E higher than at any time in the 1990s "Bull(shat)" market.  The claimed P/E ratios in the WSJ and elsewhere are on "operating earnings", which obscures charges and investment losses – as if money you lose in certain categories isn’t real (of course it does count!)

If you recall, the PPIP was the reason for the market rally off the bottom – the government was finally going to take all the bad assets off the bank balance sheets.  Really?  It appears that’s over:

June 4 (Bloomberg) — The Federal Reserve may not start lending against residential mortgage-backed securities under its Term Asset-Backed Securities Loan Facility, Federal Reserve Bank of New York President William Dudley indicated.

I said at the time the PPIP was announced that the only way it would "work" is if the banks were able to cheat – that is, bid on their own assets, thereby taking a known-size hit but exiting their positions, dumping them on the taxpayer.  The banks are carrying this stuff at or near par, and to recognize market value would render them all insolvent. 

But the FDIC has said "no cheating" – and as soon as Bair came out with that statement the writing was on the wall: No PPIP.

Unemployment increased to 9.4%, and if you look at U6 (my favorite) the rate is really 16.4% (!)  Those numbers come off the household survey, as opposed to the book-cooking games.

Now maybe you can tell me how we take an economy with 70% consumer spending, take 16.4% of consumers out of the spending force, add rising (rapidly!) long-term interest rates for mortgages (which will prohibit the banks clearing all that bad paper), shut down the PPIP and tell us all how with a GAAP P/E on the S&P north of the 1999 highs equity prices make sense.

They don’t, of course, but you have fund managers chasing the market.  If you’ve ever done it, you know how it usually ends for your portfolio P&L.  As for the banks, here’s a few comments:

Citigroup’s $1.6 billion in first-quarter profit would vanish if accounting were more stringent, says Martin Weiss of Weiss Research Inc. in Jupiter, Florida. “The big banks’ profits were totally bogus,” says Weiss, whose 38-year-old firm rates financial companies. “The new accounting rules, the stress tests: They’re all part of a major effort to put lipstick on a pig.”

Further deterioration of loans will eventually force banks to recognize losses that their bookkeeping lets them ignore for now, says David Sherman, an accounting professor at Northeastern University in Boston. Janet Tavakoli, president of Tavakoli Structured Finance Inc. in Chicago, says the government stress scenarios underestimate how bad the economy may get.

Watch out folks…..  Yeah, the market can levitate for longer than you can remain solvent if you’re short, which is a good reason not to get aggressive in that fashion.

But – if you’re a long-term investor, ask yourself this: We’ve risen 40% off the bottom.  How much more is there – really – given the above facts – and in which direction are the risks?

Disclosure: No specific positions material to the sectors or firms mentioned; short idiot fund managers chasing this spike.