The Dow Jones Industrial Average has bounced an astounding 30% from its March 9 low of 6547. Is this the dawn of a new era? Are we off to the races again?
Only a fool predicts the stock market, so here I go.
I’m not so sure. Only a fool predicts the stock market, so here I go. This sure smells to me like a sucker’s rally. That’s because there aren’t sustainable, fundamental reasons for the market’s continued rise. Here are three explanations for the short-term upswing:
1) Armageddon is off the table. It has been clear for some time that the funds available from the federal government’s Troubled Asset Relief Program (TARP) were not going to be enough to shore up bank balance sheets laced with toxic assets.
On Feb. 10, Treasury Secretary Timothy Geithner rolled out another, much hyped bank rescue plan. It was judged incomplete — and the market sold off 382 points in disgust.
Citigroup stock flirted with $1 on March 9. Nationalizations seemed inevitable as bears had their day.
Still, the Treasury bought time by announcing on the same day as Mr. Geithner’s underwhelming rescue plan that it would conduct "stress tests" of 19 large U.S. banks. It also implied, over time, that no bank would fail the test (which was more a negotiation than an audit). And when White House Chief of Staff Rahm Emanuel clearly stated on April 19 that nationalization was "not the goal" of the administration, it became safe to own financial stocks again.
It doesn’t matter if financial institution losses are $2 trillion or the pessimists’ $3.6 trillion. "No more failures" is policy. While the U.S. government may end up owning maybe a third of the equity of Citi and Bank of America and a few others, none will be nationalized. And even though future bank profits will be held back by constant write downs of "legacy" assets (we don’t call them toxic anymore), the bears have backed off and the market rallied — Citi is now $4.
2) Zero yields. The Federal Reserve, by driving short-term rates to almost zero, has messed
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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