About Today's Rally

What a rally today - the biggest percentage gain in the last few days. I hope things are finally turning around. The fundamentals of the market seem to be changing, which could make this a real rally. Vikram Pandit's letter stating Citi is profitable is good news. I heard a ton of "professionals" (who have been nothing but wrong with predicting the market so far) saying that the numbers are skewed and write offs haven't been taken yet, blah blah etc... and that Citi is not doing well. In my eyes, the fact that Citi is actually making a profit, whether or not they still have to take write offs later on, is excellent news. Period. No excuses. Vikram Pandit is not a fool, he knows Citi shareholders have been disappointed and I don't think he is dumb enough to  come out with a statement like that unless he truly felt Citi's future is looking brighter. Maybe the worst of the banking industry's problems are behind them. 

Now, also announced today is the idea of modifying mark to market accounting rules and the reinstatement of the uptick rule. Both are excellent news for the financial sector. The uptick rule will stop bears from driving down stocks for no reason. And modifying the mark to market accounting rules is going to give banks a hell of a lot healthier asset base. There is a hearing on mark to marketing on Thursday which will be extremely important.

Next, AT&T announced it is hiring 3,000 workers. That is right, HIRING! I know they are planning to layoff something like 12,000 workers this year in their land line business, but the fact that they are hiring workers in other businesses is a bullish sign. Will unemployment finally slow down?

Tomorrow is going to be key. I wouldn't be surprised if we gave back some of the gains of today. That is to be expected as people are going to take profits after today's rally. However, if we don't drop too low, or stay flat, I think that is a bullish sign. I think we will have a rally on Thursday because of the mark to market hearing. Of course, we could see a huge drop and give back all  of today's gains and the bears will still be in control. We will have to wait and see, tomorrow is going to be very interesting and critical.

Also, a few days ago the president of the Richmond Fed Reserve, Jeff Lacker, told CNBC that people would be pleasantly surprised with the bank stress tests. I think this is a hint that investors are going to be surprised that banks are actually in better condition than everyone thinks. When the bank stress test results finally come out, it will be a fundamentally positive move in the market and I expect a rally from it.

Have The Markets Bottomed?

It is premature to say that we have bottomed after one rally. For all we know we could see the markets plummeting again tomorrow. But it is worth mentioning some news. Yesterday Obama pointed to stocks, while not taken as a serious reason to buy equities, it did show that maybe the White House is finally looking to stocks and considering how they are doing. Without a doubt, the downfall of stocks in the past couple weeks has been attributed to a series of unfriendly investor news set out by the White House. But maybe, just maybe Obama is beginning to realize what he says and the actions of the government really move the market. Obama wants to fight for main street and lately it seems like he doesn't care about the stock market... but it is time to realize that main street has their retirement and savings in the stock market. A drop in the stock market seems like only wealthy Wall Street fat cats are losing money, but it is really main street that is getting hurt. If Obama has realized this, maybe we can stop seeing a loss in stocks due to government action.

From a technical standpoint, which I rarely focus on, it seems that we touched the level of 700, broke it, but now we have rebounded. It is important to keep in mind that when discussing market levels, you do so in ranges. For example, instead of giving an S&P level of 648, you would acknowledge the range of 645-655. So though we dipped below the 700 point on the S&P, I don't think we dipped below the range. To me that is much more critical than just a single point. We touched the range yesterday, and shot back up today. So in my eyes, we still held that 700 point level. 

The government has also started work on setting up a market for banks to sell off their toxic assets. This is critical. In my opinion, the biggest factor preventing us from moving on from the banking problems is that we don't know the value of their toxic assets. By setting up a market for the toxic assets, we will soon be able to fix this problem and move on. The government also outlined details about how the TALF program, which basically gets lending going in the small business, education, credit cards, etc... What I like about both these programs is that it is finally tapping into private equity. Private equity firms will be involved in setting the prices for these different securities. This is going to be well received by the markets because finally the government is tapping into private equity, which many investors see as the way to get credit and investments flowing in the economy, through private equity, not government money.

The next big thing to move the market is going to the be unemployment numbers on Friday. Now, more important than the actual number, is the reaction to the number. Now a less than expected figure in unemployment would be great news and will surely send markets rallying. But a worse than expected number is not necessarily a bad thing. If we get a worse than expected number, and markets don't tank, to me that will be further evidence that we have bottomed. If horrible economic news can no longer move the market, than we can agree that the market has priced in the worst of the news and does not have anywhere lower to go. If the unemployment number is bad and the markets tank... well then we will be having this discussion about a bottom some other time.

What Happened To The Rally?

Today demonstrated once again that the market does not seem to be able to sustain a rally. Lately, every time we see a rally, the next day the Dow Jones comes back with a 100+ loss. If you are trying to trade stocks, hoping to catch a rally, you probably won't find any luck. Don't invest in stocks because you simply want to trade them, invest in the companies they represent because you think they have business models that will be able to last through the recession.

I wrote about how investors should stay away from Kraft in a post last week because people would flock to generic names over brand names. And surely enough, today Kraft announced that it missed its earnings and the stock took a pretty big hit. Not to mention its poor earnings sunk the market. I see so many "analysts" telling people to invest in recession proof stocks like Kraft, but I want you to be aware, that just because they make food doesn't mean they are recession proof. Not only do you need to look at what their product is, but you need to keep in mind the prices of their products compared to their competitors. Kraft sells macaroni for a much higher price than a generic grocery store brand of macaroni. Sure, in a recession people are going to flock to macaroni, but not the brand name ones.

So when you go to invest in recession proof stocks, remember not all of them are equal, go for generic brands instead of brand names.