Is the 6-month Stock Market Rally About to End? By Bob Chapman

What is going to happen next is that the 6-month stock rally is about to end. It took everything the Fed could muster to accomplish this. As the market heads lower government, Wall Street and banking will have to contend with irate shareholders and retirees as well as owners of stock, life cash value insurance policies and annuities. This time when the market falls it isn’t coming back. The bottom on the Dow will be 2,600 to 4,200 if we are lucky. This time the financial system is in too deep. There can be no reversal. How can there be if the American taxpayer guarantees 90% of all mortgages, so that the legacy banks, as they are now called, can make ever more money.

Just to give you an idea of what government was up too in the second quarter, corporate debt rose marginally, but at half the level of the first quarter. Federal government debt grew at 8.3%, up from 4.9% in the first quarter. Annualized that is an increase of from 22.6% to 28.2%. Fed holdings of federal securities increased from $20 billion to $559 billion. How is that for monetization? This as mortgage debt contracted by $53 billion. Government and Wall Street say the recession is over, but polls show 86% of Americans disagree.

While all this transpires unemployment payouts worldwide are running out. Spain is on its back along with Ireland and Italy tells us that without a continuation of cash for clunkers there will be a disaster in the country. In the US car sales are expected to fall 40% in September. European sales are expected to fall by one million units in 2010. In the US banks’ lending has fallen 14% in the third quarter. It is like the 1930s all over again. This points out the fallacy of the G-20 of saving and increased consumption simultaneously. There is no mystery. Even though government lies about its statistics we can figure them out and the result is not good. The conclusion is the Fed and other European banks will have to partake in massive additional monetization to stave off a deflationary depression and it has already begun.

During this past week the Dow gave up 1.6%; S&P 2.2%; the Russell 2003, 3.1% and Nasdaq 1.8%. Consumers fell 1.1%; utilities 1.5% cyclicals 4.4%; transports 4.3%; banks 3.3%; broker/dealers 3.4%; high tech 2.8%; semis 1.7%; Internets 1.5% and biotechs 3.1%. Gold bullion fell $16.75, and the HUI fell 6.2%. The dollar index rose 0.4% to 76.74.

Two-year T-bill yields fell 7 bps to 0.87%; the 10-year yields fell 14 bps to 3.32% and the 10-year German bund fell 12 bps to 3.26%.

Freddie Mac’s 30-year fixed rate mortgage rates were unchanged at 5.04%. The 15’s fell 1 bps to 4.46% and 1-year ARMs fell 6 bps to 4.52%. The jumbos fell 1 bps to 6.17%.

Fed credit jumped $44.1 billion. Fed foreign holdings of Treasuries and Agencies increased $11.6 billion to a new record $2.854 trillion. Custody holdings for foreign central banks has risen 18.4% ytd, up $432 billion yoy or 17.9%.

Total money fund assets were unchanged at $3.483 trillion. Assets have declined $350 billion ytd, or 12.4% annualized.

M2, narrow money supply, fell $3.9 billion to $8.303 trillion. It is up 1.9% ytd and 7.6% yoy.

The unemployment rate for young Americans has exploded to 52.2 percent — a post-World War II high, according to the Labor Dept. — meaning millions of Americans are staring at the likelihood that their lifetime earning potential will be diminished and, combined with the predicted slow economic recovery, their transition into productive members of society could be put on hold for an extended period of time.

Original article by Bob Chapman

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