Market Rally Peters Out

This bear market rally has been a real head scratcher for K10.  While sentiment was incredibly negative at the end of last week and the market was "obviously" due for a bounce (which I can confidently say in hindsight,) it's still hard to fathom how quickly sentiment turned on the future prospects of the financial sector.  Remember last week, when everyone wanted to tar and feather Vikram Pandit and nationalize the banks?  All of a sudden, the fact that Mr. Pandit thinks Citi will be profitable (excluding those pesky and unimportant write-downs and credit loss provisions) meant that all of this nonsense about job losses and depressions was meaningless and everything was fine.  This prompted a near-doubling of Citi and Bank of America's stocks prices, and some fairly extraordinary moves higher in other financial stocks.

What to make of all of it?  And what is behind the crazy shifts in sentiment?  How is it possible that JP Morgan can be a $15 stock one day and a $24 stock a few days later without any fundamental change in the financial landscape?  Without any real resolution to the underlying problem of too much debt piled onto an economy whose fundamentals cannot support the burden?  Sure the bank CEOs are optimistic, but does anyone remember a year ago when all of these same clowns were uttering all sorts of "worst is over" crap that prompted Mock the Market to mock them relentlessly?

Maybe this time they really are right.  Maybe we've finally turned the corner.  I have a hard time believing it, since I still think the worst is yet to come for commercial real estate and private equity backed companies.  Many more banks will go under as the economic situation hits the fan and Sheila Bair will be calling the Fed and asking for a loan before summer, I'd wager.  I'm bearish on the REITs and insurers for reasons stated above.  I have no idea if our banks are insolvent, and enjoy reading all of the intelligent commentary on economic blogs that support either view.  My reluctance to buy bank stocks even at these levels is based on the fear that they might face the same fate as the UK banks, two of which are 75% owned by the UK government.  As I've stated before, it is a binary trade.  Given that possibility, it's hard to make a case for picking a bottom in any bank stocks.  Best just to wait and see if they make it, and buy other stocks which will benefit as the economy turns, assuming, of course, that you are dying to buy stocks.    

I tend to believe that much of the volatility we are witnessing is tied to short volatility positions on large derivatives desks that are forced to sell stocks at the lows and buy them at the highs.  This, along with short squeezes exacerbates the moves.  That is my best guess.