The Dance of the Big, Round Number

As expected, the “dance of the big, round number” is underway, with the Dow flirting with 12,000 all week, plunging under it, bounding over it, bouncing off of it, and then landing on it to end the week. My view is that a stock market rebound is likely over the next couple of weeks, but this view is based on charts and momentum and liquidity, not economic fundamentals, which are deteriorating.

The macro view here is that much of the value to be found and prices to be seen in various credit markets and the stock market is really just a reflection of the belief that the system will be bailed out. “Too big to fail” is now an operating maxim applied equally to the next Lehman wanna-be and Greece. All of the big players took appropriate notice of the actions of the monetary and fiscal authorities to prevent big institutions from suffering the fate of their poor risk management practices and investment decisions.

The faith that nobody (of any substance) will be allowed to fail is now a pronounced feature of our markets and partially explains the elevated prices we are currently seeing in nearly everything. Another major component of these elevated prices is the excessive liquidity that the Fed, ECB, BOE, and Japanese central bank continue add to the markets

However, we are now less than two weeks away from the end of the second round of quantitative easing (QE II), and everyone should be concerned with the impact that the loss of this liquidity will have on various markets. I think the early warning signs are already in place.

First, the fundamentals.

More Economic Weakness

Consumer spending was surprisingly weak in May, to some economists, at any rate:

Spending Drops as Car Sales Decline

June 15, 2011

U.S. consumers tapped the brakes in May, cutting overall spending for the first time in 11 months. But given recent signs of economic weakness, the picture was better than many analysts expected, with consumers stepping up outlays on restaurant meals, clothing and other items.

Last month’s drop in sales was driven largely by a 2.9% decline in auto sales. That’s in part due to car dealers halting incentives and increasing prices in the face of a vehicle shortage caused by the disruption of global auto-supply chains after Japan’s earthquake and tsunami.