As World Markets Rally, A Fog Of War Envelops Trading

When the stock markets around the world raced down earlier this month, there was some sense to it. The credit and liquidity troubles were real. Corporate earnings became progressively troubled. Layoffs showed clear signs of accelerating. Housing values continued to fall and mortgage default rates got worse.

To put a point on it, there were ample reasons for the markets to become undone and for panic to reign.

Over the last two days, markets in Hong Kong and Japan are up almost 20%. In just two days.Only two.

The US markets rose close to 10% in a day earlier this week and have held most of those gains. No one would be shocked if the market goes higher over the next few weeks. The momentum is in that direction. Earnings season is almost over, at least for the companies that count. This means the headlines will not be taken up with corporations cutting forecasts for the fourth quarter and next year.

Looked at another way, the weight of bad news in the economy has not been lifted. If anything unemployment will be up for the next several months. The best analysts think bank earnings will get worse and that financial companies may have to raise more money. The federal government is looking at a plan to underwrite three million mortgages which means that there are at least three million mortgages that need to be salvaged, not on the basis of the value of the homes or ability of homeowners to pay, but because it will help the economy by bringing stability to the housing market.

The conventional wisdom is that the stock market trades on the picture of what Wall St. thinks the economy will look like two quarters from now. That means a judgment about the latter part of the second quarter of 2009. If the credit crisis is over that soon, it was no real crisis. If earnings and employment rebound in 180 days, it was not much of a recession if it was one at all. If retail sales and car sales come flying back, it will be evidence that the consumer’s balance sheet has righted itself and the average citizen is flush again with money from his home equity loan and six credit cards in his wallet.

The rally is all the rage now. The DJIA might even retake the 11,000 level, or maybe pop up to 12,000. It is not far from there to get back to the all-time high.

US markets could rally a total of 20% this week. It will be almost impossible to say why.

Douglas A. McIntyre