24/7 Wall St.

Anyone looking at the stock market over the last week would assume that the global recession is over, the liquidity crisis which has ruined the banking system has been addressed, and consumers are suddenly flush.

Five days ago, the DJIA traded at 8,980. Yesterday, it hit 9,625. A 7% improvement. At that rate, the index will be back to its all-time high within six weeks.

Some analysts would attribute the run to the anticipation that Obama would win the presidential election. If so, he should be congratulated twice.

The other rationale given for the sharp trading up is that lending between banks is getting better and there is a real anticipation that the "freeze" is the credit markets is coming to an end. The Treasury and its counterparts oversees have made their magic, and its has worked.

The trouble with looking for that pony in a pile of excrement is there is no little horse in it. Fed data indicates that banks are tightening lending to consumers and businesses. Credit card limits are being slashed. Access to capital is actually getting worse, except for among banks.

Banks are also in for a keelhauling like nothing they have seen. LBO debt is about to begin defaulting at record levels. Private equity firms took on more debt than most companies that they bought can bear. The money center banks that put up that loot are going to be left with the check. Write-downs from these transactions could go into the tens of billions of dollars.

Citigroup (C) admitted in an SEC filing that credit card balances and derivatives are starting to hit the same sort of shoals that mortgage debt did. Losses from that trend may approach those from mortgage failures

Large financial firms probably did not get enough capital from the Treasury to cover these fool’s errands. The entire financial industry may have to hit the "reset" button between now and year-end. The federal government will be faced with putting more capital into the system.

There is every reason to believe that unemployment could be over 7% before the end of the year. If companies understand that they are facing a once-in-a-lifetime economic event the figure could move to 8% or 9% fairly fast. That is three million jobs gone from September on. No one watching the news can miss the daily cuts at large corporations. That must be worse at small companies where access to capital is nil.

There is no contradicting what has happened to the stock market recently. The smell of optimism must have been in noses of traders.

Probably just cheap perfume.

Douglas A. McIntyre