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Stock Market battle ground

                Wow, market is finally getting exiting again.  The previous 3 months have been a momentum driven recovery based on easy money policies and the promise by government to support the corporations and people that are too big to fail.  The bottom of the crash 6 months ago was in the week that it became obvious government was going to change the mark to market accounting rules.  Now again, like the credit bubble, we are approaching dangerous technical global trends.

                The Bullish case is that banks balance sheets have been repaired from levels of total panic to levels of stability.  They were able to raise enough reserve to ease investor’s fear of run on the banks.  Some banks were even able to pay back borrowed government money and interest.  Government programs such as cash for clunkers and tax rebates for buying houses stimulated the economy enough to maintain corporations that were in danger of failing to record profits.  The majority of corporations beat earnings easily and guided earnings higher.  The VIX is at low levels signifying that the market feels safe.  Trillions of dollars were printed to support the economy and for now it has worked.

                The Bearish case is that the system is more broken now than it was 1 year ago.  Bad banks and bankers have been rewarded for creating the greatest modern financial disaster in history.  Naturally, this will only lead to more unethical behavior by bankers.  Companies that were too big to fail got merged with companies that are now even bigger to fail.  For example, the FDIC doesn’t even have the reserve required to bail out 1% of bank of America.  Questions remain about corporate earnings results.  Many companies that beat earnings did not beat earnings because of an increase in revenue; they beat earnings because of cost cutting efforts and by not marketing down assets.

                The numbers however indicate that the global economic system is once again in the verge of collapse.  The irony is not that it will be caused by deflation of assets in the US, something the Fed greatly fears, but hyper inflation in emerging markets.  The dollar has lost value against foreign currencies while their markets have gone up over 50% in value from the bottom.  This means that for every dollar that you transfer into another free trading currency and invested in that countries equity, you would have had a return incredible return in 6 months.  Now the problem begins that this new wealth will now be competing for commodities that are priced in dollar.  The demand for the commodity will inflate the prices of the goods that it produced.  As long as commodities are priced in the USD, the demand for the dollar will ALWAYS increase with global inflation.  Based on this theory, we are expecting the dollar to strengthen when emerging markets correct and in addition bring our own equity markets into a correction.  The only danger to the US economy is if the world starts to diversify away from the USD.

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