The S&P 500 is up almost 60% since March. The Dow just had its best quarter since ’98.

Yesterday, the Dow slipped 29 points. Is the rally finally rolling over? Or is this a genuine bull market, just taking a pause?

If it is a real bull market it’s a funny-looking bull – one that is missing parts!

For example, corporate earnings are missing. P/E ratios are rising far above the corporate earnings that support them. This puts the market 35% overvalued on a cyclically-adjusted P/E basis, says Smithers & Co.

And if you look at it in terms of its “q” ratio – a comparison of capitalisation and replacement costs – the S&P is even more overvalued. As for emerging markets, “they’re off the charts,” says the Financial Times.

Another missing part is the consumer. This from David Rosenberg:

“ Consumer confidence not only surprised to the downside in September but the Conference Board index actually fell to 53.1 from 54.5 with both the ‘present situation’ and the ‘expectations’ component failing to build on the August rebound. Before we go any further on the details, let’s recall the following:

Just to put a 53.0 reading into proper perspective. It’s still recessionary… The only categories that actually saw their confidence level rise in September were the ones in the lowest income strata – less than $25,000 (their confidence rose two points). After all, they’re the only ones really benefitting from all the government intervention into the economy and the markets. ”

It’s not hard to figure out why consumers lack confidence: this bull is lacking in jobs, too. A worse-than-forecast report came in from ADP Employer Services yesterday. It said US companies cut 254,000 more jobs in September. And Reuters reports that jobless rate rose in August in all US cities.

The bull is also missing production. Another report told us that manufacturing activity in the Chicago area is still in recession. In the US as a whole, the latest numbers tell us that GDP fell in the second quarter – but by less than forecast.

‘Less than forecast’ might be good news if stocks were at an epic low. Instead, at current levels, it is much like a doctor who tells the family: “Thank God he got medical attention. He’s dead, but not as dead as he would have been without it.”

Another important part this bull market is missing is the retail stock market investor. Hey, this rally has no legs at all!

We have insisted – with no proof, up until now – that the small investor is no longer counting on the stock market for his retirement. He’s seen what can happen. At the low in March, adjusted for inflation, he was back to where he was 40 years ago. That is, in real terms, he had not made a dime from the stock market (aside from dividends) during his entire adult lifetime. We guessed that he was not buying stocks.

Now, here’s the evidence.

According to TrimTabs, only $2.5 billion (£1.6 billion) has gone into equity mutual funds in the last six months. Bond funds have attracted 13 times as much money as equity funds, says a Morningstar report.

“ US retail investors… have watched this rally from the sidelines,” the FT concludes.

Wait a minute. Someone is pushing up stock prices. If not the retail trade, who? We don’t know. Maybe hedge funds. Maybe institutional speculators. The pros have a different outlook.

If this rally turns out to be real, and they miss it, their jobs and reputations are in danger. If it turns out to be phony, on the other hand, they risk clients’ money. On balance… they are better off getting in than staying out.

But just as the pros jump like lemmings into equities… they could all scramble out fast. Give them a fright… and this rally is over.

Where might the fright come from? We can think of several possibilities. One is the housing sector. If repossessions begin to increase… and prices fall… even the pros may put two and two together. Likewise, a shocking unemployment number could cause them to connect the dots.

Another thing that may trigger a sell-off in the stock market: a sudden setback in China…

Today is a big day in China… it marks the 60 th anniversary of the communist rise to power. “The Chinese people have stood up,” said Mao, announcing the victory in 1949.

Then, over the next two decades, whenever the Chinese stood up… Mao shot them down himself. Mao’s long march to power was a huge setback for human political progress – if there is any. The man was a thorough scoundrel and a complete incompetent at everything, except getting power and holding onto it.

Every program was a disaster. When he set out to ‘liberate’ the masses, they ended up as slaves. When he set out to feed them, they starved. When he proposed to empower them with his “democratic dictatorship”, they ended up with bullets in the back of the head.

But 60 years later, the commies are still in power. China is still red.

And yet, thanks to the curious way the world turns, China’s economy is now freer and more competitive in many ways than the US. Go figure.

*** As economies age, more and more people become ‘rentiers’. That is, they get some special privilege… some inside angle… some conniving advantage. The latest numbers, for example, tell us that almost half of all households pay no federal taxes. They collect benefits – jobless benefits, food stamps, education, day care, health care, social security – without contributing to the system that provides them. Then there are the millions of households that pay taxes but receive a large part of their money from the government itself – employees, contractors, lobbyists, etc. Combine these and you have enough to win any election in the country.

But the welfare chiselers and food stamp cheats are small-time crooks. The big crooks go for billions. John Crudele in the New York Post:

“… September 18, 2008 [ US Secretary of the Treasury... Henry] Paulson placed his first call of the day at 6:55am, to Lloyd Blankfein, who succeeded Paulson as CEO of Goldman. It’s unclear whether the two connected, because Blankfein called Paulson minutes later.

“And then Blankfein placed another call to Paulson at 7:05am for what looks like a ten-minute conversation.

“After that Paulson called Christopher Cox, Securities & Exchange Commission Chairman, twice; British chancellor Alistair Darling; and New York Federal Reserve head (and now Treasury Secretary) Tim Geithner two times.

“Then Paulson took another call from Goldman’s Blankfein.

“It wasn’t even 9am yet – 30 minutes before the stock market was to open – and Paulson and Blankfein had already exchanged three phone calls.”

It pays to have friends in high places. That was the day the market learned of Paulson’s bailout proposals. Could Goldman have gotten word before others?

Hey, we’re not accusing anyone…

*** “I can’t make this work. It’s too hard. It’s too complicated. And there are too many other people doing a lot better stuff.”

Jules is free, white and 21 years old. His daddy’s rich (at least he would be rich if he lived in, say, Pakistan) and his mummy’s good-looking. But Jules is worried. He recently graduated from college and has decided to begin a career in music. He has begun a two-piece band, called ‘Royal Native’ and has produced an album. All who have heard it are impressed. But the challenge of turning a pair of talented young musicians into a going, moneymaking concern is daunting. Almost overwhelming.

“There are just so many groups doing similar things,” Jules continued. “They’re all on the internet, just like we are. And many of them are very good. And I don’t know how to distinguish what we’re doing from what they’re doing. We’re not really ‘better.’ And we don’t really have a unique sound.

“You can’t make a go of it on the internet alone. You have to perform. I can perform… but only the country/folk stuff. And that’s just not going to take us anywhere… because everybody does it. Our new sound is ‘techfolk’… it’s good, but it’s done in the studio… you can’t do it on stage. So you can’t perform. And if you can’t perform your stuff, you might as well give up because you’ll never get the ‘buzz’ you need to stand out.

“And there are so many things I just don’t know how to do… so much of this is marketing. I don’t know anything about marketing. And what can I market? You need something unique. We don’t have anything unique. We’re just trying to come up with good music… and that’s hard enough…

“I think I’m going to give up. It’s too hard. I’ll never be able to do it. Besides, all I really want in life is a house in the suburbs, a nice, blonde wife… and a job where I don’t have to work too hard.”

We had to pause and think. What to say to a young man who is just starting out… and who realises what he is up against?

Father-knows-best had this advice:

“Jules… look… you’ve got a long road ahead. This is no time to worry. You’re not supposed to know how things work… or how to get where you’re going. Life is a long hike. It is as if you were walking from Baltimore to Los Angeles. It doesn’t really matter which way you turn when you go out the front door. The important thing is just to keep walking. You’ll have plenty of time to correct your course.”

Until tomorrow,

Bill Bonner

Source: The Rally Rests on a Knife-Edge

Porter Stansberry explains the forces behind the current rally The Daily Crux

America is running out of rope The Market Ticker

The world financial system’s Achilles’ heel The Daily Reckoning

Roubini on a U shaped recovery Naked Capitalism

Larry Flynt calls for a national strike The Huffington Post

Look for an X shaped recovery Real Clear Markets

The risk of double dip recession rising Financial Times

What the stress tests didn’t predict NYT

It was a comment born of frustration. Richard was annoyed that on the very day he’d planned to phone First Direct about a mortgage, they pulled the rug from under him. Faced with a backlog of applications, the lender is refusing to take on new business.

Richard’s not the only ‘real person’ feeling the effects of the credit crunch. Britons everywhere are seeing their finances hit — and they’re resorting to drastic measures. Unsecured personal borrowing shot up in February, by £2.4 billion. To put that in perspective, it rose in January by just £900 million.

This is a symptom of the contracting mortgage market. Mortgage approvals have fallen by 40%, and there are fewer deals available. Last month there were 7,726 products on the market. Now there are just 4,794.

Consumers across the land are raiding the piggy banks, spending their future wealth to keep up with today’s rising living costs. Those without savings are borrowing to the hilt. A comfortable retirement is now seen by many as a luxury they can’t afford.

But one can’t do this forever. Soon the savings are gone, the credit cards maxed out. Those who continue to put something by — and who put it in the right investments — will come out way ahead in the long run.

Bernanke sticks his neck out… a bit

The thing about a recession is you don’t realise when it starts. It takes a few months before the figures are in and we can say “Look! Two consecutive quarters of negative growth. We’ve started a recession.”

So there’s always a bit of guesswork involved as to whether a recession has actually started. We’ve been seeing it in the US for the last few months. Are they or aren’t they?

One by one, investors, commentators and the man in the street come round to the idea that, yes, we probably are in a recession. In the case of the US, the Order of Realisation has gone something like this: nervous Wall Street investors, people who’ve already lost their jobs, sections of the media, more investors, some more of the media, politicians (in private), the mainstream media, most Americans, the rest of the world, the bloke who makes the sandwiches for our office, my sister’s cat, undiscovered life forms on other planets… and yesterday, at last, Ben Bernanke, chairman of the US Federal Reserve.

Well, almost.

In his speech to Congress, Bernanke stopped short of saying a recession had arrived, merely saying it was possible:

“It now appears likely that real gross domestic product, or GDP, will not grow much, if at all, over the first half of 2008 and could even contract slightly.”

I’m being facetious, of course, in suggesting the Fed chairman is really so far behind the curve. Privately I reckon he’s as worried as anyone. His position just won’t allow him to say so.

But now he’s done the next best thing, that surely can’t be a good sign.

“The empire is rolling over,” says my US correspondent Bill Bonner. “Now, in its advanced, decadent phase, the imperial government must provide bread — in the form of food stamps — and circuses — in the form of national party conventions, elections and foreign wars. The combination settles the public… and distracts them.”Bill tells me that food prices are up 9% in America, while house prices have slumped 11%. In Denver last year the average foreclosure rate was one in thirty-two. In some neighbourhoods today it’s one in eight.

Not a great time for investors with US exposure. But our resident market maven Frank Hemsley has been following all that money which is fleeing the States… and he’s hit on an interesting alternative to gold for those seeking some safety…

Check out the “Swissie”

Private bank Rothschild, based in Geneva, has seen its shares rise 12% this week, Frank tells me. The reason? Asian, Middle Eastern and Latin American investors seeking a safe haven from the US-led financial crisis.

But if you’re not lucky enough to have a Swiss bank account, you might want to consider their currency.

“The Swiss franc’s getting close to parity with the dollar, for the first time ever” says Frank.

Of course, there’s a risk that America’s economic problems and a weakening dollar could hit Swiss exports to the US. This could cause the Swiss to cut interest rates, which would temper any currency appreciation. But Frank reckons the risk is to the upside.

“Switzerland’s a traditional safe haven. The global financial turmoil could see the Swiss franc break through the one for one level in the not-too-distant future.”

Americans just won’t stop driving!

Some interesting, if not entirely surprising, news from our commodities desk, piloted by our Mr Commodities Garry White.

The Energy Information Administration (EIA) say US supplies of gasoline fell 4.5 million barrels last week.

“It shows demand has stayed strong even though we’re seeing record prices,” says Garry. “And let’s face it, compared with what we pay for petrol, they’re still getting a bargain!”

Despite the media bleating, Garry reckons they’ll get used to it. This demonstration of inelastic demand (i.e. unresponsive to price movements) bodes well for Garry’s oil plays.

Readers of Garry’s Smart Commodities letter could be sitting very pretty in the months ahead…

Time to “unblur” your view on Emerging Markets…

“Old structures are breaking down. New sources of economic power are rising. But our views are blurred by the whirlwind of markets.”

That’s the view of Robert Zoellick, president of the World Bank, who delivered his keynote address yesterday.

Helping us “unblur” our view and see through the whirlwind is our overseas investment expert Manraaj Singh.

“Emerging market shares have been hit badly since the crisis kicked off last August,” he told me this morning. But the long-term growth story is still hot hot hot!”

Indeed, while their markets have taken a wallop, investors remain confident. Debt issued by emerging-market countries tends to pay a higher yield than that issued by the US. That makes sense, as it’s perceived as riskier.

But here’s the thing: despite the turmoil, the spread on this debt — i.e. how much more it pays than US debt — has barely risen.

“This shows that investors don’t think that the current falls in emerging markets are going to lead to financial crisis,” says Manraaj. “You can’t really say the same about America… or the UK for that matter”.

Jérôme Kerviel sues SocGen — but still has time for Facebook

He may not be winning any Nobel Economics prizes, but rogue trader Jérôme Kerviel could be first in line for the Bare Faced Cheek award. This morning it was reported that he’s suing former-employer Société Générale for unfair dismissal. SocGen denies it, but if he goes ahead, it’ll be an interesting case…

Oh, and remember when Kerviel went missing, just after the story first broke? Ever the intrepid journalist, Garry White tracked him down on Facebook, and “poked” him. And Kerviel “poked” him back.

Sadly his profile’s not there anymore, but at least Garry has the memories…

Until tomorrow

Ben Traynor