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The Wepner Rally
Tuesday evening - August 3, 2010
I need to pull out and use (or re-use, I don't remember) one of my old boxing metaphors, and call the current market the "Wepner rally." Old-time sports fans among you will remember Chuck Wepner, "the Bayonne Bleeder," an opponent of heavyweight champ Muhammad Ali in the latter part of his career. The relatively unknown Wepner took a brutal beating, though he knocked Ali down at one point with a body shot. No matter what the champ threw at him -- and he treated Wepner like a punching bag -- the courageous fighter was able to hold on nearly the entire fight, finally succumbing in a technical knockout in the 15th round. Such was Wepner's courage and refusal to surrender, no matter how unmatched, that a young Sylvester Stallone -- sitting at ringside -- was inspired to begin writing the screenplay for Rocky.
Now, I'm not sure how Stallone would view the current stock market rally; but, like Wepner, it's getting hit with everything, but refuses to go down. Virtually across the board -- manufacturing down for the fourth month in a row, home sales down dramatically, factory orders down, consumer confidence down, personal incomes and spending flat, and the list goes on -- the markets are getting hit with all manner of bad economic news. Stocks have had their knees buckled a time or two. But they're still standing, seemingly holding out their chin to a badly deteriorating economy and asking, "Is that all you've got?" Yet, like Wepner in the late rounds, the blood is flowing. The face is puffy. The legs are rubbery. It's only a matter of time.
As I comment a bit in the new issue we'll be posting very soon to the Members Page, the bond market clearly seems to understand what's going on right now. Those high-frequency traders and speculators -- armed anew with a cheaper dollar and ample liquidity, and able to run stocks up for the moment with little of their own money -- do not. This silliness will end again, and abruptly so. The only question is when.
Those willing to loan Uncle Sam money for two years at record low yields (now at well under 0.6%) or even for 10 years at 2.9% now, understand that the deflationary undertow unleashed in a big way over the last 2-3 years not only hasn't abated, but is gathering force anew. Such an environment will make mincemeat out of most corporate profits going forward, now that the largely stimulus-induced sugar high for the economy and markets is wearing off. Sure, the Fed will keep its word and give us Q.E.-2 (and I don't mean an ocean liner, though a whole fleet of them might be needed, together with Ben's helicopters, to haul all the new cash.) But the coming pump-priming will do even less this time around; after all, most everyone is still trying to DEleverage, not leverage anew.
As I also write in the new issue, the policymakers' intensifying war against deflation will likely mitigate the downside danger for stocks, and keep them in a broad trading range for an extended period of time. But there will be an upper end to that range as well; and we're darn close to it, if not right at it.
Two events immediately ahead of us will determine whether it's time for the Wepner rally to finally be mercifully ended by the referee. The first will be this Friday's employment report for June. Traders are bracing themselves for a net decline in employment of around 100,000, due to most of the remaining census workers from the Spring getting their walking papers. Within the overall number, payrolls less those jobs lost due to the census are expected to be UP by a range of 50-70,000. This doesn't begin to approach the job creation threshold needed to turn things around meaningfully; but it's possible that a number that meets or exceeds those expectations could keep the Wepner rally on its feet a bit longer.
Next week will bring us one of the more interesting Federal Open Market Committee meetings in quite a while. Chairman Bernanke, St. Louis Fed President Bullard and others have raised expectations that something will be said or done next week to indicate that the central bank has "the kitchen sink" at the ready, in an effort to slay the deflationary beast at our doorstep. I will be most interested to see how traders react to what comes out. By rights, as I warned months ago and as we have seen at least some in the recent past, the fact that the central bank cannot raise rates -- and may now have to resort to new efforts to prop things up -- should be taken as very bad news by investors. We'll see. But I am increasingly of the belief that we're in at least round 14, if not at the beginning of the final round, of the Wepner Rally.