A Gold Medal for Last Week's Bull Rally

It was beautiful. It was wow. It was unbelievably exciting. It was indescribable. It was beyond superlatives, and no, we are not talking about the spectacular display at the Beijing National Stadium. It was the bull rally last week on Wall Street, riding the back of falling oil prices and the reversal of the dollar.

The opening ceremony of the Games of the XXIX Olympiad was magical. The collective life force of 1.3 billion people that poured into the "Bird's Nest" had one objective; to make the world's viewers speechless. Mission accomplished. A gold medal for people of China; their repressive government...

The European Central Bank and the Bank of England, facing acceleration in the decline of growth, at just .2 percent in the 2nd quarter, left interest rates unchanged on Thursday, earning silver medals; two days after the FOMC did likewise. This unanimous decision indicates an acknowledgment that inflation is no longer the sole concern of central banks in Europe. With less pressure on the dollar, now, the meme of possibly lower rates later this year fired the starter pistol for the equity Olympics.

The DJIA advanced 302.89 or 2.65 percent on Friday to 11,734.32. The S&P 500 moved higher 30.25 or 2.39 percent for the day at 1,296.32. NASDAQ climbed 58.37 or 2.48 percent Friday to close at 2,414.10 for the week, the Dow increased 3.60 percent, on two 300-plus point rallies, the S&P 500 up 2.86 percent, and NASDAQ rose for the week 4.46 percent.

The implications of a stronger dollar include companies with major overseas sales and earnings may experience softer numbers in the 3rd and 4th quarters. Exporters will notice headwinds as well and a firmer dollar will aid job losses. The tradeoff is lower oil and gold prices unless the military action by the Russians in Georgia threatens the flow of oil in the region. Speaking of which, the U.N. Security Consul held an emergency session to discuss this potentially grave regional/international matter.

This runs counterproductive to the impulse of the international Olympics. In theory, bringing together the various nations of the world to participate in athletic competition allows an exchange of communication and diplomacy that can forestall hatred, mistrust, and warring. If you don't buy this scenario, then you might want to check out gold medal Harvard historian Niall Ferguson's multi-part PBS series "War of the World". It's a fresh and sobering look at how the 20th century began and how several conflagrations converged into World War II. Hopefully, we will avoid global destruction this century.

Consumers added $14.3 billion to their credit cards in June, $8 billion more than expected, while personal income rose .1 percent and personal spending rose .6 percent. Initial jobless claims increased by 7k; a 23k drop in claims were expected.

Apparently there are still a few free lunches left on Wall Street. Bronze medals go to regulators who pressured Citigroup (C), Merrill Lynch (MER), and UBS (UBS) into buying back, from thousands of high net worth retail clients, Auction Rate Securities. This Dutch auction creature that paid above money market rates, for awhile to customers anyway, crashed and burned in the great liquidity squeeze of 2007/2008. Only a money market is as safe as a money market. Every chance I got, I attempted to talk customers out of chasing these minor differences in yield. The risk to reward wasn't there. But, if you are a hog, don't be surprised when you are slaughtered.

More silver medal analysts are glomming on to the idea that the current downturn will be deeper and will last longer than previously expected. Many, many more believe, however, that it is business as usual and that a soft landing will be engineered through Fed policy with some help from Treasury. If it were only that easy to manage the world's largest economy, no analysts would earn bronze medals. Mortgage rates are trending higher, underwriting standards are tightening, and, if residual real estate values drop another five to ten percent, that is a trillion dollars erased from household net worth.

Banks are beginning to freeze or reduce individual lines of credit. A gold medal goes to Oppenheimer & Co.'s Director of Equity Research, Meredith Whitney, who appeared on CNBC on August 4th, sharing a dismal overview of the banking industry and the economy for the balance of this year and next. Last year, 85 percent of mortgage liquidly came from securitization. Last year to date, that accounted for $900 billion in loans. In 2008, that number is $100 billion. Overall, there is $2 trillion less in liquidity in the marketplace. Also, she expects banks to reduce unused lines of credit to customers from $4.9 trillion by $2 trillion in 2009. Ouch.