Serious Stock Market Warning

From Yahoo Finance:
The "Real" Economy Is Dying: Q4 "Going to Be a Bloodbath,"
Whalen Says Posted Oct 05, 2009 01:49pm EDT by Aaron Task

Stocks rallied to start the week thanks to a better-than-expected ISM services sector report and a Goldman Sachs upgrade of big banks, including Wells Fargo, Comerica and Capital One.
But all is not right in either the economy or the banking sector, according to Christopher Whalen, managing director at Institutional Risk Analytics. In fact, Whalen says most observers are drawing the wrong economic conclusions from the stock market's robust rally.
"Why is liquidity going into the financial sector? It's because the real economy is dying [and] everyone is fleeing into the stocks and bonds because they're liquid at the moment," Whalen says. "That's not a good sign."
The banking sector's assets shrunk by about $300 billion per quarter in the first half of 2009, a sign of banks hoarding cash in anticipation of additional future losses, according to Whalen. "The real economy is shrinking because of a lack of credit."
The shrinkage will continue into 2010, Whalen predicts, suggesting the banking sector hasn't yet seen the peak in loan losses. Institutional Risk Analytics forecasts the FDIC will ultimately need $300 billion to $400 billion to recoup losses to its bank insurance fund. (In other words, the $45 billion the FDIC sought to raise last week by asking banks to prepay fees is just a drop in the bucket.)
"Investors should think about this because the fourth quarter in the banking industry is going to be a bloodbath," says Whalen, who believes smaller and regional banks like Hudson City Bancorp may come into favor vs. larger peers, which have dramatically outperformed since the March lows.
"When you see the markets rallying when the real economy is shrinking that tells you this [recovery] is not going to be very enduring," Whalen says.


As we have expressed repeatedly on this blog, there is no real recovery to date. This is a bear market rally that may have a particularly vicious downswing coming by late fall or early winter. We expect that the US dollar will rally when financial reality sets in. Crude will then fall which will be a drag on many petro dependant economies from the Middle East to Canada. Gold may retreat (at least in US dollars) when this occurs, which would be a good buying opportunity.
In our view, the dollar is in trouble in the longer term of perhaps 2 to 5 years. But in the short term, treasuries will once again become a "safe haven".