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Tuesday, December 29, 2009

S and P 500 new highs

Monday December 28th, the S&P 500 hit new highs, 1,130.38, as well as some other market indexes. What amazes me, that it wasn't significantly higher. On December 26th, the US government announced that all losses, no matter how big, are 100% backed by the US government from private institutions Freddie Mac and Fannie Mae. By inference, the market can assume that this isn't the last no-hold-bar, we got your back maneuver, and that there is more to follow.

With a one-sided bet, all upside, and no downside now in the pocket of private large financial institutions, I expected a much higher blow off. The last week in December is so far extremely light on volume. I would not be surprised to see the S&P 500 hit a new high of about 1155 before this market finally turns.

However, make no mistake, these actions are sealing the US fate, if not the world to a horrible multi-year economic downturn, similar to Japan's lost 20 years trying to cover their debts through government intervention. Japan was a CREDITOR nation, and that country took similar steps to prevent their companies from taking huge losses through government intervention. The result was that stock market fell from 40,000 down to 7,000 to 20,000 range for 20 years, currently at 10,800. The US is a DEBTOR nation, and if in the next 10 years the US can muster it's currency from collapse, and keep market valuations higher than here, then that is a great feat.

So, yes, the market made new highs. But nothing is fixed. All that has happened is transferring risk from the private sector to the US government, and by inference, the solvency of the nation. This fixed nothing, and is a direct repeat of history from Japan to the US's own great depression.

The wall that the world will hit, is the US bond rates. That is already happening as 30 year bond rates are creaping higher. There will come a point where mortgage rates will rise enough to further crush housing prices. And the government will have to choose, the stock market or the housing & debt market. To me the choice is clear, tank the stock market and save the debt market.

But one thing 2009 has taught me, stupidity runs no bounds, and the choice may be to crush the housing and debt market, and throw this country into a GREATER depression in an effort to keep the stock market valuations higher.

Happy Holidays, the multi-millionaires got their bonuses, and trillions in government handouts, what will be left for the pension funds, retirees is going to be coal in a few years.

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