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A Looming Market Reversal?


Data could throw equities a curveball that takes them lower.

Editor's note: Mike O'Rourke is the chief market strategist at BTIG LLC, a premier institutional brokerage and fund services company.

A "Crude" Awakening

Yesterday's most noteworthy action was in the crude market. With the release of the stronger-than-expected consumer confidence data, crude quickly spiked to $75, failed, and turned negative. From that point on, the commodity sold off throughout the session.

Yesterday's trading was one of those instances in which there was a bearish reaction to what otherwise should have been good news. That's usually a sign that a reversal in the commodity is imminent. The weakness led to a reversal of equities in the energy and materials sectors. API numbers exhibited bigger builds than expected tonight. Tomorrow's DOE data will show whether last week's strength was a new trend, or a curveball setting the market up for the move lower.

You May Be Better Off Filing for Unemployment

The President's reappointment of Fed Chairman Ben Bernanke keeps at least one person from joining the ranks of the unemployed. Chairman Bernanke's reappointment is a positive for markets but not necessarily an upside catalyst. Bernanke is about to fight a two-front war. First, he must continue to battle the weak economy. Second is the almost equally daunting task of protecting the Fed's independence.

US District Judge Loretta Preska ruled Monday that the Fed has to disclose the companies that participate in their Emergency Lending programs within five business days. The Judge opined:
"The Board essentially speculates on how a borrower might enter a downward spiral of financial instability if its participation in the Federal Reserve lending programs were to be disclosed. Conjecture, without evidence of imminent harm, simply fails to meet the Board's burden of showing that Exemption Four [of the Freedom of Information Act] applies."
It's tough to say which is worse -- the fact that the Fed lawyers couldn't make the case or that Judge Preska has such little insight into the workings of financial markets. Her Honor must have stopped opening her 401(k) statements last September. Every day from September to March offered examples of downward spirals of instability for a variety of reasons, including participation in government programs. Elected politicians talking out of turn was another reason for such spirals.

Sunshine May Be the Best Disinfectant, But Too Much Sun Can Give You Cancer

Transparency is always perceived to be positive, but when the information disclosed has the potential to create a panic, people should be thinking about accountability. In the end, if the Central Bank has to make these types of disclosures, institutions will attempt to hide their problems and will potentially create larger problems. The obvious example that should have proved the Fed's case was Lehman.

In its final days, Lehman didn't go to the Fed's Primary Dealer Credit Facility (PDCF). Instead, in order to avoid disclosure in the market, Lehman borrowed from the ECB. As of September 10, 2008, PDCF borrowing was zero. The PDCF had "near" transparency because its potential borrowers at the time were the four investment banks. Multiple choice doesn't get much easier than that -- especially with the news flow that was circulating. When the judges and politicians are done "fixing" the problems in the system from this crisis, you won't want to be around for the next one.
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No positions in stocks mentioned.

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