YOU SHOULD BE WARY OF THIS MARKET REBOUND

By JOHN CRUDELE

January 24, 2008 —

IT’S a miracle - two days in a row.

The stock market was going to hell again yesterday when suddenly - out of a cloud of dust and a hearty Hi-Ho Silver - someone came to the rescue.

You are going to read elsewhere that investors, at precisely 12:44 p.m. yesterday, got the urge to buy enormous amounts of equities because of some mass and simultaneous belief that stocks had gone down enough.

And you’ll hear words like "capitulation" - which is the "I surrender" white flag that the pros say is the sign that the market is down enough and about to turn up.

I don’t happen to share those opinions.

Let’s just say that I don’t believe in magic any more now than I did when I warned you in December that stocks would be up against it when cranky auditors made banks own up to their mistakes in year-end reports.

That was about 1,500 Dow points ago.

Don’t get me wrong, I’d love to see stocks get back on track and the economy make a right turn onto Easy St. as quickly as possible. Who wouldn’t?

But I’m not doing my job if I pretend that everything is suddenly alright because some guy in Washington decided to cut interest rates in a frantic move that - at best - won’t be felt by the economy for months.

So I won’t lie to you.

There’s a lot of trouble ahead, starting with next week.

That’s when the Fed meets for its regular meeting and when an insatiable Wall Street is expecting yet another cut in interest rates. The problem is, next Friday is when the Labor Department is scheduled to report employment statistics for January and that figure could be, as we are allowed to say only in a tabloid, f-ugly. More on that in another column.

Corporate earnings are another landmine next week. A hundred of the Standard & Poor’s 500 companies are scheduled to report earnings, as are nine components of the Dow Jones industrial index, including American Express, McDonalds and Boeing.

With a stock market this skittish, any one of these reports could cause convulsions.

But the real problem may come in a few weeks when banks will be forced by the Securities & Exchange Commission and the Financial Accounting Standards Board (FASB) to acknowledge to the government in annual reports just how much (or little) some of their esoteric securities are really worth.

"Fair value" accounting probably sounded like a good idea back in bubble land but right now it’s a pointy object aimed at a half-deflated balloon.

Next month is also when a good amount of Citigroup’s Structured Investments Vehicles are maturing, probably with little hope that investors will re-up for another term. Not surprisingly Citi, along with a handful of European banks, continue to be the subject of distressing rumors in the investment community.

With all that sludge coming at us, who could have been brave enough these past two days to step in front of a falling market - or, as they say on Wall Street, catch a falling knife? The Dow did, after all, have a 625-point reversion in yesterday’s session alone.

Here’s where I’d like to in troduce you to Robert Heller.

Heller was a gover nor of the Federal Reserve during the 1989 stock market collapse. I’ve brought him up be fore in this column because right after he left the Fed, Heller gave a speech proposing the rigging of the stock market during emergencies.

The speech was published in the Oct. 27, 1989 Wall Street Journal.

Heller was speaking of a situation just like ours today, where the Fed is being forced to cut interest rates even though there’s little indication that people want to borrow.

Heller said "instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thus stabilizing the market as a whole."

"The stock market is certainly not too big for the Fed to handle," Heller added.

I’ve written about this operation before.

I’ve also written about how Treasury Secretary Hank Paulson has been very vocal about the fact that he has re-energized something called The President’s Working Group on Financial Market - better known as the Plunge Protection Team. The Working Group, also formed in 1989, reportedly had an emergency session over the weekend.

Was the President’s Working Group the Lone Ranger of this market? And was the group riding Heller’s idea?

We will probably never know. But rigged markets have a tendency to be unstable. So if this one is being supported by Heller’s notion, watch out.

john.crudele LXE nypost.com

http://www.nypost.com/seven/0124200...

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