A bear rally in bull's clothing?

By Bill Fleckenstein

Last week's worldwide jubilation in stocks was plain to see. What's not so clear, however, is what propelled the upside action. Some were speculating it was the Group of 20 stimulus package, though I can't believe anyone would really point to that as the cause.

Others thought it was sheer bliss over the decision by the Financial Accounting Standards Board, or FASB, to back off from its previous mark-to-market rules. But it's hard to believe that that was the reason either. First of all, it can't be much of a surprise that the board retreated from its stance, as that's what the board always does. (Think back about 10 years ago, when it considered requiring corporations to record stock options as expenses and was browbeaten into submission for a while.)

Leave out the 'S' for 'Standards'

But it is somewhat confusing as to why a relaxation of the mark-to-market rules now would precipitate elation when the major cause of the recent financial-system calamity was the way in which financial institutions managed and priced risk. In some ways, the FASB's decision is a step backward -- toward the very laxity and fantasy that created the crisis.

Of course, loosening the accounting rules will potentially reduce the incentive for the financial problem children to want to hit bids, thereby thwarting the goals of the PPIP, the Treasury's Public-Private Investment Program, which was set up to try to get the prices of "toxic" paper to clear.

There is also another possible reason for the celebration: the copious amounts of money being created from thin air by the world's central banks (not least of which being the early stages of quantitative easing, the conversion of government debt into money). Money printing plus imagination are potent forces that can't solve our problems but can affect the stock market in such a way as to make it appear that the worst has passed.

It must be remembered that some of the best rallies occur in bear markets. For instance, in the first half of 1930, the market jumped 40% -- twice what Bubblevision defines as a bull market -- and it certainly didn't end very well. (Part of the reason for that big rally was a belief that the recession, which became the Great Depression, was already over.)

• Video: Revamping mark-to-market

Having said all of that, it is possible that money printing will lift the economy off the shoals. At this juncture, such an outcome would be a low-probability bet, but it's not inconceivable. (I am trying to be agnostic, not dogmatic.) In my opinion, the rally under way is the one I had expected earlier this year but that never materialized.

Rally Balboa versus Jersey Joe Earnings

Now that stocks have rebounded as far as they have, the upcoming earnings season will be particularly interesting -- and potentially dangerous -- but it will offer information as to the sustainability of the recent advance. If stock prices can shrug off the news, then the market may be headed higher still.