The Recent Rally Isn't Much of a Gift

Here comes Santa Claus indeed. This year, however, Santa appears to be headed right for Wall Street. He's got all kinds of fiscal stimulus and industry bailouts in his bag, and he is disbursing them to all the good boys and girls. That is, if your definition of good includes excessive risk-taking, over-leveraging your balance sheet and saving yourself at the expense of shareholders.

After one week of rallies, I am having trouble finding a bear left on Wall Street. Even a phone call to the curmudgeonly option trader who is still ensconced down on Siesta Key found him less bearish that usual. All the battered stocks that were pummeled by hedge fund selling in October were up strong on Monday. Stocks such as Chesapeake Energy (CHK - commentary - Cramer's Take), Bank of America (BAC - commentary - Cramer's Take) and General Electric (GE - commentary - Cramer's Take) were up on strong volume.

All must be well in the world, since the shipping and container stocks rallied as well. Beleaguered, debt-laden DryShips (DRYS - commentary - Cramer's Take) was up over 50% during the day. It is not like I can complain about it. Some of my hedgie-dumped stocks such as Cleveland Cliffs (CLF - commentary - Cramer's Take) rallied strongly through the past several trading days as well. L.B. Foster (FSTR - commentary - Cramer's Take) is off the charts in the last week, rallying almost 15%.

I will take the gains anytime, but I do not buy the rally. I confess that I pondered my opinion after reading Doug Kass' bullish piece on Monday. I agree with a lot of what he said. Sentiment is negative, and stocks do appear cheap. However, I do not believe that any of the programs have even begun to repair the damage to the economy, most importantly to the real estate markets. My main thesis for months has been that until the real estate market stops going down, we cannot have a bottom in the stock market.

We saw mortgage delinquencies rise 12% month over month and a whopping 54% over the same quarter last year. We need to see almost all new building activity stop before the current supply overhang can begin to be worked through. We have seen mortgage applications rise, but it is important to remember that with the new tighter credit standards used by most banks, applications are not approvals.

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At the time of publication, Melvin was long Cleveland Cliffs and L.B. Foster, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.