TheCenterLane.com

© 2008 – 2017 John T. Burke, Jr.

An Ominous Drumbeat Gets Louder

Comments Off on An Ominous Drumbeat Gets Louder

August 13, 2009

Regular readers of this blog (all four of them) know that I have been very skeptical about the current “bear market rally” in the stock markets.  Nevertheless, the rally has continued.  However, we are now beginning to hear opinions from experts claiming that not only is this rally about to end — we could be headed for some real trouble.

Some commentators are currently discussing “The September Effect” and looking at how the stock market indices usually drop during the month of September.  Brett Arends gave us a detailed history of the September Effect in Tuesday’s edition of The Wall Street Journal.

Throughout the summer rally, a number of analysts focused on the question of how this rally could be taken seriously with such thin trading volume.  When the indices dropped on Monday, many blamed the decline on the fact that it was the lowest volume day for 2009.  However, take a look at Kate Gibson’s discussion of this situation for MarketWatch:

One market technician believes trading volume in recent days on the S&P 500 is a sign that the broad market gauge will test last month’s lows, then likely fall under its March low either next month or in October.

The decline in volume started on Friday and suggests the S&P 500 will make a new low beneath its July 8 bottom of 869.32, probably next week, on the way to a test in September or October of its March 6 intraday low of 666.79, said Tony Cherniawski, chief investment officer at Practical Investor, a financial advisory firm.

“In a normal breakout, you get rising volume. In this case, we had rising volume for a while; then it really dropped off last week,” said Cherniawski, who ascribes the recent rise in equities to “a huge short-covering rally.”

The S&P has rallied more than 50 percent from its March lows, briefly slipping in late June and early July.

Friday’s rise on the S&P 500 to a new yearly high was not echoed on the Nasdaq Composite Index, bringing more fodder to the bearish side, Cherniawski said.

“Whenever you have tops not confirmed by another major index, that’s another sign something fishy is going on,” he said.

What impressed me about Mr. Cherniawski’s statement is that, unlike most prognosticators, he gave us a specific time frame of “next week” to observe a 137-point drop in the S&P 500 index, leading to a further decline “in September or October” to the Hadean low of 666.

At CNNMoney.com, the question was raised as to whether the stock market had become the latest bubble created by the Federal Reserve:

The Federal Reserve has spent the past year cleaning up after a housing bubble it helped create.  But along the way it may have pumped up another bubble, this time in stocks.

*   *   *

But while most people take the rise in stocks as a hopeful sign for the economy, some see evidence that the Fed has been financing a speculative mania that could end in another damaging rout.

One important event that gave everyone a really good scare took place on Tuesday’s Morning Joe program on MSNBC.  Elizabeth Warren, Chair of the Congressional Oversight Panel (responsible for scrutiny of the TARP bailout program) discussed the fact that the “toxic assets” which had been the focus of last fall’s financial crisis, were still on the books of the banks.  Worse yet, “Turbo” Tim Geithner’s PPIP (Public-Private Investment Program) designed to relieve the banks of those toxins, has now morphed into something that will help only the “big” banks (Goldman Sachs, J.P. Morgan, et al.) holding “securitized” mortgages.  The banks not considered “too big to fail”, holding non-securitized “whole” loans, will now be left to twist in the wind on Geithner’s watch.  The complete interview can be seen here.  This disclosure resulted in some criticism of the Obama administration, coming from sources usually supportive of the current administration. Here’s what The Huffington Post had to say:

Warren, who’s been leading the call of late to reconcile the shoddy assets weighing down the bank sector, warned of a looming commercial mortgage crisis.  And even though Wall Street has steadied itself in recent weeks, smaller banks will likely need more aid, Warren said.

Roughly half of the $700 billion bailout, Warren added, was “don’t ask, don’t tell money. We didn’t ask how they were going to spend it, and they didn’t tell how they were going to spend it.”

She also took a passing shot at Tim Geithner – at one point, comparing Geithner’s handling of the bailout money to a certain style of casino gambling.  Geithner, she said, was throwing smaller portions of bailout money at several economic pressure points.

“He’s doing the sort of $2 bets all over the table in Vegas,” Warren joked.

David Corn, a usually supportive member of the White House press corps, reacted with indignation over Warren’s disclosures in an article entitled:  “An Economic Time Bomb Being Mishandled by the Obama Administration?”  He pulled no punches:

What’s happened is that accounting changes have made it easier for banks to contend with these assets. But this bad stuff hasn’t gone anywhere.  It’s literally been papered over. And it still has the potential to wreak havoc.  As the report puts it:

If the economy worsens, especially if unemployment remains elevated or if the commercial real estate market collapses, then defaults will rise and the troubled assets will continue to deteriorate in value.  Banks will incur further losses on their troubled assets.  The financial system will remain vulnerable to the crisis conditions that TARP was meant to fix.

*   *   *

In a conference call with a few reporters (myself included), Elizabeth Warren, the Harvard professor heading the Congressional Oversight Panel, noted that the biggest toxic assets threat to the economy could come not from the behemoth banks but from the “just below big” banks.  These institutions have not been the focus of Treasury efforts because their troubled assets are generally “whole loans” (that is, regular loans), not mortgage securities, and these less-than-big banks have been stuck with a lot of the commercial real estate loans likely to default in the next year or two.  Given that the smaller institutions are disproportionately responsible for providing credit to small businesses, Warren said, “if they are at risk, that has implications for the stability of the entire banking system and for economic recovery.”  Recalling that toxic assets were once the raison d’etre of TARP, she added, “Toxic assets posed a very real threat to our economy and have not yet been resolved.”

Yes, you’ve heard about various government efforts to deal with this mess.  With much hype, Secretary Timothy Geithner in March unveiled a private-public plan to buy up this financial waste.  But the program has hardly taken off, and it has ignored a big chunk of the problem (those”whole loans”).

*   *   *

The Congressional Oversight Panel warned that “troubled assets remain a substantial danger” and that this junk–which cannot be adequately valued–“can again become the trigger for instability.”  Warren’s panel does propose several steps the Treasury Department can take to reduce the risks.  But it’s frightening that Treasury needs to be prodded by Warren and her colleagues, who characterized troubled assets as “the most serious risk to the American financial system.”

On Wednesday morning’s CNBC program, Squawk Box, Nassim Taleb (author of the book, Black Swan — thus earning that moniker as his nickname) had plenty of harsh criticism for the way the financial and economic situations have been mishandled.  You can see the interview with him and Nouriel Roubini here, along with CNBC’s discussion of his criticisms:

“It is a matter of risk and responsibility, and I think the risks that were there before, these problems are still there,” he said. “We still have a very high level of debt, we still have leadership that’s literally incompetent …”

“They did not see the problem, they don’t look at the core of problem.  There’s an elephant in the room and they did not identify it.”

Pointing his finger directly at Fed Reserve Chairman Ben Bernanke and President Obama, Taleb said policymakers need to begin converting debt into equity but instead are continuing the programs that created the financial crisis.

“I don’t think that structural changes have been addressed,” he said.  “It doesn’t look like they’re fully aware of the problem, or they’re overlooking it because they don’t want to take hard medicine.”

With Bernanke’s term running out, Taleb said Obama would be making a mistake by reappointing the Fed chairman.

Just in case you aren’t scared yet, I’d like to direct your attention to Aaron Task’s interview with stock market prognosticator, Robert Prechter, on Aaron’s Tech Ticker internet TV show, which can be seen at the Yahoo Finance site.  Here’s how some of Prechter’s discussion was summarized:

“The big question is whether the rally is over,” Prechter says, suggesting “countertrend moves can be tricky” to predict.  But the veteran market watcher is “quite sure the next wave down is going to be larger than what we’ve already experienced,” and take major averages well below their March 2009 lows.

“Well below” the Hadean low of 666?  Now that’s really scary!

Doubts Concerning The Stock Market Rally

Comments Off on Doubts Concerning The Stock Market Rally

August 6, 2009

As of today (Wednesday night) the current “bear market rally” continues to surprise people with its longevity.  On the other hand, many news outlets, including The Washington Times and CNBC are declaring a “New Bull Market”.  There seems to be no shortage of commentators proclaiming that the market indices will continue to climb forever.

Back on planet earth, there is a good deal of commentary about the suspicious activity behind this rally.  In my last posting, I discussed the “Plunge Protection Team” or PPT.  Rather than repeat all that, for the benefit of those unfamiliar with the PPT, I will quote the handy definition at the Hamzei Analytics website:

Plunge Protection Team has been the “Working Group” established by law in 1988 to buy the markets should declines get out of control.  It is suspected by many market watchers that PPT has become far more interventionist than was originally intended under the law.  There are no minutes of meetings, no recorded phone conversations, no reports of activities, no announcements of intentions.  It is a secret group including the Chairman of the Federal Reserve, the Secretary of the Treasury, the Head of the SEC, and their surrogates which include some of the large Wall Street firms.  The original objective was to prevent disastrous market crashes.  Lately it seems, they buy the markets when they decide the markets need to be bought, including the equity markets.  Their main resource is the money the Fed prints.  The money is injected into markets via the New York Fed’s Repo desk, which easily shows up in the M-3 numbers, warning intervention was near.  As of April 2006, M-3 is longer reported.

Many of us have looked to the PPT as the driving force behind this rally.  News sources have claimed that the rally is the result of money “coming into the markets from the sidelines” — implying that crisis-wary investors had finally thrown caution to the wind and jumped into the equities markets to partake in the orgy of newfound wealth.  The cash accumulating in the investors’ money market accounts was supposedly being invested in stocks.  This propaganda was quickly debunked by the folks at the Zero Hedge website, with the following revelation:

Most interesting is the correlation between Money Market totals and the listed stock value since the March lows:  a $2.7 trillion move in equities was accompanied by a less than $400 billion reduction in Money Market accounts!

Where, may we ask, did the balance of $2.3 trillion in purchasing power come from?  Why the Federal Reserve of course, which directly and indirectly subsidized U.S.banks (and foreign ones through liquidity swaps) for roughly that amount.  Apparently these banks promptly went on a buying spree to raise the all important equity market, so that the U.S. consumer whose net equity was almost negative on March 31, could have some semblance of confidence back and would go ahead and max out his credit card.

Similar skepticism was voiced by Karl Denninger of The Market Ticker website:

So once again we have The Fed blowing bubbles, this time in the equity markets, with (another) wink and a nod from Congress.  This explains why there has been no “great rush” for individual investors to “get back in”, and it explains why the money market accounts aren’t being drained by individuals “hopping on the bus”, despite the screeching of CNBC and others that you better “buy now or be priced out”, with Larry Kudlow’s “New Bull Market” claim being particularly offensive.

Unfortunately the banksters on Wall Street and the NY Fed did their job too well – by engineering a 50% rally off the bottom in March while revenues continue to tank, personal income is in the toilet and tax receipts are in freefall they have exposed the equity markets for what they have (unfortunately) turned into — a computer-trading rigged casino with the grand lever-meister being housed at the NY Fed.

*   *   *

No, real buying is just that – real buying from real retail investors who believe in the forward prospects for the economy and business, not funny-money Treasury and MBS buying by The Fed from “newly created bank reserves” funneled back into the market via high-speed computers.  The latter is nothing more than a manufactured ramp job that will last only until “the boyz” get to the end of their rope (and yes,that rope does have an end) as the fractional creation machine does run just as well in reverse, and as such “the boyz” cannot allow the trade to run the wrong way lest it literally destroy them (10:1 or more leverage is a real bitch when its working against you!)

Is it coming to an end now?  Nobody can be certain when, but what is certain is that over the last week or so there have been signs of heavy distribution – that is, the selling off of big blocks of stock into the market by these very same “boyz.”  This is not proof that the floor is about to disappear, but it is an absolute certainty that these “players” are protecting themselves from the possibility and making sure that if there is to be a bagholder, it will be you.

Many commentators, including Joseph Saluzzi of Themis Trading, have explained how the practice of computer-driven “High-Frequency Trading” has added approximately 70 percent of “volume” to the equities markets.  This is accomplished because the exchanges pay a quarter-of-a-penny rebate to High-Frequency Trading firms for each order they place, waiving all transaction fees.  As a result, the “big boy” firms, such as J.P. Morgan and Goldman Sachs, will make trades with their own money, buying and selling shares at the same price, simply for the rebates.  Those pennies can add up to hundreds of millions of dollars.

I recently came across a very interesting paper (just over eight pages in length) entitled:  A Grand Unified Theory of Market Manipulation, published by Precision Capital Management.  The paper describes a tug of war between Treasury Secretary Ben Bernanke and the New York Fed, that is playing out in the equities and Treasury securities markets.  The authors suggest that if Bernanke’s biggest threat is high long-term Treasury yields (interest rates), the easiest way to prevent or postpone a yield ramp would be to kill the stock market rally and create a “flight to safety in Treasuries” – situation that lowers long-term yields.  The paper describes how the New York Fed facilitates “painting the tape” in the stock markets to keep the rally alive.  For those of you who don’t know what that expression means, here’s a definition:

An illegal action by a group of market manipulators buying and/or selling a security among themselves to create artificial trading activity, which, when reported on the ticker tape, lures in unsuspecting investors as they perceive an unusual volume.

After causing a movement in the security, the manipulators hope to sell at a profit.

Instead of accusations that the PPT is the culprit doing the tape painting during the final minutes of the trading day, we again see a focus on the New York Fed as the facilitator of this practice.  Here’s the explanation given in the paper by Precision Capital Management:

The theory for which we have the greatest supporting evidence of manipulation surrounds the fact that the Federal Reserve Bank of New York (FRNY) began conducting permanent open market operations (POMO) on March 25, 2009 and has conducted 42 to date.  Thanks to Thanassis Strathopoulos and Billy O’Nair for alerting us to the POMO Effect discovery and the development of associated trading edges.  These auctions are conducted from about 10:30 a.m. to 11:00 a.m. on pre-announced days.  In such auctions, the FRNY permanently purchases Treasury securities from selected dealers, with the total purchase amount for a day ranging from about $1.5 B to $7.5 B.  These days are highly correlated with strong paint-the-tape closes, with the theory being that the large institutions that receive the capital interjections are able to leverage this money by 100 to 500 times and then use it to ramp equities.

As for the all-important question of how the authors expect this to play out, they focus on what might happen at the market close on August 5:

And, while it is a bit early to favor one side or the other, we are currently leaning toward a nervous Bernanke and the need to ramp Treasuries at the expense of equities into August 9.  Equities have had more than a nice run and can suffer a bit of a correction.  Key will be watching the close on Wednesday.  A failed POMO paint the tape close could signal that an equities correction of at least a few weeks has gotten underway.

What we saw on Wednesday afternoon was just that.  At approximately 3 p.m. there was an effort to push the S&P 500 index into positive territory for the first time that day, which succeeded for just a few minutes.  The index then dropped back down, closing .29 percent lower than the previous close.  Does this mean that a market correction is underway?  Time will tell.  With the S&P 500 index at 1002 as I write this, many experts consider the market to be “overbought”.  Fund manager Jeremy Grantham, who has been entrusted to invest over $89 billion of his customers’ hard-inherited money, is of the opinion that the current fair value for the S&P 500 should be just below 880.  Thus, there is plenty of room for a correction.  The answer to the question of whether that correction is now underway should be something we will learn rather quickly.

Reality Check

Comments Off on Reality Check

July 13, 2009

Have you become sick of hearing about the “green shoots”?   Back on March 15, Federal Reserve Chairman Ben Bernanke appeared on 60 Minutes and made the self-serving, self-congratulatory claim that “green shoots” could be found in the economy.  I guess we’re supposed to thank him for all the extra money printing he had mandated, to facilitate this claimed result.  While we normal people continued to cope with ongoing job losses, an almost nonexistent job market, unavailable mortgages, a constipated real estate market and fear about the future   . . .   Chairman Bernanke was trying to sell us on some good news.  Since that time, the expression “green shoots” has been the mantra for those pundits who, for whatever reason, want the naive public to believe in the emperor’s new clothes.  The usual motive for chatting up the “green shoots” is to encourage a widespread popular return to investing in the stock market and by so doing, make life more rewarding for those at brokerage firms.

This week brings us a “reality check” that will come in the form of earnings reports from the second quarter of 2009, required for disclosure by publicly-held corporations, traded on our nation’s stock exchanges.  Recent news reports have focused on the fact that despite the “bear market rally” that began in May, last week’s drop in stock prices revealed widespread investor concern that the truth will not support all the hype they have been reading since the spring.  Here’s what E.S. Browning had to say in the July 8 edition of The Wall Street Journal:

Expectations for the current earnings season are very low, and investors are worried companies will give weak outlooks for the second half of the year.

“We kind of think the market got ahead of itself.  It ran too fast, too hard, and we are soon going to be staring at second-quarter earnings reports that are not going to be pretty,” said Janna Sampson, who helps oversee $1.3 billion as co-chief investment officer of OakBrook Investments in Lisle, Ill.

After the market bottomed March 9, investors increasingly embraced risky assets, bidding up stocks, especially those of smaller companies with little or no profit.

Those unfortunate investors were hit by two “sucker punches”.  The first was the often-repeated claim that “stocks are now a bargain  . . .  we’ve hit the bottom so now is the time to BUY!”  The second sucker punch involved the use of high-speed trading programs (such as the one recently stolen from Goldman Sachs) to run up the prices on stocks and exploit “retail investors” such as you and me.  An astute explanation of this process was recently published by Sal Arnuk and Joseph Saluzzi of Themis Trading.  You can read that report here.  What’s even more interesting about the computer program used by (and stolen from) Goldman Sachs, is the statement made by Assistant U.S.Attorney Joseph Facciponti, as quoted in the July 6 article by David Glovin and Christine Harper for Bloomberg News:

“The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” Facciponti said, according to a recording of the hearing made public today.

So Goldman Sachs has a computer program that allows the user to “manipulate the markets in unfair ways”?  That’s quite a revelation!  If that weren’t bad enough  . . .  according to a recent report by Tyler Durden at Zero Hedge, Goldman Sachs is not the only kid on the block with a high-frequency trading program.

Alexendra Twin of CNN (in addition to providing us with a schedule of earnings reports and other important economic data to be released over this week and next) pointed out another important reason for last spring’s stock market rally, which is not likely to be a factor this month:

Last quarter, analysts and corporations alike ratcheted down forecasts, setting up a period in which a greater percentage of companies than usual beat forecasts.  But this quarter could be different.  Fewer companies have been cutting forecasts and analysts haven’t budged as much either, giving corporations less of an opportunity to defy expectations.

“The question is whether we’ll see a similar surprise factor this time,” said John Butters, senior research analyst at Thomson Reuters. “If companies haven’t cut and analysts haven’t cut, can results beat forecasts?”

My take on this process is a bit more cynical:  the system is being “gamed” by companies’ providing artificially low estimates for future earnings, in order to win at what commentator Bill Fleckenstein calls “beat the number”.

Once we have read about all these reports  —  will we finally stop hearing about “green shoots”?  I have my money on bad economic news, as I continue to maintain my position in the SRS exchange-traded fund.  Nevertheless, I’m keeping one hand on the ripcord, ready to bail out at any minute.

Painting The Tape

Comments Off on Painting The Tape

July 2, 2009

Would you be willing to wager your life savings on pro-wrestling matches?  That is basically what you are doing when you invest in the stock market these days.  The game is being rigged.  If you are just a “retail investor” or “little guy”, you run the risk of having your investment in this “bear market rally” significantly diminish in the blink of an eye.  Regular readers of this blog (all four of them) know that this is one of my favorite subjects.  In my posting on May 21, I recalled feeling a little paranoid last December when I wrote this:

Do you care to hazard a guess as to what the next Wall Street scandal might be?  I have a pet theory concerning the almost-daily spate of “late-day rallies” in the equities markets.  I’ve discussed it with some knowledgeable investors.  I suspect that some of the bailout money squandered by Treasury Secretary Paulson has found its way into the hands of some miscreants who are using this money to manipulate the stock markets.  I have a hunch that their plan is to run up stock prices at the end of the day before those numbers have a chance to settle back down to the level where the market would normally have them.  The inflated “closing price” for the day is then perceived as the market value of the stock. This plan would be an effort to con investors into believing that the market has pulled out of its slump.  Eventually the victims would find themselves hosed once again at the next “market correction”.  I don’t believe that SEC Chairman Christopher Cox would likely uncover such a scam, given his track record.

After my last posting about this subject on May 21, I have continued to read quite a number of opinions by authoritative sources, echoing my belief that the stock market is being manipulated.  Tyler Durden at Zero Hedge has been quite diligent about exposing incidents of “tape painting”.  Some examples appear here and here.  In case you don’t know what is meant by “painting the tape”, here is a definition:

An illegal action by a group of market manipulators buying and/or selling a security among themselves to create artificial trading activity, which, when reported on the ticker tape, lures in unsuspecting investors as they perceive an unusual volume.

After causing a movement in the security, the manipulators hope to sell at a profit.

As one might expect, this activity is more easily accomplished on days when trading volume is low.  On June 11, Craig Brown had this to say about the subject on the Seeking Alpha website:

I have read some posts about some suspicions on perhaps some entities painting the tape. Volume has been light so it is something that could happen. We will see if these conspiracy theories play out.

Regular readers of Zero Hedge (it’s on my blogroll, at the right) had the opportunity to see some televised interviews during the past few days, when professionals have complained about “tape painting” in the equities markets.  On Monday, June 29, we saw on (of all places) CNBC, a discussion with Larry Levin, a futures trader on the Chicago Mercantile Exchange.  I would consider CNBC the last place to criticize “pumping” of stock prices, since their commentary often seems designed to do just that.  Nevertheless, watch and listen to what Larry Levin had to say at 2:22 into this video clip.  He explains that “this market continues to be propped up by government intervention and manipulation” and he unequivocally accuses the Obama administration of acting to “prop this market up on a daily basis”.  Again, on Wednesday, July 1, visitors to the Zero Hedge website had the opportunity to see this June 30 clip from Bloomberg TV, wherein Joe Saluzzi of Themis Trading noted that “you’ve got government forecasts that are intentionally misleading us, constantly”.    He went on to emphasize that the trading volume we see every day is “fictitious — it’s not real”.  He explained the potential hazards to retail investors caused by trading programs that “artificially inflate the prices” of stocks, although a “news event” could cause that program trading to abruptly reverse, erasing a valuable portion of the retail investors’ assets.

On June 24, Bret Rosenthal posted an article on the HedgeCo.net website, entitled:  “Coping With Government-Sponsored Market Manipulation”.  Here’s some of what he had to say:

We must not allow the government manipulations to cloud our judgement and sucker us into investments that have no hope of success over time.  Example:  the government-sponsored rally in the financials over the last 3+ months was clearly created to help the banking sector raise capital.  Again, if you wish to argue this point I suggest you go down to the water’s edge and scream at the tide.  Massive amounts of capital were raised through the secondary markets for financial companies in the last 30 days.  This is a simple fact. Now that this manipulation is complete and private capital has been sucked in where will the equity markets go?

The best advice for the retail investor, attempting to navigate through the current “bear market rally” was provided by Graham Summers, Senior Market Strategist at OmniSans Investment Research, in this July 1 posting at the Seeking Alpha website:

This rally has sucker punched the shorts countless times now, particularly when it comes to late-day market manipulation.  In a nutshell, every time stocks begin showing signs of breaking down, someone steps in, usually during the final 30 minutes of trading, to push the market back into positive territory.  So while economic fundamentals indicate we’ve come much too far too fast, it’s hard to make money trading based on this information.

*   *   *

To rephrase the above thoughts, stocks are currently trading where they should be a full year from now assuming that the economy turns around this fall.  This hardly makes a strong case for greater gains or more upward momentum.  But it’s hard to go short with the historic rig that is currently taking place in the market.

So my advice to anyone right now is to stay put.  This week is a wash anyhow due to it being short and due to performance gaming:  portfolio managers and institutional investors pushing stocks higher so they can close out the quarter with gains on their positions.  Indeed, yesterday’s market volume on the NYSE was the lowest we’ve seen since January 5, 2009.

So don’t open any new positions for now.  This week will be exceedingly choppy.  And with volume drying up to a trickle, there is potential for some violent swings as the big boys play around with their end of the quarter shenanigans.  You don’t want to be on the wrong side of one of those swings.

Meanwhile, I’ve been watching my investment in the SRS exchange-traded fund (which inversely tracks the IYR real estate index, at twice the magnitude) unwind during the past few days, erasing the nice profit I made just after getting into it.  Will I bail?  Nawww!  I’m waiting for that “news event” to turn things around.

Where The Money Is

Comments Off on Where The Money Is

June 1, 2009

For the past few months we have been hearing TV “experts” tell us that “it’s almost over” when discussing the Great Recession.  Beyond that, many of the TV news-readers insist that the “bear market” is over and that we are now in a “bull market”.  In his new column for The Atlantic (named after his book A Failure of Capitalism) Judge Richard A. Posner is using the term “depression” rather than “recession” to describe the current state of the economy.  In other words, he’s being a little more blunt about the situation than most commentators would care to be.  Meanwhile, the “happy talk” people, who want everyone to throw what is left of their life savings back into the stock market, are saying that the recession is over.  If you look beyond the “good news” coming from the TV and pay attention to who the “financial experts” quoted in those stories are … you will find that they are salaried employees of such companies as Barclay’s Capital and Charles Schwab  … in other words:  the brokerages and asset managers who want your money.   A more sober report on the subject, prepared by the National Association for Business Economics (NABE) revealed that 74 percent of the economists it surveyed were of the opinion that the recession would end in the third quarter of this year.  Nineteen percent of the economists surveyed by the NABE predicted that the recession would end during the fourth quarter of 2009 and the remaining 7 percent opined that the recession would end during the first quarter of 2010.

Some investors, who would rather not wait for our recession to end before jumping back into the stock market, are rapidly flocking to what are called “emerging markets”.  To get a better understanding of what emerging markets are all about, read Chuan Li’s (mercifully short) paper on the subject for the University of Iowa Center for International Finance and Development.  The rising popularity of investing in emerging markets was evident in Fareed Zakaria’s article from the June 8 issue of Newsweek:

It is becoming increasingly clear that the story of the global economy is a tale of two worlds.  In one, there is only gloom and doom, and in the other there is light and hope.  In the traditional bastions of wealth and power — America, Europe and Japan — it is difficult to find much good news.  But there is a new world out there — China, India, Indonesia, Brazil — in which economic growth continues to power ahead, in which governments are not buried under a mountain of debt and in which citizens remain remarkably optimistic about their future.  This divergence, between the once rich and the once poor, might mark a turn in history.

*    *    *

Compare the two worlds.  On the one side is the West (plus Japan), with banks that are overleveraged and thus dysfunctional, governments groaning under debt, and consumers who are rebuilding their broken balance sheets. America is having trouble selling its IOUs at attractive prices (the last three Treasury auctions have gone badly); its largest state, California, is veering toward total fiscal collapse; and its budget deficit is going to surpass 13 percent of GDP —  a level last seen during World War II.  With all these burdens, even if there is a recovery, the United States might not return to fast-paced growth for a while.  And it’s probably more dynamic than Europe or Japan.

Meanwhile, emerging-market banks are largely healthy and profitable.  (Every Indian bank, government-owned and private, posted profits in the last quarter of 2008!)  The governments are in good fiscal shape.  China’s strengths are well known — $2 trillion in reserves, a budget deficit that is less than 3 percent of GDP — but consider Brazil, which is now posting a current account surplus.

On May 31, The Economic Times reported similarly good news for emerging markets:

Growth potential and a long-term outlook for emerging markets remain structurally intact despite cyclically declining exports and capital outflows, a research report released on Sunday said.

According to Credit Suisse Research’s latest edition of Global Investor, looking forward to an eventual recovery from the current crisis, growth led by domestic factors in emerging markets is set to succeed debt-fuelled US private consumption as the most important driver of global economic growth over coming years.

The Seeking Alpha website featured an article by David Hunkar, following a similar theme:

Emerging markets have easily outperformed the developed world markets since stocks rebounded from March this year. Emerging countries such as Brazil, India, China, etc. continue to attract capital and show strength relative to developed markets.

On May 29, The Wall Street Journal‘s Smart Money magazine ran a piece by Elizabeth O’Brien, featuring investment bargains in “re-emerging” markets:

As the U.S. struggles to reverse the economic slide, some emerging markets are ahead of the game.  The International Monetary Fund projects that while the world’s advanced economies will contract this year, emerging economies will expand by as much as 2.5 percent, and some countries will grow a lot faster.  Even better news:  Some pros are finding they don’t have to pay a lot to own profitable “foreign” stocks.  The valuations on foreign stocks have become “very, very attractive,” says Uri Landesman, chief equity strategist for asset manager ING Investment Management Americas.

As for The Wall Street Journal itself, the paper ran a June 1 article entitled: “New Driver for Stocks”, explaining that China and other emerging markets are responsible the rebound in the demand for oil:

International stock markets have long taken their cues from the U.S., but as it became clear that emerging-market economies would hold up best and rebound first from the downturn, the U.S. has in some ways moved over to the passenger seat.

Jim Lowell of MarketWatch wrote a June 1 commentary discussing some emerging market exchange-traded funds (ETFs), wherein he made note of his concern about the “socio-politico volatility” in some emerging market regions:

Daring to drink the water of the above funds could prove to be little more than a way to tap into Montezuma’s revenge.  But history tells us that investors who discount the rewards are as prone to disappointment as those who dismiss the risks.

On May 29, ETF Guide discussed some of the exchange-traded funds focused on emerging markets:

Don’t look now, but emerging markets have re-discovered their mojo.  After declining more than 50 percent last year and leading global stocks into a freefall, emerging markets stocks now find themselves with a 35 percent year-to-date gain on average.

A website focused solely on this area of investments is Emerging Index.

So if you have become too risk-averse to allow yourself to get hosed when this “bear market rally” ends, you may want to consider the advantages and disadvantages of investing in emerging markets.  Nevertheless, “emerging market” investments might seem problematic as a way of dodging whatever bullets come by, when American stock market indices sink.  The fact that the ETFs discussed in the above articles are traded on American exchanges raises a question in my mind as to whether they could be vulnerable to broad-market declines as they happen in this country.  That situation could be compounded by the fact that many of the underlying stocks for such funds are, themselves, traded on American exchanges, even though the stocks are for foreign corporations.  By way of disclosure, as of the time of writing this entry, I have no such investments myself, although by the time you read this  . . .   I just might.

Update: I subsequently “stuck my foot in the water” by investing in the iShares MSCI Brazil Index ETF (ticker symbol: EWZ).  Any guesses as to how long I stick with it?

June 3 Update: Today the S&P 500 dropped 1.37 percent and EWZ dropped 5.37 percent — similar to the losses posted by many American companies.   Suffice it to say:  I am not a happy camper!  I plan on unloading it.

DISCLAIMER:  NOTHING CONTAINED ANYWHERE ON THIS SITE CONSTITUTES ANY INVESTING ADVICE OR RECOMMENDATION.  ANY PURCHASES OR SALES OF SECURITIES ARE SOLELY AT THE DISCRETION OF THE READER.

A Consensus On Conspiracy

Comments Off on A Consensus On Conspiracy

May 21, 2009

I guess I can throw away my tinfoil hat.  I’m not so paranoid, after all.

Back on December 18, after discussing the bank bailout boondoggle, I made this observation about what had been taking place in the equities markets during that time:

Do you care to hazard a guess as to what the next Wall Street scandal might be?  I have a pet theory concerning the almost-daily spate of “late-day rallies” in the equities markets.  I’ve discussed it with some knowledgeable investors.  I suspect that some of the bailout money squandered by Treasury Secretary Paulson has found its way into the hands of some miscreants who are using this money to manipulate the stock markets.  I have a hunch that their plan is to run up stock prices at the end of the day, before those numbers have a chance to settle back down to the level where the market would normally have them.  The inflated “closing price” for the day is then perceived as the market value of the stock.  This plan would be an effort to con investors into believing that the market has pulled out of its slump.  Eventually the victims would find themselves hosed once again at the next “market correction”.  I don’t believe that SEC Chairman Christopher Cox would likely uncover such a scam, given his track record.

Some people agreed with me, although others considered such a “conspiracy” too far-flung to be workable.

Thanks to Tyler Durden at Zero Hedge, my earlier suspicions of market manipulation were confirmed.  On Tuesday, May 19, Mr. Durden posted a video clip from an interview with (among others) Dan Schaeffer, president of Schaeffer Asset Management, previously broadcast on the Fox Business Channel on May 14.  While discussing the latest “bear market rally”, Dan Schaeffer made this observation:

“Something strange happened during the last 7 or 8 weeks. Doreen, you probably can concur on this — there was a power underneath the market that kept holding it up and trading the futures.  I watch the futures every day and every tick, and a tremendous amount of volume came in at several points during the last few weeks, when the market was just about ready to break and shot right up again.  Usually toward the end of the day — it happened a week ago Friday, at 7 minutes to 4 o’clock, almost 100,000 S&P futures contracts were traded, and then in the last 5 minutes, up to 4 o’clock, another 100,000 contracts were traded, and lifted the Dow from being down 18 to up over 44 or 50 points in 7 minutes.  That is 10 to 20 billion dollars to be able to move the market in such a way. Who has that kind of money to move this market?

“On top of that, the market has rallied up during the stress test uncertainty and moved the bank stocks up, and the bank stocks issues secondary — they issue stock — they raised capital into this rally.  It was a perfect text book setup of controlling the markets — now that the stock has been issued …”

Mr. Schaeffer was then interrupted by panel member, Richard Suttmeier of ValuEngine.com.

My fellow foilhats likely had no trouble recognizing this market manipulation as the handiwork of the Plunge Protection Team (also known as the PPT).  Many commentators have considered the PPT as nothing more than a myth, with some believing that this “myth” stems from the actual existence of something called The President’s Working Group on Financial Markets.  For a good read on the history of the PPT, I recommend the article by Ambrose Evans-Pritchard of the Telegraph.  Bear in mind that Evans-Pritchard’s article was written in October of 2006, two years before the global economic meltdown:

Hank Paulson, the market-wise Treasury Secretary who built a $700m fortune at Goldman Sachs, is re-activating the ‘plunge protection team’ (PPT), a shadowy body with powers to support stock index, currency, and credit futures in a crash.

Otherwise known as the working group on financial markets, it was created by Ronald Reagan to prevent a repeat of the Wall Street meltdown in October 1987.

Mr Paulson says the group had been allowed to languish over the boom years.  Henceforth, it will have a command centre at the US Treasury that will track global markets and serve as an operations base in the next crisis.

*    *    *

The PPT was once the stuff of dark legends, its existence long denied.  But ex-White House strategist George Stephanopoulos admits openly that it was used to support the markets in the Russia/LTCM crisis under Bill Clinton, and almost certainly again after the 9/11 terrorist attacks.

“They have an informal agreement among major banks to come in and start to buy stock if there appears to be a problem,” he said.

“In 1998, there was the Long Term Capital crisis, a global currency crisis.  At the guidance of the Fed, all of the banks got together and propped up the currency markets. And they have plans in place to consider that if the stock markets start to fall,” he said.

The only question is whether it uses taxpayer money to bail out investors directly, or merely co-ordinates action by Wall Street banks as in 1929.  The level of moral hazard is subtly different.

John Crudele of the New York Post frequently discusses the PPT, although he is presently of the opinion that it either no longer exists or has gone underground.  He has recently considered the possibility that the PPT may have “outsourced” its mission to Goldman Sachs:

Let’s remember something.

First, Goldman Sachs accepted $10 billion in government money under the Troubled Asset Relief Program (TARP), so it is gambling with taxpayer money.

But the bigger thing to remember is this:  The firm may be living up to its nickname – Government Sachs – and might be doing the government’s bidding.

The stock market rally these past seven weeks has certainly made it easier for the Obama administration to do its job.  That, plus a little fancy accounting during the first quarter, has calmed peoples’ nerves quite a bit.

Rallies on Wall Street, of course, are good things – unless it turns out that some people know the government is rigging the stock market and you don’t.

That brings me to something called The President’s Working Group on Financial Markets, which is commonly referred to as the Plunge Protection Team.

As I wrote in last Thursday’s column, the Team has disappeared.

Try finding The President’s Working Group at the US Treasury and you won’t.

The guys and girls that Treasury Secretary Hank Paulson relied on so heavily last year when he was forcing Bank of America to buy Merrill Lynch and when he was waterboarding other firms into coming to Wall Street’s rescue has gone underground.

Anybody who has read this column for long enough knows what I think, that the President’s Working Group Plunge Protectors have, in the past, tinkered with the financial markets.

We’ll let interrogators in some future Congressional investigation decide whether or not they did so legally.

But right now, I smell a whiff of Goldman in this market. Breath in deeply, it’s intoxicating – and troubling.

Could Goldman Sachs be involved in a conspiracy to manipulate the stock markets?  Paul Farrell of MarketWatch has been writing about the “Goldman Conspiracy” for over a month.  You can read about it here and here.  In his May 4 article, he set out the plot line for a suggested, thirteen-episode television series called:  The Goldman Conspiracy.  I am particularly looking forward to the fourth episode in the proposed series:

Episode 4. ‘Goldman Conspiracy’ is manipulating stock market

“Something smells fishy in the market. And the aroma seems to be coming from Goldman Sachs,” says John Crudele in the New York Post.  Stocks prices soaring.  “So, who’s moving the market?”  Not the little guy.  “Professional traders, with Goldman Sachs leading the way.”   NYSE numbers show “Goldman did twice the number of so-called big program trades during the week of April 13,” over a billion shares, creating “a historic rally despite the fact that the economy continues to be in serious trouble.”   Then he tells us why: Because the “Goldman Conspiracy” is using TARP and Fed money, churning the markets.  They are “gambling with taxpayer money.”

It’s nice to know that other commentators share my suspicions … and better yet:   Some day I could be watching a television series, based on what I once considered my own, sensational conjecture.