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