Wednesday, December 23, 2009

The Last Pump and Dump

Only 5 trading days left (the 24th and 31st are half days) until Wall Street's big pay day. The only question left is will Wall Street once again get paid the big bucks, leaving Main Street behind to hold the bag? Even as Wall Street is once again eyeing massive end-of-year bonuses, millions on Main Street remain jobless and financially decimated. Throughout the past year, with each bad jobs report, the stock market leaped higher on the basis that fewer jobs meant lower interest rates (more juice for stocks) and higher profits, as companies cut back on costs. Only with the December jobs report showing a mere 11,000 lost jobs, did the rally finally slow. Coincidence? I think not, because everyone on Wall Street knows that once interest rates start going up, the party is over.

World's Biggest Pump and Dump:
Many want to believe that we are in a repeat of 2003 when the Greenspan Fed sponsored a 4 year borrowing bonanza that ultimately culminated in last year's crash, because everyone believes they will be the guy who is smart enough to take profits before the new Fed-sponsored Ponzi Scheme implodes. By driving interest rates down to zero, the Bernanke Fed is encouraging the same type of risky speculation that led to the 2008 crash, be it in so-called "carry trades" (borrowing in US$ to buy foreign assets), yield curve "arbitrage" (borrow short-term, lend long-term) or plain old leveraged speculation. Have we not learned anything from the past decade? There is no such thing as true yield curve arbitrage or risk-free carry trade. All of these types of trades involve substantial risk and eventually have to be unwound, usually under considerable duress. However, once again, as long as a trade works for one bonus cycle (one year), Wall Street appears to be once again willing to embrace the strategy, regardless of the longer-term consequences. Wall Street greed is boundless, I understand that, but from the Fed's standpoint, do they really believe that this liquidity driven strategy will lead to a sustainable economy? All of the jobs created during the Bush/Greenspan pseudo-recovery have evaporated. You may recall that most of those temporary jobs were in construction, mortgage finance and bar-tending. I am sure some bartenders have stayed busy for obvious reasons, yet who needs a bar-tender when you can get a cheap bottle of tequila and stay in bed at the homeless shelter? The U.S. has had a decade of lost job growth, yet here we go again attempting the same Ponzi-financing strategy that blew us up last year.

Man of the Year
And to add insult to injury, Time Magazine just nominated Ben Bernanke as Man of the Year for 2009!!! Are you kidding me? That's like giving the Chief of the Fire Department an award for saving (half) your house, knowing full well that he started the fire in the first place. Can we really be this stupid? People decades into the future will not comprehend how it's possible for people of today to be this dumb.

Culture of Consumption
As predicted by Paul Kennedy twenty years ago, the ascendant culture of consumption has become all-pervasive and brought with it a frightening new predisposition towards deceit and laziness. More effort is now put into confusion and denialism than is put towards facing reality or coming up with constructive solutions to most of the world's pressing issues. The same short-sightedness, greed, and gluttony underlying the financial crisis has made its way into all nature of pressing realities, not the least of which is Climate Change and its associated denialism movement. For example, The Economist (12/5) estimates that a viable solution for carbon-control would cost 1% of global GDP per year as compared to last year's banking crisis which cost 5% of global GDP (albeit many believe last year was a one time event). One would think that 1% of GDP would be a small price to pay as an insurance policy against future catastrophe, to say nothing of side benefits such as less pollution, energy independence, and reduced funding for international terrorism. However, the Denialism culture would rather spend its time to confuse and obfuscate and run well-timed smear campaigns than to admit the problem and participate in the solution. Similarly, the Millenium Development Goals project from 10 years ago, was intended to make significant steps towards eradicating world poverty. The cost of that program was pegged at just over 1% of OECD GDP, yet only Denmark made the goal. All other nations fell well short of the 1% goal - many (which will remain nameless) to an embarassing degree. As for the climate situation, I have no doubt, that the coming economic collapse and Peak Oil (another widely-denied reality) will do more to reduce carbon emissions than any convention in Copenhagen could ever accomplish. Nothing like falling economic output, and a sky-rocketing cost of capital to put high risk, multi-year oil exploration projects on hold for years if not permanently. Similarly, the economic contraction is going to soon put an end to the brilliant strategy of funding terrorists via their Middle East oil sponsors (Saudi, Iran etc.) while at the same time squandering billions fighting those terrorists in the same region. One way or another we are going to be forced by circumstances to adopt a downscaled way of life more in line with economic and environmental realities.

Nothing matters, until it matters
I admit that having been a bearish prognosticator for most of this year, I am bowed and bloody, yet far from broken. The market is still substantially lower than it was when I made my first predictions of dire financial collapse over 3 years ago. Meanwhile, I am not fooled by Wall Street's latest attempts to manipulate this market higher by every trick in the book, as evidenced by ever-declining breadth and fading strength rotating from one sector to another on a thin volume rally designed solely to fatten end-of-year bonus checks.

I have indicated several times recently that the same red flag markers that were present at the top in 2007 and again before the crash in 2008 are flashing EXTREME warning signs now: low options volatility (.VIX), overwhelming bullish sentiment surveys (AAII/IIS), options put/call ratios indicating investors taking on too much risk and not hedging. In addition, as you see Wall Street is fully willing to ignore the impending signs of catastrophe emanating from Dubai, Vietnam, Greece and Spain, as the next saga to the credit crisis - sovereign defaults and a global currency crisis - waits in the wings. That latent catastrophe will seemingly have to wait a few more days though until Wall Street gets paid, because the Boyz are not ready to panic just yet, what with so much payola on the line. Better to wait until January when its mostly client money at risk and therefore leaving the general public as the usual bagholder. How many times have we seen in the past decade Wall Street ignore the blatant early signs of a crisis (Dotcom bust, housing bust, subprime etc.) only to inexplicably panic a few weeks/months later on basically re-release of the same news? On Wall Street, nothing matters until it matters.

Fool me Twice...
If you are reading this BEFORE the collapse, then be honest with yourself as to whether the latest Obama/Bernanke Ponzi scheme is going to work out. Or, do you think you can ride the rally and perfectly time the next collapse? Bear in mind, that in a currency crisis, there will be a total lack of liquidity, so you could easily wake up one morning and find that half your portfolio is gone and never coming back. The only safe investment is mid-term and short-term treasuries and the easiest way to own them is via the IEF and SHY exchange traded funds.

So, from my standpoint, whether the Boyz on Wall Street panic early and all start rushing to the exits at the same time, tripping over each other to get out the same door prior to 12/31, or somehow they continue to levitate the markets through 12/31 only to have it fall off the cliff in early January, either way, THIS ALL ENDS BADLY AND I STILL BELIEVE SOONER RATHER THAN LATER...


Thursday, December 3, 2009


Last night the Elliot Wave International Short-term update (published 3 times weekly) issued a bullish market call through year end. Both their top prediction and their top alternate prediction now call for higher prices into year end. This despite, by their own admission, the fact that investor bearish sentiment is now at a 6.5 year low ! Yet, despite being bearish for the better part of last 3 months and telling us that the next major wave down "P3" was just around the next corner, EWI are now telling us that the next intermediate sized move will be up through year end, not down.

Frustrating? Yes. It would have been nice had they issued this bullish call two months ago, at around S&P 950-1000, so we could have saved some pain and suffering on this last 10% leg higher. In fairness, Prechter issued a monthly interim report on 11/23 saying he is now recommending 200% short (bearish) positions, but this only causes further confusion because there is now a clear disconnect between the big man himself (Prechter) and the Short-term update (STU).

Been there, done that
As frustrating as this disconnect may seem, I have seen this movie before and I know how it ends. I keep a checklist of "factors" that I look for before a major turn in the market and truth be told, I now expect EWI STU to be leaning wrongly as one of the key factors I look for prior to a major turn in trend. To know why this is so, let's go back to the all time high in the stock market two years ago in 10/2007. At that time, an eerily similar series of events played out in which EWI's STU had been leaning bearish and then inexplicably issued a bullish multi-week forecast. Out of massive frustration, I was forced to "go it alone" and I went so far as to issue this tirade here, indicating that any thoughts about a "running triangle" into year-end, were pure bullshit and marked capitulation at the highest levels. Who was right in the end? As it turns out, the market did what I said it would do - it made its top 10 days later, rolled over, and never looked back.

What does this all mean? It means that if you are now "long" (owning) stocks now, just bear in mind one thing, that the Investors Intelligence Advisor's Survey shows the number of bears at 16.5%, which by EWI's own admission is a 6.5 year low. In addition, the all-time bearish investor newsletter service, none other than EWI itself, has now capitulated to the bullish camp (at least intermediate term) and is also now bullish into year-end despite having been bearish for the better part of the past several months. Therefore you might ask, just how bearish is EWI overall? Suffice to say, they begin each monthly Financial Forecast newsletter telling us that the next leg down will be a "SURVIVAL LEVEL EVENT". Therefore, their turning bullish, even for the intermediate term is a sign of complete capitulation by all things bearish.

Now ask yourself this one thing, if you want to sell stocks (Corp. bonds, Muni bonds, gold), who is left to buy?