The G-Man Airs It Out
Now that all the fraud has
been perpetrated for options expiration and things are
back to normal dynamics, let’s evaluate the aftermath. We’ll look at
some charts tomorrow, for today I’d
like to address the psychology of the market.
Does Merrill’s Joe Osha not belong to the same
team as the rest of the analysts
who have proclaimed the birth of the new bull market? Today, Osha downgrade
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accumulate, stating that the
claims of increased demand going into the next quarter were essentially
all a bunch of phooey. The official
box score attributes the downgrades to Osha’s
belief that industry conditions have not improved and certainly do not
warrant the recent 39% rally in the
SOX index.
Osha stated that: “The frantic rush to ‘be
in front of it’ is creating a situation
in which investors have the potential to lose 40% between now and the
real, fundamental bottom in the semiconductor business. We would add
that there is no identifiable
evidence that the semiconductor recovery is close
at hand.” What a party pooper. I guess no one gave him the same stuff
everyone else was smoking last week.
Evidence? You don’t need actual evidence
of a recovery to claim one is occurring, Joe. Heck, by the time everyone
comes to their senses, the index will move 40% and your firm will have
one hell of a trade on the books (see Jonathan Joseph’s semiconductor
upgrade last week). Mr. Osha clearly
must not have learned how to play the game
from the right people.
Newsflash…this just in: Compaq Computer
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still sucks wind. We won’t waste time
reviewing their inability to hurdle their already pathetically lowered
earnings forecasts. Navistar (NAV) also
warned for the quarter and stated that weak pricing in the
truck market hurts their earnings outlook going forward.
Like the legendary hero, Robin Hood, the
“new economy’s” hero, Alan “Hood” has
once again ridden to the rescue and let go yet another 50-bps-rate-cut arrow
that sent the equity markets into quite a tizzy. In
reality, the confused old bugger only managed
to once again service his mistress, the stock market. Under
the premise of bolstering consumer consumption and confidence by providing
a psychological jolt to the equities markets, Alan “Hood” has now
clearly built his house on a foundation of deceit,
double-talk and ineptitude. Back in 1991 when
the economy was entering a recession, the consumer
responded by decreasing their demand for credit. This response in turn
minimized the negative impact of the recession and helped create an environment
that fostered a relatively quick economic recovery. However, in this
instance, Alan Hood feels that it is more important to continue feeding the
public’s unwavering demand for credit, in essence fanning the flames of the
uncontrollable inferno of debt that continues to consume the U.S. consumer.
Job well done, Alan. It is no doubt that our country — that has the lowest rate
of personal savings in the world and the highest levels of personal
debt — will continue to set new records in these categories. Heck, would
you want to put money in the bank and collect 2% interest or buy some stocks
that you are virtually guaranteed on a daily basis will return at least
15-20% by year’s end. In fact, the consensus of major market analysts on
Wall Street all agree the S&P 500 will be trading at levels at least 10-20%
higher than present. Don’t you see? Wall Street and Alan will have you
believe that if you save money, you are actually “losing” money
because you aren’t keeping up with the
“assured” gains of the stock market. God help us all when this fallacy
finally hurts every single American who currently has
a large amount of their household net worth in the stock market.
Through it all, we again heard from shameless
technology fund managers who have
triumphantly been claiming that although the Nasdaq has had “its bout
with weakness” their “mandate was to give
their investors tech exposure.” I suppose
I can never hope to achieve such a position as a tech fund manager as I
would assume my clients’ mandate would be for me to preserve their capital.
Don’t get me wrong, with my current trading
operations, I certainly aspire to maximize
returns. However, the fundamental difference between myself and them
is I don’t feel it necessary to lose 65-70% of my capital in the interim.
Alan is just a regular guy…Moving on, this
scenario of the “not-so-secret” rate cut has me brainstorming. Last
Tuesday evening, the futures went limit up
aftermarket. Alan Hood was like a dose of Metamucil to the markets as he provided
quick overnight relief the following day to the joy of those who were
“in the know,” and as such, well positioned for it. I remember the
days of the Long Term Capital Management
debacle in which the firm attributed “a sudden
evaporation of liquidity” to the massive mess that the Federal Reserve
ultimately bailed them and the rest of the market
out of. In other words, LTCM had hundreds of
millions in derivatives that blew up in their face, they couldn’t get out of
them, and the market completely knew about it. In this instance,
however, the evidence is mounting that perhaps the Federal Reserve once
again stepped in as a relief pitcher and intentionally walked in the winning
run. Could it be that the reason Goldman Sachs was buying tens of thousands
of S&P futures contracts and idex call options for two weeks before the
not-so-surprise fed rate cut was because the entire situation was set up for
them to be bailed out by what would later appear to be “natural forces”?
Can we really believe that the institutions that were getting so heavily
long futures in the pits of Chicago were doing so out of normal market
dynamics? If you can believe that this occurrence was merely coincidental,
you probably need to finally throw away the ETYS and Pets.com stock
certificates you are holding on to. This whole thing stinks to high heaven and
warrants a look from Oliver Stone.
The Federal Reserve’s timing and methodology on
the rate cut was uncanny. Impressively, Alan
Hood and his insane posse of govs executed the move in a manner
of an old fashioned currency intervention. In such an instance, the intervening
entity usually waited until options expiration week and chose a time
when the market was right below an area where there were a lot of options
struck at a critical level of resistance before releasing the hounds.
And just like that, during an expiration week,
you get the Alan Hood-induced rally that took names like
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125% and
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4 lows. After the last piñata of short sellers was disemboweled, the final
scores read something along the lines of the Nasdaq Composite gaining over
40% as of last Friday’s high, with the DJI rallying above the 10,700 level
before succumbing to gravity. In essence, the Fed has now sewn the seeds
of its own demise by clearly broadcasting to the international community
that our Federal Reserve is targeting the equity market. As the 10,200
level in the Dow isn’t high enough to rescue the credit hungry consumer,
how high is “high enough” for Alan Hood and what will happen when
his quiver runs out of rate-cut arrows?
The only time the markets didn’t respond
positively after four rate cuts was in the 1930’s…and, quite possibly, we are
witnessing it now. With today’s action, the
major indices came very close to revisiting the levels at which they
were trading prior to the Fed’s bail-out — er — surprise, rather, rate cut.
This week’s action truly holds the key to the underlying strength or weakness
that truly exists under all the hype and drama.
But…oops, they did it again. The overzealous
bubbleonians (to borrow a term from Bill Fleckenstein) continued to bid up the
techs into the end of expiration week,
needing to “in the market” worse than a heroine addict in the
need of a thorazine fix. This, as they were made to believe, was the “real
thing,” the rally that would restore the glory days of the past when you
can just buy and watch your holdings melt-up in an unyielding parabola higher.
How easily they were to forget the pain of the past and the lessons of
improper money management only to once again be lured in at the risk of losing
the opportunity to make back everything they lost.
Speculation is not only not dead, but it has a
far more foreboding tone to it this time around. For you see, there was lots of
fun in the speculation that took the Nasdaq
up to 5100 and saw stocks gain 50-70 points in a single session.
Heck, buying a stock up 18 and selling it up 49 was just another day in
the office. Throw in the fact that bulletin-board stocks that were trading
for pennies also were bid up to levels in the $100’s of dollars and you
truly can remember the mania. However, it is different this time. You sense
desperation. You sense a willingness, no…a need to create the mother of
all rallies so the unsuspecting who were taken to the cleaners can jump on and
make back the losses they incurred by holding on to stocks just as Wall Street
had prescribed. Why can’t it be just as easy now as it was then? Why don’t
the institutions want to play the same game they did back in late 1999-2000?
The prevalence of this mindset is the largest reason why this stock
market will continue to decline throughout the next 2-3 years. Until valuations
revert to the mean, fundaments and balance sheets once again reign paramount,
and speculation is executed, as Mr. Cooper accurately quoted me as saying,
we are goin’ dowwwwwntown.
Fundamentals? Valuations? Investing? None of
those terms can be used in describing the
current state of this market. Sadly, but not unexpectedly, the
market has morphed into a gigantic speculative casino in which the only question
is which way will the hype, lies and subsequent momentum created by said
hype and lies push us this week? Or better yet, we have created a modern
day Roman Coliseum in which the crowds are whipped into a frenzy by staged
productions in which you can count on someone’s face getting ripped off
at the end of the event.
As I read several news publications this weekend,
namely the Smart Money magazine that
has the cover ask: “Are You Ready For The Bounce” in which they
cleverly display a rubber ball rebounding like turbocharged flubber in a
vacuum, I thought of the most world-renowned playboy in the world, Hugh Hefner.
Hugh has gone out of his way to publicly display his ménage-a-eight.
He makes most men bubble over with a desire to “be like Hef”
and live the same naughty yet enviable lifestyle he leads. It is here that
I see the similarity between Hugh and our stock market. You see, just as
Hugh presents an outward appearance of being the world’s greatest lover who
has a small regiment of beautiful, bubbly blondes indulging him in his every
desire, the stock market has presented itself as “The Great Game” in
which fortunes are made if people just follow the
simple rule of “buy and hold.” And
just as Hugh would probably resemble nothing short of overcooked fetuccini
without the Viagra candy bowl next to his bed, the stock market would
collapse under its own weight if it weren’t for the Federal Reserve giving
the bubbleonians their thorazine every few months or so. And so the charade
and the dependency continues until we all just get tired of the blantant
insult to our collective intelligence.
With CNBC being quick to have a small army of
analysts and market strategists step forward
and confidently claim that today’s weakness was a normal “pause that
refreshes” that “was expected,” we can’t help but to notice the
internals. Under my dictionary of market
terminology, the phrase “pause that refreshes”
does not have “down” volume outnumbering “up” volume by a
multiple of seven (7). That is, the Nasdaq
Composite today had 258 million shares of “up” volume and 1.56 billion
shares of “down” volume. However, our friends at
CNBC were careful not to expound upon this small bit of data as it may have
most certainly been a difficult matter to address by the bullish regiment
of guests. Nonetheless, we are being told to buy now before we miss the
new bull market that will most assuredly shower those of us who conform to
their urgings with untold wealth.
As soon as we thought that the music had stopped
and those of us who were fortunate enough to run and find a seat got
comfortable, it has become clear that the
band merely went backstage for awhile, smoked a joint, came back out and
is playing a very loud encore. Are you going to get up and dance again or
are you going to play from your seat?