Financial topics

[JonLaw]

So it's quite possible that the current situation will continue at
least until Labor Day. After that, things should start moving along.

The next major, predictable, economic problem should be the Alt-A/Option ARM spike that is beginning soon and will continue into 2011.

I think that a general sense of calm will be pervasive until that gets rolling and potentially turns into recession #2.

[Higgenbotham]

The fundamentals have been working quite well over intermediate and longer timeframes since 2000 and I expect that they will continue to do so until the debt mess is ultimately resolved through either default or extremely severe inflation.

As long as there is an indirect $23 trillion bid under the stock market, I would expect the technicals to be more accurate in the short run. A switch was flipped in March 2009. I have only taken losses in short funds since that point.

I'm not interested in betting against the market in this environment. We already had a market crash/financial panic and the first recession, of what could easily become a muli-dip recession, is in the process of ending. The odds seem to favor the longs, so I am speculating accordingly.

I see no reason to bet against this market in the short run until I see signs of a significant technical breakdown.

Your statement describes exactly how most traders operate and how most traders probably should operate (I should add most of the time!). Basically it is to accurately gauge which way the herd is moving at the present time and to move with the herd in that direction.

When somebody is shorting into a high as I am doing (and have done in the past) they are speculating that it is necessary to take a position in advance because something so unexpected and sudden is likely to happen that it will be impossible to adjust to that "in the moment" using standard indicators.

It seems the entire herd is on board for further gains in the stock market or at least no sudden losses near term (including - finally - most here at the most bearish forum on the planet, though many have just dropped out of sight). As I've acknowledged, that doesn't mean the herd is wrong. But my preference is to follow the more nebulous and uncertain (near term) outline of history rather than the probabilistically more certain idea that what happened yesterday or since March will continue today.

In other words, getting back to the basics of the generational theory, it seems to me that the Strauss and Howe Fourth Turning catalyst is close enough over the horizon that I want to be positioned for that. What it will be and when it will be, I don't know. Nobody does. I think your opinion is that it has basically happened in the financial area and you could be right. For reasons I've stated, I think a much bigger blowup is coming.

[Higgenbotham]

Here's an example of what I'm talking about:

On the morning of August 24, 1857, the financial community of New York was horrified by the announcement of president Charles Stetson that his city branch of the Ohio Life Insurance & Trust Company had suspended payments. Men quickly learned that the house, which did a heavy interest in western investments, had liabilities of from five to seven millions - and that its assets had been largely embezzled by the cashier. The economic situation had been uneasy. A panic now struck, sudden and devastating as a tornado. Stocks fell to incredible levels; commodity prices sank; bankruptcy followed bankruptcy.

"Western investments" refer to the land speculation that was going on at the time.

Why isn't anybody talking about this? Because stocks are going UP!

Another example from today's news:

Of the origins of the crisis, Bernanke's only remark was that, until just before the crisis, "there was little to suggest that market participants saw the financial situation as about to take a sharp turn for the worse."

Bernanke's speech gets to the crux of the matter we are grappling with. Was it possible to foresee this crisis even vaguely or did we here just make lucky guesses? Did the Fed "save the world" as the headlines suggest? And if the headlines are delusional, could this mark the top of the market?

[Higgenbotham]

I talked to a futures broker I know this afternoon and asked if he knows of anyone still short the S&P futures. He said they were almost all stopped out, and anyone who is still left short is on margin call.

[John]

I talked to a futures broker I know this afternoon and asked if he knows of anyone still short the S&P futures. He said they were almost all stopped out, and anyone who is still left short is on margin call.

Did he say whether he thought that today's rally was short covering?

That sounds like the "reverse capitulation" or "upside capitulation" concept that
I was wondering about, based on your earlier description.

John

[The Grey Badger]

The Main Street/Wall Street disconnect has never been more evident. Today the DOW went up over $9,500 while the local media talked about the national jobless rate increasing and the number of intact families, even newborn infants, on the streets and homeless.

All the talk of green shoots and lights at the ends of tunnels and so on is starting to remind me of the scene in Atlas Shrugged where Dagny Taggart notes how full the media suddenly are of wedding anniversaries and dog shows and all sorts of fluff - at a time when the handbasket as already hit the hot place and is nearing the floor.

[Higgenbotham]

I talked to a futures broker I know this afternoon and asked if he knows of anyone still short the S&P futures. He said they were almost all stopped out, and anyone who is still left short is on margin call.

Did he say whether he thought that today's rally was short covering?

That sounds like the "reverse capitulation" or "upside capitulation" concept that
I was wondering about, based on your earlier description.

John

John,

He didn't say that, but I noticed when the 1016 level was hit, the market accelerated higher. Since the stops have been known to be at 1016 for a couple weeks, I think we can safely assume that this rally was due to short covering. There was also a pop higher near the close. This was probably due to shorts that were underwater finally giving up because the market didn't come back down. Really an extraordinary day.

[agnostic]

Regarding the various people who still are trying to hold onto their "shorts" (sort of punning).

I believe that TG, BB, and Goldman have decided as a matter of national/company pride to make sure that maximum ruin first hits anyone who tries to bet against the economy/country/goldman. I'm sure in their minds there is little to distinguish these three notions. I don't exactly know where the money is coming from for GS et al. to pull off the technical tricks that force the short players to cover their positions. (I suspect some combination of Fed/Treasury largesse, but no proof.) Basically, the inner circle is using "future taxes" and the ability to print money to buy up the market. At some point, almost all speculators who use fundamentals to guide their bets will be ruined.

I don't think anyone can really predict how long this game will continue. I think the trigger for the final downward swoop will be something external to the US economy/govt. It could be 2 days from now -- but it could be 2 years from now. Given the govt attitude [which is make the DOW/SP500 go up "at all costs"], fundamentals are no longer relevant.

[Higgenbotham]

Regarding the various people who still are trying to hold onto their "shorts" (sort of punning).

I believe that TG, BB, and Goldman have decided as a matter of national/company pride to make sure that maximum ruin first hits anyone who tries to bet against the economy/country/goldman. I'm sure in their minds there is little to distinguish these three notions. I don't exactly know where the money is coming from for GS et al. to pull off the technical tricks that force the short players to cover their positions. (I suspect some combination of Fed/Treasury largesse, but no proof.) Basically, the inner circle is using "future taxes" and the ability to print money to buy up the market. At some point, almost all speculators who use fundamentals to guide their bets will be ruined.

I don't think anyone can really predict how long this game will continue. I think the trigger for the final downward swoop will be something external to the US economy/govt. It could be 2 days from now -- but it could be 2 years from now. Given the govt attitude [which is make the DOW/SP500 go up "at all costs"], fundamentals are no longer relevant.

I believe you are correct when you say they are using printed money to buy up the market (indirectly). I went on record here a few months ago saying they would not do that. The reason I said that is because it's suicidal - it will destroy the currency. That's the limitation on how far this can go - the value of the dollar. This morning, the dollar fell again as the stock market rose. It's close to going off the edge of the cliff. If that happens, we will have far more problems than low stock prices. Denninger explains in more detail here and in other articles:

http://market-ticker.denninger.net/arch ... Ahead.html

I also believe you are correct in saying that to date fundamentals have not been relevant. I've been saying for about a week that the fundamentals are nowhere near what they were when the stock market has made similar rebounds from bear market bottoms. Now David Rosenberg has come out today with an article with charts with hard data that illustrate this. In fact, this is the largest rebound in history coupled with the weakest fundamentals of any rebound off a bear market bottom in history. I'm now pretty much convinced that most of the shorts who were tracking fundamentals all the way from the March low and using that to make decisions have been destroyed because fundamentally none of this makes any sense. I look at the future differently though in that the disparity provides for huge crash potential. Not all holders of stock are complete idiots and the government can't sponsor the purchase of all of it because there is too much. At some point, investors will sell.

[wvbill]

... I look at the future differently though in that the disparity provides for huge crash potential. Not all holders of stock are complete idiots and the government can't sponsor the purchase of all of it because there is too much. At some point, investors will sell.

This has also been my thinking. That this rally has been manipulated means there is no support once it turns. I also, believe that once Goldman decides "game is up" they will switch to the short side.

I feel the potential for a catastrophic second leg down is high -- my priority has been to be "in position" when that happens. It is tough, though -- we've been taking some punches -- low blows...

Bill