Monday, June 27, 2011

Fat Chance

Greek Foreign Minister Papandreou is out selling the new austerity package to his Parliament. He wonders why Greeks are rioting in the streets. How would you like to see your taxes go up $ 4,000 per year next year? That's what a typical family of four in Greece will face under the proposed austerity plan, according to calculations by a Greek newspaper, To Vima.

That is only the beginning. This austerity plan is merely a small down payment on a massive effort to stem the huge budget deficit. There is no hope of a budget surplus. This plan is intended to slow the growth of debt, not reduce it. Reducing debt would require far, far larger sacrifices.

Papandreou assumes that citizens that have been told for generations that they are entitled to early retirement, free health care, free education...essentially free everything..will now pony up to pay for all of this free stuff. I have my doubts.

No way Greece will implement this plan. No way. The Parliament may pass the plan, but it will not be enforced or implemented in what is arguably the most corrupt government within the European Union.

Analysis of the stock market rally of 28th June.

Today the markets rallied and closed solidly in green. However I have few concern regarding the coming uptrend so eagerly awaited by the bullish small speculators.

  • The VXO is in 20s. All past major corrections have ended with VXO in the range of 28+.
  • If  we look at the weekly chart of SPX and put a 75 simple moving average, we shall see that from 2004, all corrections have ended near or below 75 SMA on a weekly chart. By that reckoning, we still have a fair way to go.
  • The money flow was very negative.The Block Traders sold in the strength in the last hour. If past is any indicator, normally the next day is a huge gap down day.
  • The CBOE market data shows that the retail investors have turned bullish.
So I am not holding my breath for a stock rally yet.

I think what I think.

A new week. But the old Greek drama continues. The market has been selling off for eight weeks now. So where do we stand. I am thinking that:
      ·         Although S&P 500 has sold off 7.5% from the June 1st, the fear factor is not high enough to call a bottom. In that logic, I am thinking that we shall see continuation of the sales.
  •        It is possible that we shall see a breach of the 200DMA and then the panic factor comes in play. 
  •    It is possible that by Wednesday, 29th June 2011, we shall see a huge sell off coinciding with the Greek vote. 
  • Because of the uncertainty regarding the Greece situation, the Euro has been selling off. Along with Euro other risk assets like Gold , Silver, Oil etc are also soft.
  • All these commodities along with the stock markets will possibly reach bottom by Wednesday when the market will realize that the Greek vote is inconsequential.
  • We would possibly see a summer rally, in opposite thinking of end of Fed induced liquidity, when retail investors might think of leaving the market.

So I am thinking and  I am marking Wednesday, 29th June as the date of reckoning.

But if the VXO does not reach high 20s by then, I would still think that the sell is not over yet. In short term stock markets are ruled by greed and fear. As of now, there is very little fear. the retail investors have turned bullish as evident from the put/call ratio.Unless we see fear and panic, there is no point going long. So if 29th June gets pushed to 5th July, so be it. I would rather wait.

Sunday, June 26, 2011

Who needs a crash diet?

When you see this picture, you can figure out that it is a picture from Greek Parliament.
Who do you think needs an austerity measure?  To me the answer is obvious. The rich and powerful of Greece, the fat cats, who have sucked the country dry, needs to be put on a strict diet of olive and water for the rest of their life.

Call Biden's Bluff

There is no time like the present to bring an end to the massive US fiscal deficits. Congress should vote a resounding "no" to an increase in the debt limit. Force the issue. It is the only way any progress will ever take place. It gets no easier later. Now is the time as Senator Obama pointed out five years ago, when he voted, as a senator, not to increase the debt limit. He was right then, he is wrong now.

For example, moving the age limits on social security saves a lot more money if you do it now, than if you do it one year from now or five years from now. Why wait until all of the baby boomers have retired and the problem is a multiple of what it is today. Do it now!

This is the time. This is the place. Folks like Senator Warner of Virginia claim to be moderates, but their voting record is to the left of Barney Frank. They are preaching that if we don't raise the debt ceiling, there will be catastrophe. Thanks to senators like Warner there has been an ever escalating deficit. He knows that he won't be there when the ultimate catastrophe comes. All Warner wants is the ability to waste more taxpayer dollars and postpone dealing with the problem, so that he can get re-elected. That's why he wants a "clean" debt ceiling increase bill.

Congress should call Biden's bluff. A poll taken in the last few days shows that the public favors a "no" vote on raising the debt ceiling by a margin of 41-38. Every Congressman who votes to increase the debt ceiling should lose his seat -- Democrat or Republican.

Saturday, June 25, 2011

Paying money to lose money in Stock Market

Losing money in stock market is a no brainer. After all these days it looks more like a giant casino and you don’t even have to leave home to gamble. It is rigged and the house always wins. But the dumbest way to lose is to follow the market gurus like Charles Nenner, Prechter of Elliot Wave, and many other forecasters of their ilk.

Before you say that I have no idea about what I am saying, I want to say loud and clear that yes I do have the idea.  Because I have been dumb enough to learn it 1st hand.

When you are new in the game of investment, you want to try out everything and find out what works. I was no exception. In-spite of having a professional degree in Finance & Accounting, in-spite of working at the highest level of corporate management, there is still that desire to be on the correct side of the market without efforts . It is the same reason people go to faith healers who tell them that cancer can be cured with their magic touch or villagers go to fortune tellers and palmist who then predict the future and give them the way out.  I suppose I was na├»ve and stupid to put my belief on these people instead of doing more rational and analytical thinking and research. At some level professional education is no match to the primal insecurity of human being which has created a class of people called god-man.

Let me share my own experience so that those who are reading this, be forewarned.

Prechter of Elliot wave is a very good salesman. He prays on the fear of the people and is always predicting a doom. Now a broken clock is also right twice a day. Because the memory of 2008 crash is so fresh in the minds of the people, people are fearful of another looming disaster and the economic news has not made things easy either. The whole of 2009 and 2010 Prechter and his company went on to predict a crash, month after month, he went on TV predicting Dow at 1000 and all sorts of doomsday scenarios. And every month, the goal posts would be moved. In between there were few corrections in the stock market and he got further boost from those corrections.

Stock markets corrections are a natural phenomenon and are necessary. But he would come and say “I told you so” and a big one is coming. People like me, who invested on the short side of the market, based on his advice, lost money head over heels. We missed out on the great Bull Run and it did not do us any good. Prechter‘s favorite saying was that he called the 2008 bottom correctly and predicted the start of the new bull market. Again, it was one of those fluke things, when lots of people were calling the bottom, like they are doing now. No way Elliot Wave did predict the bottom or call out the new bull market. Because the Elliot wave theory is basically charting the history after the events have taken place. There are many interpretations of the so called wave, major, minor, still born, unborn and every one of the wave experts have their own theory. The internet is flooded with them. The long and short of it, after losing money by following this gentleman, I quit and went for another clairvoyant.
And there was Charles Nenner, the cycle forecaster. His reputation ran ahead of him. Ex-Goldman Sachs and the man who had called the top sometimes in the past. I should have known better.  It is alleged that GS and other primary dealers have 1st hand knowledge of the market movement and possibly a hotline or two with Fed. Otherwise how come they have only one losing trading day in the entire quarter and sometime they never have a losing trading day in the whole quarter at all. It defies the law of probability and the chances of that happening to you and me are one in a billion. That someone has access to that hotline and made a correct call in the past is no wonder. May be he was set up by them to make that call. Who knows?

 But then when I started reading Nenner, I found that it is an exercise in double talk and confusion. For e.g. “The cycle bottoms next week but it can come earlier”, what do you make of such statement? Once again, the blame is put on the reader because of the wrong interpretation. Personally I have never made money following Nenner; in fact I lost money whenever I acted upon his advice. My bad luck! Nenner’s newsletter is like the astrology columns in the news papers. Vague, general and applies to some people at some time but is never accurate.

I challenge both these gentlemen to publish their short term market call (things that will happen in the next 15 days), in clear, unambiguous language and we shall monitor their call for a year. I am ready to stand corrected but till they take up this challenge, I will be a skeptic.

Today, after many years of trial and error, I have found that we can also make the market call, as well, if not better than Nenner or Prechter. Now I study many things like sentiments, demography, money flow in the market, many other technical indicators and try to think like a criminal to beat the criminals in their own game. And I think I am successful. I am winning consistently and if you read my blog, you will see that I am getting good at calling the turns.

Tons of free stuff is available on the net, so we don’t need to pay money to lose money.

Standard Chartered Bank report indicates that "Gold Top" is coming.

No, they did not say that in their report. In fact the report of Standard Chartered Bank is just the opposite. They are calling for US$ 5000/oz gold very soon. And the arguments are same that has been used over and over again during the last 10 years of gold Bull Run.

Before, we go over their argument for $5000/oz gold, let me clarify few things. I have deep suspicion about any recommendation from the big banks which comes out for the benefit of their clients and other investing population. Remember Goldman and other similar banks? It is alleged that (If I don’t use the A word, I might hear from their Lawyers), they packaged all the shitty deals and crappie products into AAA products and unloaded on their unsuspecting clients.  Didn’t Senator Carl Levin say the same thing in his report that Goldman Sachs Group Inc. (GS) “clearly misled their clients and misled the Congress,”? Yes, of course GS has refuted what Senator has said but Justice Dept. may be considering taking action based on that report. In light of that, if I continue to have deep suspicion on the recommendation of these Big Banks, may be that is healthy skepticism after all. Normally, when they say buy, I sell and when they sell, I buy. So far it has served me and my clients well.

So when Stan. Chart Bank comes out with a report based on old hashed reasoning; my conspiracy theory antenna goes up and starts giving alarm signal. May be the top is near, 3 months at the most.
Let us look at their reasoning:
We believe that these factors – limited gold production, buying by central banks and increasing demand from India and China – can potentially drive the gold price to US$5,000/oz, as highlighted in our commodity team’s earlier report." 
Now, Indians have been purchasing gold for ages infinite. How come, pray, gold went into a bear market for over 20 years? Let us look at the long term chart of gold.

As you can see for yourself gold reached the top in the year 1980 with a parabolic move, and then came crashing down. From 1980 till 2001, for 20 long years, gold was in a bear market. Investors, who listened to the same logic in 1980 and purchased gold at the top had to wait 20 years to see any traction in price. In the mean time gold reached near $ 200/oz.  On an inflation adjusted basis, if gold has to match its peak price reached in 1980, it should be over $2500/oz now. So even at today’s price, Investors of Gold in 1980 have actually lost money.

Were not the Indians buying gold for those 20 years? Did the production of gold increased during those years and have now fallen dramatically? Were not there any war or inflation scare during those periods?  And regarding the purchase by central banks, the 2nd largest holder of gold is not any central bank but the GLD fund. Central banks buy gold along with other foreign currencies and it is always within a certain percentage of their total holding. In the year 2010, as per Wikipedia, ( ) China had only 1.7% of their reserve in gold. It is the developed world, North America and Europe, who have the largest gold reserve as a percentage of their forex reserve.  And we shall not see any dramatic change in the holding percentages anytime soon. So the logic given by Stan. Chart does not sound very convincing.
Standard Charted Bank knows all these and yet they come out with a report based on fairy tale.  Let us see when the gold price started rising.

We see the rise in gold prices from the year 2001. Do you remember what happened during that time? The Tech. Bubble burst. Allan Greenspan, in his infinite wisdom, started flooding the market with liquidity. Most of the liquidity went to create another bubble, i.e. Housing bubble, but some part of that money flowed in commodity sector, not because of increase of demand from India and China, but because of the speculators had a free run. By the way, biggest commodity desk and speculative section is usually found in the confines of the big banks. In the year 2008, when the housing bubble burst, helicopter Ben, started throwing more money, more liquidity in the market. The Stock market and commodity became the next bubble. Actually Ben wanted just to inflate the share market, to create a wealth effect, but he has no control where the money ends up. So Oil went up from $35 to over $ 100 and gold and silver went for a parabolic rise. Don’t we hear the same logic about oil? Production is limited. India and China consuming more and more oil etc, when we all know that $40 out of every barrel price is for the speculators.

Let us look at the US Dollar index:

This is a 30 year monthly chart.  In March 2008, UD$ index reached its lowest level of 71. And gold reached $ 1000 for the 1st time. Thereafter when the dollar index jumped up, gold fell. If gold is to reach $ 5000 in the foreseeable future, the dollar index has to fall to the level of below 20. Can you imagine such a situation? If that was to happen, US dollar would have lost its world reserve status, there would be riot on the streets of USA, Gas would be $ 20 per gallon, and food prices would be beyond the reach of common people.
If and when gold reaches $ 5000/oz, we are better off buying guns and ammunition and fill up the basement with dry foods. Because then there will be civil war folks. Then we will not need gold.
Standard Chartered Bank knows that as well. They know that such a situation is not likely to happen. Still they come out with such a report. Only reason I can think of is that, they want to unload their gold position.
gold do well before the crisis not during the crisis. If there is a credit event, another recession, war , balance sheet contraction or whatever the theory the gold bugs are propagating, gold is sure to go down along with other asset class.

Personally, I think, Gold will reach a temporary bottom by end of June 2011, and then it will go up for another two, max three months and reach a top price of $1650/oz. That is when I would want to get out of gold.   

Friday, June 24, 2011

Are we there yet!

For days I have been writing that the sell off is not over yet because the fear factor is not high enough.

The stock market is ruled by greed and fear. Unless we see high fear, verging panic, we cannot call a bottom. How many investors purchased the 200 DMA? It seems quite a lot. It goes to prove that one should not buy based on TA, however TA is very useful while selling. All the TA indicators have been screaming oversold, buy and what not and yet the fear factor was absent.
This is the only chart one need to know. The Eur/Usd.

Remember that the stock markets are price driven not news driven. News follow the price. The 24/7 financial TV and channels have to report something to stay alive and seem relevant. So they spin any news according to the price action of that day and time. If the prices are moving higher, they paint the news rosy and if it is going down, the sound bites are gloomy. But no matter whatever the MSM ( Main Stream media) say, it is almost always irrelevant and on the borderline of being false news. One should see the latest of Jon Stewart on Fox news.

Moreover, we always find that the big movers and shakers (some hot shot hedge fund manager or bond king ) comes and gives their opinion regarding the future of the market. Or Gsucks give advice to its clients which are made public. 9 out of 10 times, we can be sure that they have an agenda. They want to sell high and buy low and they will say the exact opposite of what they are actually doing. A healthy distrust of these people or recommendations are essential for survival in the jungle of the stock markets.

A case of point was the last hour rally in the stock markets yesterday,23rd June 2011. Basically the market rallied on headline and without reading or understanding the full context. As if Greece has really been fixed! Like some one yelling fire and people rushing out in panic. In this case it was greed. The retail investors wanted to catch some early windfall and the news barons, who are billionaires, added some more to their wealth. Today morning all that gain was given up.

I still think we need to sell some more, go down below the 200DMA and have a panic situation. Only then we can call a bottom. But in this manipulated market, one can never be sure. 

Leave the Oil Market Alone

Obama's decision to release oil from America's strategic reserve is another bone-headed, political decision designed to rescue his collapsing state in the polls. It is bizarre that a President who claims to support alternatives to fossil fuel energy objects to the rising price of fossil fuel energy. There really is no other way to stimulate alternative energy than to let prices of fossil fuel energy rise and let the market produce alternatives. There simply is no other way.

This is truly an administration that believes government can work wonders. The only wonder is why they believe that. The sobering facts of what has happened to the economy under this administration is a compelling testament to the failure of government to create jobs and improve economic performance. Now, these folks think they can solve energy problems by lowering the price of fossil fuels. You wonder if anyone in this administration knows anything about economics.

This is Why Politics Has a Bad Name

Are they kidding? Merkel and Sarcozy. Is Greece really going to accept economic devastation for at least a generation to pay back German and French bankers? Is there anyone out there who thinks this is really going to happen?

There is no way Greek citizens will agree to this. It is not politically possible. The Greek Parliament may pass whatever legislation that it feels like passing, but enforcement will not take place. There are few governments or countries in the world where corruption and tax evasion is as rampant as Greece. This is always the outcome of of an ever burgeoning government.

European Union officials believe, as Obama believes, that raising tax rates will generate revenues. In fact, raising tax rates last year in Greece led to a substantial decline in tax revenues.

What is happening in Europe is typical of modern politics both in Europe and in the US. Pretend politics. There are few, if any, statesmen in Europe who are behaving rationally these days. Remember the Treaty of Versailles? How did that work out for you?

Thursday, June 23, 2011

How they cook a lobster.

The Asians (Thailand, Korea) do it the conventional way. They throw the thing in hot boiling water.

In Latin America, they hammer it over the head and then cook it anyway they like it.

In Europe, they put Greece in a pot of cold water and then slowly turn up the heat!

Talk about the humane way of doing things without cruelty.

One would think that the colour of the skin of the lobster has everything got to do with the way of cooking.
When the economic crisis hit Asia in the 80s, these countries did not get pampered with all the Keynesian stimulus stuff, they did not get endless bounty of love to prop up their banks or any such sop. But ahh, there you have it. The banks in Asia did not owe money to the Banks in France. So the benevolent Europeans had nothing to lose if these countries went under. The currencies of the Asian tigers collapsed, businesses closed down and there were untold human miseries all around. Where was the humanitarian concern of IMF at that time? In fact IMF forced these Asian countries to do a cleansing without any social safety net at all. Why then the double standard now when their own European countries are facing the default.That's called new age of colonialism.

In fact if Greece were to default, it would not be the end of the world. Like the Asian countries, Greeks would get up, dust up and fix their economy in a way to become competitive once again. Greeks gave the world democracy but unfortunately today that is a society in decay. Tax avoidance is rampant, in fact at the highest level in Europe, the rich and powerful are in collusion with their political class and have already sent their money out of Greece. It is the bottom 90% who are being asked to join the belt tightening program. But they have got used to the easy life for last so many years and they will not accept anything less. In fact, instead of being thankful to the Germans for the good money that the Germans have thrown after bad money, they are now calling them Nazis. The ungrateful b******s. Not my word. The German press is saying it. The Greek society is blaming everyone else for their plight except themselves.
Anyway, the Lobster got to get cooked. The world will not end. At the most, the hierocracy and double standard of the Europeans will get cleansed along with some ill gotten wealth of the bankers. The growth will resume only after the mess has been cleared off.

Wednesday, June 22, 2011

These are a few of my favorite blogs...

OK, I won't hum a few bars from Rodgers and Hammerstein, but I will get right into today's post. 

In Monday's wrap up of the AR blogger quiz, I mentioned that one of the desert island quiz questions asked us to name our favorite blog. The exact question was, "if you could only read one blog (not Abnormal Returns) which would it be?"

If you read that post, you know that I picked Kent Thune's blog, The Financial Philosopher, as my desert island pick. What you may not have known is that I had a very hard time picking just one blog to read, and in fact named several blogs as favorites in my original response! 

So getting right to it, here are a few of my favorite, "must-read" blogs:

1. First off, if you haven't read The Financial Philosopher, I highly recommend it. 

Not only will you find the more recent posts a joy to read, but I think you'll also find that the archived material holds up very well and includes a great deal of original insight and wisdom not only on financial matters, but on life as well. I've learned a lot from Kent's blog and it's a great place to occasionally reflect and exchange ideas (in the comments section) with Kent and his readers.

2. You might have noticed some links to Joe Fahmy's trading blog in recent months, here and on Twitter. 

While Joe doesn't have as much time to update the blog as he used to, I still check in for his thoughts on the stock market and on trading. There are some great posts (and videos) on his stock selection methods and trading philosophy here. You'll also find some key interviews with pro traders like Joe's mentor, Mark Minervini.

3. The Tischendorf Letter is another great resource in the world of stock trading blogs. 

Not only does editor, Olivier Tischendorf combine technical analysis with macro and fundamental themes, he also serves up some great quotes and excerpts from his favorite trading books. Don't overlook his public chart lists and key interview posts as well.  

4. Last, but not least, is the excellent Mises Institute blog

A font of information and insight on economics and liberty, the Mises blog is also a gateway to the vast library of resources (ebooks, audio, and video presentations) found on the main site. Keep this one bookmarked; you will need it (trust me). 

And of course, as a student of the markets and of writing, I'm always checking quality blogs whenever I can to get the best available info from my chosen filters. Please visit our blogroll ("Blogs") in the sidebar to find more of the excellent bloggers in our network. 

I learn something from all of these sources and I'm pleased to count some of them as my friends. Pay them a visit, read their posts, and if you like what they have to offer, subscribe and let them know!

Tuesday, June 21, 2011

Sell The Rally

"Stocks up on news of a Greece settlement," read this morning headlines. Stocks are cheap, no doubt. But, stocks are cheap for a reason. Economic policy in the US threatens to push the economy into a second recession and Europe is turning a small problem into a potential financial conflagration. This rally is going nowhere. Sell it and wait for more rational times (or even cheaper stock prices).

Monday, June 20, 2011

From Molehill to Mountain

Greece is a small country with an estimated 11.3 million in population. It's total GDP was about $ 320 billion in 2010. So, why all the hubub. Why can't Greece default on its nearly $ 400 billion national debt? It is not going to be able to pay it and it's debt is growing currently at nearly $ 50 billion annually. With these numbers, why are France and Germany so intent on stepping in and turning a molehill into a mountain.

Politicians are obsessed with fixing things and so long as disaster is unlikely on their watch, they proceed. Obama doesn't have to worry. The US is not likely to go bankrupt within the next four years. Within the next ten years, that's a different story. But, he won't be there then, so what does he care?

Sarcozy and Merkel are obsessed with the same mindset. They don't want disaster on their watch. So, kick the can down the road and set the stage for a far bigger disaster on the next guy's watch. Such statesmanship!

Democracy is a tough game (for the electorate). It is easy to promise and hard to deliver. But you can get elected on a promise and by the time folks find out that you didn't deliver, you've bought your own island somewhere and what do you care. That is the kind of cynicism that permeates the folks who think government can solve all problems. They are not there when disaster strikes.

So, the European Union pushes the car closer to the cliff's edge, thinking it is doing something worthwhile. Only the car is now a bus and has many more passengers and the size of the bus and the number of passengers are growing every day. It is obvious that the bus is headed over the cliff. The only thing we don't know is how big the bus will be when it goes over and how many passengers are going to go with it.

It is still " Sell the Rally".

Today was a double POMO day. Approx. US$ 10 Billion was pumped in the market but all S&P 500 has to show is only a rise of less than 7 handles. Not impressive at all.  One more thing to look for, S&P up for 3 days in a row but volume down 2 days in a row.  This is called price volume negative divergence and is normally a short sell set up.

I am not buying in the rally yet  for two reasons.  For one, I expect a lower low than the March low and second, the fear factor (VOX) has not yet reached the high 20s where we can see some panic. In fact at 3 pm, the put call ratio was .88. Means there are more calls than puts and people have reached the conclusion that the bottom is in.

I keep talking of the fear factor because stock market is ruled by greed and fear. Not by news, not by economics. In the past with SPX pullback of 10% or so, the VOX was on an average in the range of 28 +. By that reckoning, we have still some more way to go.

Stock market corrections are like quick sand. They advance two steps lower and rebound one step back, so that the fear factor does not build up too quickly. These countertrend rallies keep everyone interested and invested till such time the capital is gone.

Buying stocks in the face of fear and selling it in the face of greed is the only way to make money in stock market. I am not convinced that I am seeing that fear yet.

Abnormal Returns: financial bloggers Q&A

Last week, while Tadas Viskanta at Abnormal Returns was on a week-long "blog break", AR ran a series of Q&A posts with some key independent finance bloggers. 

Since I enjoyed participating in, and reading, the quiz responses, I thought it'd be fun to share these with you here. 

1. Desert island blogger quiz - Book recommendations.  

Finance bloggers pick their favorite trading and investing books. One of my all-time favorites, Reminiscences of a Stock Operator, garnered the most top choice picks, but I highlighted another trading book.

2. Blogger quiz - Recent book recommendations

This time, Tadas asks the group for their favorite recently published (post-crisis) book. 

There are some interesting selections here. Still, I was a little surprised that no one picked Greg Zuckerman's The Greatest Trade Ever, an excellent account of the subprime mortgage crisis that centered on Paulson & Co.'s subprime CDS short trade.

3. Desert island blogger quiz - Blind trust edition

Bloggers decide who they'd turn their money over to if they had to put their portfolio into a blind trust. There are some great answers to this question.

4. Blogger quiz - Favorite blogs

If you could only read one blog (besides AR), which would it be? Tough question. I had a hard time naming just one and offered up several favorites, in spite of the one blog limit. Tune in tomorrow to find out which others I consider essential reading.

5. Desert island blogger quiz - Career change edition

There was a real common thread among finance bloggers running through this discussion topic. Check out the answers and Tadas' intro explanation to understand why. 

6. Blogger quiz - Tadas Viskanta responses

Turnabout is fair play, right? Tadas answers his own blogger quiz questions in this Q&A wrapup. 

All in all, this Q&A was a fun read and a great idea for a post series during AR's brief linkfest hiatus. Thanks to Tadas for including us, and to all the bloggers for their thoughtful answers. Go check out their blogs while you're at it.

The Plight of Papandreou

Why is Papandreou, Greece's prime minister, struggling to convince the Greek public to cut spending and raise taxes? At the moment, Greece is spending 25 percent more than their tax revenues, which means their national debt is continuing it's upward spiral. There has been no progress since the last year's bailout. No, indeed. Things have gotten much, much worse for Greece's finances, not better.

The problem for George Papandreou is the political rhetoric of the past half century. Politicians like Papandreou and his economist (sic) father Andreas Papandreou have, for several generations, preached to the Greek population that they could have it all -- free health care, free education, free everything, plus early retirement with a fat pension. Everything is free in the wonderful Papandreou state. Nothing need be paid for. That's what Papandreou and his father have been telling Greeks for the past fifty years.

Guess what? They lied. Providing all manner of free and inexpensive stuff to folks doesn't work unless there is someone out there who is willing to fund all of this. The fact is, in the long run, there is no one willing to fund the Greeks in the style to which the Papandreous wished them to become accustomed. The Papandreous were frauds and now the Greeks and other Europeans are angry, confused and rioting. Who wouldn't be angry and confused?

Papandreou deserves his current fate. He helped to create the problem and cheerlead the fraud that led to the current problems in Europe. Why Obama is choosing to follow this path is a great mystery.

Sunday, June 19, 2011

I love " Love Stories"!

I love this story which came out just 2hours ago.
A German compromise plan to resolve a dispute with the European Central Bank over the Greek rescue that was reported by Der Spiegel magazine is no longer on the table, a government source said Sunday………. But a German official, who spoke on condition of anonymity, said that while "several options" were being debated to involve private creditors in an Athens rescue, the reported proposal was "no longer on the agenda".
The source added that the initial plan had differed from the reported proposal in "key aspects".
German officials say they seek a plan with as few "unwanted side effects" as possible. ”.

So already the “Non-Default” event of last Friday and the perfect family reunion photo-op of Mom and Pop shaking hands has been washed down the drain. Anyway the Bond Market has already called the bluff and the brief EUR rally might come to an end sooner than expected.

 I have a feeling, those who are looking for a rally on Monday, 20th June, might be in for some disappointment.

 I love this cartoon and could not resist copying it here. Courtesy

Whom they are trying to fool?

The pompous jacka*s duo Trichet and Sarkozy keep telling everyone who care to listen that there will be no haircut in Greek bailout. Everything will be voluntary and a Greek default is out of the question. They passionately defend everything that is European and throw hissy fit if anyone dares to say the inevitable.
One starts to wonder is it pure stupidity that these men cannot see the obvious? Or is there something else.
For an answer, let us look at the following chart.

Now we know!

The fact is, Trichet is a Frenchman and along with Sarkozy,  all he wants, is to keep the French banks out of the harm’s way, as long as possible. They know that they are just buying time and in the mean time, take money out of Germans and other still solvent European countries. They are doing the bidding of their masters after all.

Good to have such lap dogs!

In search of a bottom!

The stock markets have been selling off for the last 6 weeks and have barely had a green close this week.
Lots of people including many subscription based newsletters have been advising their readers to look at the long side of the trade again.
Some are saying the VIX has gone out of the BB and come back and that’s a sure sign of market rally. Some are looking at the high put/call ratio. Many are looking at chart patterns and technical Analysis to find the coming trend.

In my long association with the Stock Market, I have come to few conclusions and I base my trades on that. I do not believe that TA gives you any clue of the future. It just represents history.  I would be better off reading tea leaves. I also do not do day trading. Because I think it is like sitting on a rocking chair. It keeps you occupied but doesn’t take you anywhere. Moreover, when you are always looking at one minute or five minute charts, you tend to miss the big moves.

For a longer range trade I still depend on old fashioned fundamental analysis. But for trading purpose, I would rather look at market psychology. The stock markets represent the animal instinct and primal gambling nature of human being. Did you ever notice that there are more men than women in the field of speculation? That’s because men take more risks. Women make better investment decision although we men think we know better!

Stock markets are governed by greed and fear. And the pendulum swings between the two extremes. My measure of fear factor in the US Stock Markets is still VOX. Not VIX. VOX measures at the money options where as VIX measures out of the money options. VOX measures only the top 100 S&P companies which are more liquid and highly traded. In all similar selloffs / corrections where S&P has corrected between 5% to 10%, bottom has come when VOX has reached the level of 30%. Today it is still in the range of early 20s, which shows that while some fear is still there, panic has not yet set in.

And unless we see the panic, we would not see the bottom of this correction.
That is my humble view but market knows best and I can be very well wrong if we start a rally on Monday. After all it’s a double POMO day.
For me, I would still sell the bounce.

Betwixt and Between

What accounts for the fact that Obama is in trouble with both the left and the right and the middle appears to be defecting as well? Isn't anyone happy with Obama?

The problem for Obama, as well as for Europe, is simply a case of affordability. We've run out of chips, as has Europe. Who is to fund all the largesse that the left dreams about? The answer -- no one.

Unfortunately, much of the citizenry of the western world now believes that things like old age pensions, health care, education, jobs, etc. are rights to be guaranteed by the government. But, who pays?

Taxing the rich and selling bonds only takes you so far. 100 percent tax rates aren't likely to raise much revenue. Bondholders like to get their money back. They won't get it back if they loan it to western nations. Bond holders are learning this now at a rate that alarms western politicians. Western politicians are already beginning to blame bond holders for their greed in demanding that they get repaid. What terrible people? Wanting to get their money repaid?

This is all silly. It is merely a question of numbers. There is no way to make this work. You could resort to compulsion (i.e. dictatorship) to level the economic status of your populace. Some form of government such as the kind that the infamous Soviet Union imposed on its people. That kind of political outcome produced poverty and stability, but at least there were no rich folks. Or were there?

If all you want is to eliminate rich people, that is relatively easy to do. If you want your average citizen to prosper, then that is an entirely different proposition. Giving people opportunity, minimizing the reach of government, and providing a rule of law are the best prescriptive tools to economic prosperity for any nation. Unfortunately, the US and the West have been busy for several decades dismantling the very things that created prosperity in the West in the first place.

Asia is not so foolish. So far, their leaders have not promised the impossible. They have problems, no doubt, but they have created nothing like the absurd expectations of the average citizen in Greece. The US and the West are in the middle stages of removing themselves from world leadership, both political and economic.

Obama now realizes, I would suppose, that his policies don't really work. I doubt that he would say this out loud. But, really? 9.1 percent unemployment at this point in the recovery. 1.8 percent economic growth? These numbers are unprecedented for an economic recovery. Failure is only a word, but it aptly describes the economic reality of Obama policies.

So, what can Obama do? Not much. He has tried his full panoply of liberal schemes and they have simply made things far, far worse. Even the most leftist citizen still would like a job. That's the hard cold fact that the Obama folks don't seem to get.

Meanwhile, Obama continues to lecture the rest of the world about how to run their affairs. Fortunately, no one listens. Obama has badly damaged the American economy and its future. He is now essentially an irrelevant force, other than presiding over the wreckage that his policies have created.

Perhaps, playing golf is the only thing left for this president.

Saturday, June 18, 2011

Boeing and Obama

The Obama NLRB has intervened in Boeing's business decision to locate a plant in South Carolina. Why? South Carolina is a "right-to-work" state, meaning that South Carolina law doesn't force unwilling employees to join a union that they don't want to join. Freedom is a crime, according to the NLRB. Thus, an ordinary business decision is now a subject of litigation.

No doubt, other countries would be happy to provide a site for the plant that the NLRB doesn't want to see located in South Carolina. In effect, the NLRB is pushing American companies to outsource major sections of their business, unless they are willing to unionize their work force. So much for freedom.

You begin to wonder if this is part of a grander plan. Force the US economy to its knees by foolishness like the Boeing decision and push American jobs to foreign countries and foreign workers. Meanwhile, do everything possible to restrict free trade in products -- e.g. the Obama Administration's refusal to push the Columbia trade agreement to the finish line. Maybe this Administration really doesn't want the US economy to recover.

I have always thought the Obama economic policies resulted simply from stupidity, but the Boeing decision is so damaging to job creation (other businesses are watching) and such a government grab for power and influence over business, that it makes you wonder what the real end game is for the Obama Administration?

Friday, June 17, 2011

Bond Market has called the bluff of Europe.

This morning we work up with the wonderful news that Greece has been saved. Mom and Pop have made up and have given a nice photo-op. The “non default, default”  event was conjured up by the Politicians of Europe in the style of Prof. Dumbledore.  For a brief few hours we were transported to Hogwarts, the mystical and magical land. And then, poof! The magic went out of the window. The Bond Market called the bluff, lie and farce of the European politicians.
Let’s start with Greece.
Two year yield was near 30%. Not a sign of confidence, eh?

May be Ireland was doing better?
But last we saw, it was over 11%

We would probably have better luck with Portugal.
But no such luck, the rate was nearing 11%.

How about Spain?

Hmmmm, getting near 6%. What the bond market is seeing that we are missing?

But nothing to worry. Core Europe is fine.
Really?  Let’s look at Italy.

But if it is so fine, how come the rate there is near 5%.

The pompous fool of Trichet and Sarkozy is giving media show and gaining some more time for the Banks of their country, France. I don’t think they really care about Greece or united Europe or Euro, I think they are concerned with their jombi banks which are definitely going to go bust along with Greece. By the way, banks in France will be affected more badly than the banks in Germany when the time comes.
I also think, Merkel agreed to go along with Sarkozy for now because Germany have set September as their date of reckoning and the banks in Germany need some more time to withstand the catastrophic effect of the Greece default.
But the Bond Market and the Stock Markets called their bluff. The S&P 500, which went up 10 handles in the morning with the news of the “Non Default”, gave up almost all its gain for the day and at some point, was on the verge of going negative. Only some last minute monkey job saved the day for option expiry. The investing community knows a default when they see one.
I hate to say, “I told you so”, but I did tell you in the morning don’t believe this rally. It was running on empty.

Why Not Cut Your Exposure?

The markets are rife with concerns that European banks and American banks will lose a lot of money if Greece defaults. So, why don't the banks simply sell their Greek sovereign debt holdings and avoid any further exposure? After all, post-2008, the banking systems in the US and Europe have been subject to new regulations and are marking their portfolios to market. Right? Wrong!

As usual, regulation doesn't work. If European and American banks sell their Greek debt assets, they will take huge losses precisely because they are not marking these assets to market as everyone assumes. The regulators are letting these banks carry all of this bad debt at par and their balance sheets incorrectly show assets at highly inflated values. So much for financial reform!

It's the same old story. Everyone assumes that bank regulation works. The fact is that it doesn't work. Just when you need heads up banking regulation, what you get is a wink and a nod and political interference. That is what is going on right now.

What would have been a minor problem -- a Greek default two years ago -- is being elevated into a major problem that will ultimately undermine the financial stability of Europe and the US.

Financial regulation doesn't work. Regulators are not the answer. Dodd-Frank legislation is a sham and is simply a hindrance to a serious economic recovery. Let the markets work. Let those who buy bad debt take their losses without involving taxpayers in the process.

We are in serious danger of replaying the fall of 2008 by more foolish government policy regarding the debt markets.

A Stock Market rally is coming today.

So Greece has been saved while we were sleeping!
Germany and France apparently agrees on the common ground and there will now be another bailout package of $ 150 billion. No haircut for senior / private investors. And so the S&P futures are already up 12.5 points one hour before the open. A rally is coming today. Isn’t that a perfect world!
I have already said in my blog that we should expect the Stock Markets to go up on Thursday and Friday. How did I know? Did I have a dream or vision? No, but I am getting a feeling of the pattern of the manipulation in my head.
But I said that the low is not in yet and don’t believe in any bull$hit rally. There was not enough panic in the market for the market to go up. There was no gut wrenching despair and talk of share market crash. Everybody was expecting a bounce and bounce we are getting. Now everyone cannot be correct at the same time. To quote from one of my favorurite blogger Rohan from Australia:                                                                   ” if everyone has the same opinion, and has entered into the same trade in anticipation of that opinion playing out, then no-one is left to ‘buy’ or ‘sell’ to deliver the outcome that is the expected by the consensus opinion.”.
I think the stock markets will go up substantially today, not because the problems of the world have been kicked down for few months, but because the manipulators have to kill maximum number of puts and calls and so they have to pop the market today. Today might be a perfect opportunity to close all the longs and go on the short side of the market. 
I am expecting a lower low in the coming week.

Thursday, June 16, 2011

Till “Debt” do us part.

The Stock markets in USA, reached their bottom only two years ago.  It was June 2009 when S&P 500 reached a low of 666, Dow reached a low of 6470. Two years hence S&P reached a high of 1370, Dow reached a high of 13870. They doubled!
So the factors which caused the stock markets to collapse in the 1st place have all been sorted out, correct? Otherwise how come such a parabolic gravity defying moves?  But then we are shocked to see that unemployment is still above 9%. We are shocked. Even after spending over US $ 2 trillion, what we have to show for? Only the wealth effect in the stock market and commodity speculation. Sad but true. So what is driving the stock markets? For answer let us look at the following picture.

It is the huge amount of leverage built up on margin , helped by QE1 and QE2 , that has encouraged the investors, speculators and yield hungry pension funds to pile on to the long side based on the mantra  “ don’t fight the Fed”.  Margin levels are almost at the same level where they were in 2008.
But debt on debt does not help growth of GDP. If you have read the excellent book, “This time is different” by Reinhart & Rogoff, you know that after the debt has reached a certain percentage of GDP, it actually reduces growth and leads to default. Reinhart & Rogoff have given numerous examples from the last 700 years of various countries, where Countries have defaulted because they took on excessive debt. And we see that happening in Greece, Ireland, and Portugal and in so many other places. Japan has become a country in perpetual deflation for the last 3 decades and most likely the same situation awaits us here. The similarities between USA and Japan are too much to ignore, but that is a discussion topic for another day.
When the going was good, Greenspan was giving away free money and creating another bubble, all these banks and speculators have borrowed and invested, rather speculated on various assets, whose value today is less than half of what it was initially. Thus there is debt destruction or balance sheet contraction. Even the two trillion US Dollar that helicopter Ben has pumped in the system in the last 2 years, have not been able to increase the money  supply in the system because the banks are busy repairing their balance sheet to the extent they can. They are now holding approx. US Dollar 1.5 trillion in their cash reserve and hoping that when the sushi hits the fan now, they would be able to survive.
The problem facing us is not inflation, in spite of the money pumping because everywhere the value is getting destroyed, be it home equity for the individuals or loan portfolio of the banks. The powers that be have tried to fight this with more debt and it is failing. And they know that they are facing the demons of deflation.
Now we go back to the chart at the top. When deflation finally hits the shore, when the contagion from Europe catches up with USA and the dominos fall, the margins will be called 1st and this time there will not be anyone to re-inflate it again. According to Russell Napier, the S&P 500 will reach 400 at the end of the true bear market. If such a situation should arise, all the castles of sands will be washed out to sea because:  the final bear market stage "is caused by distress selling of sound securities, regardless of their value, by those who must find cash market for at least a portion of their assets."

Low is not in yet.

I have mentioned in my morning post that today would most like be a green day. So it was. And I expect a big jump tomorrow and possibly on next Monday as well. But do not read much into these counter trend rallies because the next week may not be pretty. The low is not in yet.

Profit from the "End Game".

Yesterday, one of the protesters in Greece was carrying a placard with a sign that their Prime Minister, George Papandreou was "Goldman Sach’s employee of the month". Now that’s a good insult. If the Greeks can get it, understand it that they have been screwed tight by the Banksters, why can’t the Americans, Irish and people in similar situation?
I have mentioned before, that it is a question of when not if Greece will default. Nobody can survive with 160% debt to GDP, when the economy is shrinking and you don’t have the control of money in your own hand. One way to default would have been to devalue the old Greek currency, but that option is not available today.
Today the question is, is the end is now or will they be able to kick down the can for some more time. Knowing the politicians, they will try to kick the can to infinity and the effort is on in earnest.

Reuters, reports, Germany now "wants the deadline for a second Greek rescue package to be pushed back to September, reflecting the problems Europe is having hammering out the details, EU and banking sources said on Thursday."
One EU source told Reuters that German Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble favored a delay.

"The argument goes: We don't know what to do, let's buy more time," the source said, adding that Berlin had its customary backing from the likes of the Netherlands, Finland and Slovakia.

A high level German banking source also told Reuters Berlin was targeting September as the point at which all the problems could be solved

The euro reached 1.4080 by 8.30 AM but is now rallying back above 1.4141. The US Dollar index which was above 76 in early morning has now come down to 75.74. All these are happening in the last one hour, indicating that the end has been pushed down for some other day. Reading between the German official statements, they are saying that their Banks will be ready to absorb the shock of the Greek Default by September. I think Germans are now ready for the default eventuality, they always were and being methodical and systematic people as they are, they have now fixed a date and time for the inevitable.
Meanwhile, jobless claim has come out and it is below expectation. Something to spin around for a higher stock price in the US Markets. Yesterday was a major distribution day (NYSE down Volume: NYSE up Volume >= 9) and the day after a major distribution day is usually a green day. Unless something happens that is beyond the control of the manipulators. And going by the Option Pain results, they will try to push the markets up today and tomorrow.
But the selling is not over yet and will not be over till next week at the earliest. They want to create panic and are almost there. Yesterday Barron’s screamed about “Bull Run” being over. Times had an article about weak economy. NY Times ran something similar. So one last time they want to buy cheap and by September will sell it back high. If we can ignore the talking heads of the televisions and MSM, if we can do just the opposite of the recommendations of the likes of Cramer, we should be OK. It is not difficult to see through their broader plan; the immediate timing may vary a bit. In the end, we might be able to profit from that end game.

Is This News?

There is a growing realization by world financial markets that Greece is not going to make it without some kind of default (partial or complete). Is this really a surprise? Is Obama serious that US taxpayers should step in and finance profligate Greek spending behavior? How absurd is the Obama economics going to get?

The Greeks expect the rest of Europe (and now, according to Obama, the US) to fund their extravagant lifestyle. Why? What greater good is served by bailing out folks who have a corrupt political and economic system and no work ethic? Does that do some over-arching good somewhere?

There seems to be no end to the irrationality of Obama economic policy. Let the Greeks default. Is it really a surprise that they are on the brink of default? Ordinary Greeks are not interested in paying their own bills. Look at the riots in the streets. That tells you what the typical Greek citizen thinks. They are mad that the rest of Europe is not willing to fund them indefinitely.

So, where is the news in this? When will Europe (and Obama) wake up to the realities of economic life?

Wednesday, June 15, 2011

A Good Shake

I have been watching the live streaming and reading news all day about the 3rd general strike in Greece. Now it is 4 pm my time and it is night out there in Athens. Thousands of people, estimated to be around 40000+ , have blocked the Greek Parliament. Police have fired teargas towards the crowd who are slowly becoming unruly.
We are seeing it in a country which is supposed to be part of the developed world, not a third world country. The anger of the population is so immense that one can almost touch it. The same anger is growing in the youth of Spain, people in Ireland are getting restive. And I wonder, whether we shall see that kind of anger in USA.
Iceland was smart. They gave the middle finger to the European bankers and now they are on the path to recovery. Everywhere else in the developed world, the bankers have passed on all the losses to the population and now it is the bottom 90% who are asked to sacrifice, the social safety net programs are being dismantled or reduced, Public utilities are being sold off to private entities and the politicians are trying to reduce the tax rate on the rich. This is not "Democracy", this is "Oligarchy". And this is also the recipe for disaster. Social unrest will definitely follow in a big way and the capital market will be destroyed. Democracy and capitalism as we know today will not be the same. But that is another day.
As we talk, S&P 500 is sitting just above the 200 DMA. Last time it was below 200 DMA was in Sept 2010. Today S&P 500 fell over 22 points or 1.73%. All the gains of yesterday were given back and some more. This is exactly what I said yesterday, that do not believe in this bull$hit rally.  Where it will go from here, nobody can say. But we can make an educated guess, based on so many other parameters, some fundamental, some technical and some based on the observation of the market manipulation.
I think the market will close green tomorrow as they will try to kill as many puts as possible. Because CBOE equity only put call ratio now reflect more put buying by the retail investors. The short term average of the ratio now stand at 0.76 (from 0.64 last week), which is highest since last summer’s correction.
However the week after Triple witching week is usually bad. Dow has declined 19 of the past 21 years in the week after.  I therefore do not think that a low has been set in. While VIX has touched the top of the Bollinger band, it has not yet jumped through it. I think, sometime in the next 10 days, there will be one night when the Futures, as well as the entire world is in deep red, and if you are long, (purchased the f**king dip) you will find it very hard to sleep and market keeps selling off until you feel pain in the stomach, don’t hit the sell button yet because most likely the bottom is in then.  
From the top of 1370, we should expect a 10% selloff as a normal correction and therefore we have to close well below the March low. I would think the range is somewhere between 1230 to 1240 when we can call a bottom. By then gold, silver, oil and every other risk trade would have got a good shake out. 

And I plan to go long thereafter.  

Tuesday, June 14, 2011

MSFT and AAPL: a tale of two tickers

Who would have thought 10 years ago that Apple ($AAPL), then valued at an $8 billion market cap, would meet, then exceed Microsoft's ($MSFT) $200 billlion market cap by 2011? 

We could say so many things about Apple's historic transformation from tech also-ran to re-emergent industry leader in that time. You could also write a book describing Microsoft's eroding dominance and its stagnating shareholder returns in the post-PC world. 

Or we could just look at the chart above and know that a picture is worth a thousand words.

Risk is on for this Week.

As I have been saying here, the HFT Bots and Big Bank Algos will take SPY in the range of $ 130 - $ 132 by this Friday 17th June, 2011, the “Risk” trade is on today. It is in perfect sync. with Euro. See the chart below:

The Euro is on the right hand side and S&P 500 is on the left hand. S&P is the red line and Euro are the candle sticks
The futures were up 15 handles before the ordinary investors could participate in the rally. That is how they game the system people. Now the lemmings will follow the pied piper and pile on to the long side. If you remember, nothing, absolutely nothing in the economic indicators changed between yesterday and today, except the bull shit economic report from China. Even that was in line with expectation.
However the selling is not yet over and once the option expiration is behind us, we shall again see renewed selling and a lower low will be visited so that all the stop loss points for the bulls are taken out. The idea is to inflict the maximum pain to maximum people.
The market will rally one last time in summer and I shall keep you informed about a good entry point soon.
So do not give much thought to the rally, one way or other. As a trader, we can take short term profits in up move or down move. But as a long term investor, we better keep our  cash ready to pile on the short side by fall.

Monday, June 13, 2011

Howard Lindzon interviews Mark Cuban


Could have sworn I posted this StockTwits TV interview with Mark Cuban months ago, but maybe I just retweeted it. In any case, enjoy this laid-back and excellent discussion with the highly visible (and vocal) Mavs owner and entrepreneur. 

Entourage guest spots, investing, free agent talks with Lebron, the birth of and the rise of user-generated web video... it's all here in this interview. 

Plus, more from Mark and Howard in this long/short interview segment.

Oh, and congrats to Mark and the Dallas Mavericks on their first NBA championship. The victory is well-earned

Related articles and posts: 

1. 10 Questions for Mark Cuban - Forbes interview.

Sunday, June 12, 2011

Economy and Stock Market.

Is stock market an indicator of the economy or is it a rear view mirror?
There is no clear answer to that. I would think that in an ideal world, where Governments and central Banks do not continually try to influence the stock markets, where manipulation is within a certain limit, stock markets can be regarded as an indicator of the economic health of the country. But not so in today’s situation.
Today the biggest creditor nation of the world is trying to hold on to the proverbial straw to stay afloat. The situation has come to such that the US Government is actively monetizing its debt, although it is illegal in its constitution. They do it in a not so subtle manner. 1st one arm of the Government sells the Tbonds to the primary dealers and then another arm of the same Government buys them back. The primary dealers who are the powerful banks and the .01% of the population who virtually control the Government, make money in the process.  By the end of June 2011, Fed will hold 16% of the US debt vs. 12% for the Chinese.
The two trillion dollars injected in the system since 2008, have done nothing to kick start the US economy except re-flating the US Stock market and jacking up the price of the commodity. Only the top 10% of the US population own any stocks. (Congratulation to you for being in that top 10%, otherwise you would not have read this blog). The bottom 90% are squeezed dry every day. They are paying more for their food and gas and their purchasing power has gone down as wages have not gone up, dollar has gone down and  today the use of food stamps are at the record high and increasing. Where is the growth they talk about?
Between the top 10%, there is another sub division. The top 0.05% and then the next 9.95%. The objective of the uber top is to take the last drop of money from the rest and leave them in semi slavery. May be that’s what capitalism is all about. That’s how human history was for all these years before western civilization invented democracy about few hundred years back where lofty ideals like equality and fairness were talked about and cherished.
If stock market were to follow the economy , S&P 500 would have been below 500 level. There is huge disconnect between the real economy and the stock market. The classic example is the Oil prices. We know that consumers cannot afford $100 a barrel oil and such high price leads to demand destruction, as consumers, those bottom 90%, live pay check to pay check, have to adjust their spending pattern and cut down on other expenses just to get by. That leads to slower growth. But the manipulators don’t really care. The oil price today is not a factor of demand and supply but of speculation. There is not enough storage in the world to hold all the oil in the oil contracts.
Today the stock market is all smoke and mirror. Very soon that smoke and mirror will crush and it will catch down the real economy.
In the mean time, S&P 500, which is having a sell off of some kind, will now rebound before the option expiration. I think the March 2011 lows will be broken in a dramatic gap down in the morning of Monday or Tuesday to take out all the bull stop loss points. Then there will be sharp turn / reversal to finish the Triple Witching week at 1300 plus level. Just when bulls get some hope, I expect the market to back test the lows again. That is the nature of the beast. It will back test the lows before a bottom is in. if you believe my theory about the top 0.05%, who manipulate and control the market, they will inflict the maximum pain on the rest 9.95%. I also expect a sustained rally in summer because everyone is expecting a crash.
But as I said before, at some point, the smoke and mirror come crashing down and in this case the stock market will catch down with the real economy. I am betting that September 2011 will be that time when the end game starts.

Saturday, June 11, 2011

US Banks sitting on another ticking bomb.

There are many reasons for the US Economy is in a mess. Undue risk taking by the US Banks and over-leveraging by the “Too big to Fail” Banks must be counted as a major reason. But the whining of the Banks never stops and the story of greed and unnecessary risk taking goes on.
Frank- Dodd bill did nothing to solve the last crisis and prevent the coming one. The derivatives are the MAD of the world and the switch of destruction is in the hands of few power drunk greedy souls. One of the major component of all the outstanding derivatives in the books of the Banks are the “ Credit Default Swaps”. The Bank of International Settlement s has presented a 146 page report on these credit default swaps with lots of data and charts.
Economist Kash Mansori has done an excellent job of analyzing this BIS report and you can read his report at .  
From Kash’ s blog :
“It seems that approximately 30% of total potential exposures to debt from the PIGs are covered by default insurance (see the figures in red). Put another way, if one of the PIGs defaults, creditors who actually hold bonds from that country will absorb about 70% of the losses, while agents (primarily banks and insurance companies) that sold insurance against the possibility of default will have to cover the remaining 30%. That's not a trivial amount.
There is “striking differences between how European and US creditors would be hit in the case of default by one of the PIGs. If Greece were to default, for example, approximately 94% of the direct losses would fall on European creditors, and only 5% would fall on US creditors. However, US banks and insurance companies would have to make about 56% of the default insurance payouts triggered by such an event, while European agents would make only 43% of those payouts.
“Finally, it's worth noting that once you account for the substantial payouts that US agents will have to make to European creditors in the case of a default by one of the PIGs, financial institutions in the US have roughly as much to lose from default as those in France and Germany. (See the figures in blue in the table above.) The apparent eagerness of US banks and insurance companies to sell default insurance to European creditors means that they will now have to substantially share in the pain inflicted by a PIG default.

The implications of the above observation are ominous. The European Banks, who are filled up to their gill with the toxic bonds and loans of the PIGs, know that it is a question of when, not if these countries will go broke. May be this September, 2011, may be another year. So the European Banks are systematically buying insurance to cover these ripe to explode stinks even when the price of the insurance is getting higher everyday. Basically, the Europeans are betting that a debt default will happen sooner rather than later.
Now who are selling them these insurances? Our very own US Banks. Just like AIG, they are looking to collect the upfront insurance payment and putting their head in the sand and hoping that the default will never happen. Talk about greed and risk taking!
When, not if, Greece defaults, these US banks will have to pay substantial amounts to their European counterparts and once again US Taxpayers will be called upon to bail out these too big to fail Banks. Lehman Brothers episode was just a trailer for the real show that is coming up soon.