9/20/11…Obama strikes back!

Bloomberg Top Stories:

 

*Stocks Rally in Europe, U.S. Futures Climb; Italy Debt Swaps Reach Record

(If the first two are based on crisis ebbing, please explain the latter!!! TB)

*Italy’s Rating Cut One Level by S&P as Greek Crisis Fans Contagion Concern

*Housing Starts in U.S. Decrease More Than Estimated to 571,000 Annual Rate

*Eight Offshore Banks Under Grand Jury Investigation Over Taxes, U.S. Says

*Bond Woes to Worsen as Austerity Smothers Outlook for Growth in Europe

*Bond Cuts in U.S. Exceeding Upgrades on Double-Dip Threat

*Brevan Howard Hedge Fund Said to Consider Returning $2 Billion to Clients

(that’s $40M in fees…think about what that means for returns going forward. TB)

*Lower Profit Margins May Fail to Deter U.S. Stock Gains – more insanity! TB

*Retailers Risk 2009 Holiday Shipping Rush With Cautious U.S. Consumer View

(When will Black Friday come this year? …on schedule? Behind schedule? Never?)

*Israel Urges Palestinians to Abandon UN Recognition Bid in Favor of Talks

(That’ll convince ‘em…sure reminds TB of Lucy and Charley Brown, right?)

*Goldman Critic Sides With Buffett Over Closing Futures Tax Code ‘Loophole’

*Typhoon Roke on Course for Leaking Japan Reactor as 1 Million May Evacuate 

 

Volume plunged again to 3.7B shares from 4.6B shares for NYSE stocks while trades executed on the Big Board shrunk to 908M shares, lowest since July 26th from 1.8B shares which was the highest since 8/11, and finally breaking the ennui that has existed for the past three weeks. This time it was a down day and again all three metrics looked weak – see doesn’t matter if up OR down they are WEAK! Advance/Declines were very negative: -3.5:1 vs +1.1:1 vs +3.3:1 vs +3:1 vs +3.2:1 on NYSE and -4:1 vs +1.1:1 vs +2:1 vs +3:1 vs +3.1:1 on Nasdaq. Breadth was worse: -6.4x vs +1.1x vs +7.5x vs +5.4x vs +3.1x on NYSE and -3.5x vs -1.2x vs +3.3x vs +5.5x vs +6x on Nasdaq. New 52 week highs plunged again to 52 vs 72, while new lows surged to 196!!! from 85 – nearly -4:1! The VIX surged to 35.33 before retracing but still closed at 32.73 +1.75 still below the 40 day 33.30, but for how long? the 50 day is 30.50; and 200 day 21.03, all still climbing. 48 was the selloff high, not seen since 5/21/10: 48.20!

 

Look at the six, for the month/quarter/and now ytd (in parenthesis): Dow (-1.8%/-8.2%/-1.5%) -0.9% vs +0.7% vs +1.7% vs +1.3% vs +0.4% vs +0.6%; Transports (-1.7%/-15.4%/-10.2%) -1.7% vs flat vs +1.4% vs +2% vs +3.4% vs -0.2%; S&P 500 (-1.2%/-8.8%/-4.3%) -1% vs +0.6% vs +1.7% vs +1.4% vs +0.9% vs +0.7%; Nasdaq Composite (+1.3%/-5.8%/-1.5%) -0.4% vs +0.6% vs +1.3% vs +1.6% vs +1.5% vs +1.1%; 100 (+3.0%/-0.7%/UP 4.1%) UP 0.1% vs +0.9% vs +1.5% vs +1.5% vs +1.3% vs +1.3%; Russell 2000 (-3.4%/-15.1%/-10.4%) -1.5%!!! +0.1% vs +1.3% vs +1.8% vs +1.8% vs +0.9%. For the month, only the two Nasdaq indices are positive – barely! NYSE Financials were off 2.5% yesterday and stand at -6.8%/-18.9%/-19.3% – is that what you call a banking recovery???

 

Global stocks are rallying are rallying (ex Japan which was also the contrarian yesterday): FTSE +1.3% vs -2% vs +0.6% vs +1.9% vs +1.5% vs flat; CAC 40 +1% vs -2.9% vs +0.6% vs +2.5% vs +2% vs +0.5%; DAX +2.1% vs -3%!!! vs +1% vs +2.5% vs +1.1% vs +1%; Nikkei DOWN 1.6% vs UP 2.3% vs +2.3% vs +1.8% vs -1.1% vs +1%; Hang Seng +0.5% vs -2.8% vs +1.4% vs +0.7% vs -3.5% vs closed; Korean KOSPI +0.9% vs -1% vs +3.7% vs +1.4% vs -3.5% vs closed; Indian Sensex UP 2.1% vs -1.1% vs +0.3% vs +1% vs +1.5% vs -0.2%. U.S. futures rallying…but: DOW +70 vs -149; SPX +7.20 vs -19.30; NDQ +19.50 vs -33. As for bonds, weak but well off the overnight lows: 10 yr 1.97% -3/16; 30 yr 3.24% -3/8

 

Gold still not benefitting from the uncertainty – but coming back It is now $1789.90 +$11. It is now $133 off the record high of $1923.50 set on 9/6. Crude gave up its pursuit of $90, tanked yesterday after having traded in a narrow range for the four sessions around the 40 day at $88.34 – all with lower highs and lower lows (bearish), then fell to $85.70 yesterday and again a lower low. $86.22 +.52.

 

…Obama, whilie reiterating much of what he has been saying, stood up on his hind legs today and sounded…well…presidential. He attacked House Speaker Boehner for speaking out of both sides of his mouth, something TB had intended to do yesterday. He also alluded to House Majority Leader (sic), Eric Cantor for saying Obama is trying to provoke class warfare. On Boehner:  he said that we must not  promote “my way or the highway” and then in absurd follow-up said there will be no revenue increases. In other words he offered a Hobson’s Choice: that being no choice at all, and no possible compromise! THEN Cantor accused Obama of trying to provoke class warfare. That, as TB has said for more than a year already exists, when the wealthy fall back on the percentage of total government revenues they pay rather than the percentage of their income, then say any changes in taxes must come from a total revision of the tax code…Obama also called for this…but there is no way in hell that is going to happen. They say everybody has to have skin in the game…but the poor have had it all scraped off already, they want a consumption tax (similar to a VAT), which would not only be regressive but cause consumption to be reduced even further which has happened every time a VAT tax has been imposed…at least initially. What have the voters of America created? No wonder, NYC Mayor Bloomberg is warning of rioting in the cities…something that TB said would happen and Jacques Attali warned of in his book Millenium: Winners and Losers in the Next World Order, written more than 15 years ago! An incredibly concise and enlightening read.

 

Today is reader appreciation day. TB has included two thought-provoking notes from readers, one in each section. It makes TB proud that he has done something towards getting people to think for themselves and these two comments show that people can express themselves well. The information is out there…you just have to look and listen for it.

 

The first is from a friend, reader and investment professional. Robert Prechter is a widely known and thoughtful technician, most famous for his Elliott Wave chart, the second is in the closing section:

 

Dear Friends,

 

I have attached the most recent newsletter written by Robert Prechter, The Elliot Wave Theorist, September 2011 issue. For those who do not know Prechter, he can be easily Googled (love today’s technology) of course. For me, he is one of the most brilliant thinker, perhaps the best technical market oberserver of trends, and a proponent of socioeconomic market drivers. The attached piece is not a bullish read; this is my reason for sharing it with you. I believe that all of us are worried but many have not acted on our gut instincts. I encourage you to read this letter and contemplate what you might do to prepare for the future. I will gladly correspond or speak with you at your convenience.

 

Here are a few quotations from the piece along with their section headings:

 

Cool Market

People tend to forget that markets fall faster than they rise.

 

The Stock Market Acts as if It’s in Primary Wave 3(with a circle; this labeling is perhaps too arcane for all readers but the message is clear to me)

I was surprised to find that by itself an extremely negative a/d ratio is not instructive as to immediately ensuing market action.

 

Again surprisingly, the size of the TRIN in these instances does not seem to predict immediately ensuing market action.

 

Anticipating vs Reacting

The three pillars of market analysis and forecasting are patterns, momentum and sentiment.

 

Recovery? or Double-Dip Recession?

The economy has been sliding into depression. I date its beginning as 2000, but it started getting serious in 2007, the first down year in real estate prices. A year later we saw the first quarter ever (4Q 2008) in which the companies in the S&P reported losses instead of earnings.

 

…despite the unprecedented manufacture of new Fed money—to get the total supply of credit back above its 2008 high. Debt is such a drag on the global economy that it cannot recover.

 

The Money Multiplier is Stuck in Negative

…fewer people show this chart of what the primary engine of inflation—bank lending—has been doing. Figure 6 shows a history of the U.S. money multiplier from 1984

to the present.

 

During the final lunge toward peak positive social mood, the availability of unlimited cheap credit and the Fed’s seeming power to inflate at will supported investment manias in real estate, stocks and commodities, which peaked in 2006, 2007 and 2008, respectively. When social mood turned down from that point, the value of bank collateral crashed, and creditors became conservative (reflecting a change toward negative social mood) and stopped lending. The Fed panicked and bought $1.3 trillion worth of risky debt, creating $1.3t. worth of new dollars. But the money multiplier continued to fall. Subsequently the Fed went on two more buying sprees, dubbed QE1 and QE2. But the money multiplier has continued to fall. In fact, it has continued to fall despite a two-year economic “recovery.” What is the problem?

The problem is that base money does not drive lending and borrowing. Waves of social mood drive lending and borrowing.

 

Social psychology is the ultimate driver of the Fed’s success or failure.

 

Sadly, all the Fed’s machinations do during such periods is increase society’s debt load, thereby increasing the risk of systemic failure whenever social mood turns against the assumption and service of debt.

 

The Coming Worldwide Bank Run

The specter of a banking panic has become far darker since the collateral for bank deposits—land and buildings—has fallen globally in value at the steepest rate since the Great Depression. One day this shortfall in collateral value will impress itself on people’s minds, and there will be an unprecedented run on banks around the globe as panicked depositors try to become the first ones out the door.

 

Global credit deterioration is objectively real; but disaster will strike only when it becomes subjectively realized. Waves of social mood make that determination. Objectively, the elements of a worldwide bank run are firmly in place. All we need do now is wait for the inexorable turn of the wheel to see it happen.

In 2008 there was a credit crisis. The next five years will bring on the credit crisis.

 

Gold, Silver and the Economy

Those who argue that gold is still cheap might want to consider Figure 7, which shows that since 1913, when the Fed was created, gold has achieved four times the gain of the Consumer Price Index. To match the gain in the CPI, gold would have to fall below $500/oz. Granted, the CPI is a manipulated index, so it might understate the true gain in consumer prices. But there is still a notable disparity. And if I am right about the approach of a crushing deflation, the CPI will probably start falling sometime in 2012.

 

If you take the time to think about this you will understand what fools we are to let self-proclaimed economists tell us what is wrong with America and worse, how to fix it! Furthermore, they were elected by well-intentioned voters misled by some of the wealthiest people in America only intent on growing their vast fortunes. It is incomprehensible that so many are protective of these peoples right to pay such a small amount in taxes. It can only be explained by the idea that they all think they might win the lottery one day. TB was listening to Obama speak yesterday at his gym when an older man, obviously middle class, said, “this is bullshit” and walked away. What had Obama said? …that hedge fund managers should not pay a lower tax rate than Warren Buffett’s secretary. Some time ago TB reported that a friend and professional tax accountant said he had researched it and there is nothing in the tax code that allows this exception…despite this, he later labeled TB a socialist and stopped reading this blog. We are in trouble when we let out thinking be governed by our emotions…yet that is where we are today.

 

Bloomberg story today says Sen. Carl Levin is going to push to tax derivatives trades as ordinary income…oops…wouldn’t that be a tax increase? Damned right and it damned well should be taxed as ordinary income…it produces nothing of value and encourages investment in them rather than REAL capital investments!

 

The SEC is now investigating insider trading prior to S&P cutting the rating on U.S. treasuries…this was so widely telegraphed that it is impossible to determine if there was insider trading…furthermore, only a dunce would have expected the stock market to rally on this!!! Note also that there was no follow-thru from the other two rating agencies…come on SEC do something useful! Jeez!!!

 

. . .  – – –  . . .    . . .  – – –  . . .

 

This idea was sent by a friend and shows how ridiculous the situation has become:

 

We hear often that the government is like our family, when things are bad, we must “tighten our belt”

 

My view of this metaphor is a bit different.  Let’s imagine, mom, pop, and ten kids operate a modest farm.  The work is divided, so one kid raises cows, another sheep, a third vegetables and so on.  Mom is the treasurer, so she prints up tokens, which are given to each contributor for his produce, and he can buy other goods from the others.  Mom buys enough food for family meals.

 

Everything is going fine, until mom is walking to the family get together, with  her sack of tokens.  The sack develops a hole, and 10% of the tokens are lost.

 

She starts buying up food for the week from each kid, until she notices that she has run out of tokens.  She turns to the remaining son, who bakes bread.  She says “I’m sorry, but we are out of tokens, you will have to be laid off.   Stop baking bread, stay home until things get better”

 

“But mom, why not just print more tokens?”

 

“Son, that would be dishonest.  Think of hyperinflation in Germany.  No, we will all be better off if you just stay home and stop baking”

 

Taking it one step further, if the son can no longer afford to bake bread, won’t they all starve? Is that the path we are on? At least cannibals don’t eat their own.

 

 

 

TB will leave you with an uplifting clip of the boat evacuation of Manhattan following the collapse of the twin towers that he received yesterday from a friend. Watch it and you will be moved.

BoatLift

 

Never forget!

 

TB

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2 Comments »

  1. Ron Gregoire said

    I must make comments on a few topics. I must also say that I firmly disagree with you on many of your views.
    First, the United States has a spending problem at all levels of government. It does not have a revenue problem. We need to reduce our spending levels and cut drastically the size of government, period. You say now is not a good time. Perhaps, but later will only be a worse time. The best time was a long time ago but delaying only makes the problem bigger.
    Secondly, we should respect each other. Dissing the President, as you said a few weeks ago is not right. Neither is dissing a former President (Dudya) or any elected officials (Tea Baggers, etc). These people were all elected and deserve our respect, whether we agree with them or not. Or should we respect only those that we agree with? I don’t thing so.
    Lastly, the current tax structure is what it is. If it increases from what it is today, that’s an increase. Period. Forget whether the current rates were temporary or not. If they go up, call it an increase. Calling it anything else doesn’t make sense.

    • traderbill said

      Ron, I appreciate your comments, and will heed your advice on Bush. It was not meant so much as disrespect, as to differentiate him from his father in one word, who was an able president.
      You are completely wrong on the revenues not being a problem as you can see in any table. They plunged in 2008-09, and you can also see that the biggest component of the deficit was not social security or medicare (yet) but the Bush tax cuts. The wealthiest do not consume as much proportionately. The second largest was George W. Bush’s Medicare Part D, passed by the GOP led Congress with Dem support…it had no funding! That is a revenue problem! With regard to the tea party, they are well intentioned but funded by the Koch brothers, two of the richest men in America who violate more safety and environmental laws than anyone in the country – the second largest privately owned company in America behind Cargill.

      While I would like to see less government spending you do not and cannot cut spending significantly in a weak economy – the problem was created by the GOP cutting taxes and spending more money even as the economy (financial led by real estate) was strong! This was insane and even Gingrich admits that much. We are on the cusp of double dipping, crime is increasing in inner cities, and major spending cuts will further increase unemployment and poverty. Even the polls are telling us this. Surveys of tea party members showed that the majority did not oppose taxing the wealthy more…and when the GOP would reject even $1 in tax increases for $10 in spendding cuts shows that this is an ideological fight, not based on economics.

      Lastly, restoring a TEMPORARY tax cut is not a tax increase…nor is removing insane subsidies that do not benefit the American people. What I cannot understand is why middle class people defend billionaire hedge fund operators who pay 15% tax in what a tax professional (one on your side by the way) told me had no justification under the tax code. If you think you should pay a tax rate that is twice as much as they do, the only justification is that you expect to win the lottery.

      I do not want to be confrontational but the tone of your letter left me no other recourse.

      TB

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