Wall Street Redux

By: Captain Hook | Mon, Mar 22, 2010
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The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, March 9th, 2010.

There has been no shortage of mainstream media coverage regarding the public's growing outrage with Wall Street and its now unparalleled lust for money and power (greed), with everything from Matt Taibbi's comprehensive accounting of the growing scandal entitled Wall Street's Bailout Hustle, to the hollow calls from politicians to rein in these apparently misguided people, heavy on the sarcasm here. And with the growing Tea Party Movement and the success of independent candidates like Ron Paul aiming at the next Presidency, you had better believe the bureaucracy (the bureaucracy behind the two party system that really runs the country) is concerned about this growing outrage, where in the balance the final straw that ultimately breaks the camel's back might have been thrown with this past year's record bonus packages - this while main street suffers and Washington's disregard for this suffering is evident.

This is not new however - only the degree. One only needs to think back to Oliver Stone's movie Wall Street, and Gordon Gekko's eternal words for context in this regard, as follows: (the following quotes are from the Teldar Paper's stockholder meeting)

"Well, ladies and gentlemen we're not here to indulge in fantasy but in political and economic reality. America, America has become a second-rate power. Its trade deficit and its fiscal deficit are at nightmare proportions. Now, in the days of the free market when our country was a top industrial power, there was accountability to the stockholder."

And perhaps his most famous quote, and one Wall Street insiders have increasingly taken to heart;

"The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA. Thank you very much."

If we only knew what was to come, where it's natural to hope for the best, and a return to sanity captured at the end of the movie where Carl Fox tells Bud, his son, (played by Martin and Charlie Sheen, who are father and son in real life);

"You should get a job where you make something with your hands - create something - instead of living off the buying and selling of other people".

Of course during the years to follow, America, or should I say the bureaucracy that controls America, has seen fit to export much of it's manufacturing base to China, all in the name of greed so that the bankers could extend the credit cycle, and the growth of our fiat currency economy. And they would have exported more lowly manufacturing jobs, including military manufacturing if possible (as their greed has no bounds), however besides the obvious constraints in this regard the war machine lobby is at the very heart of the bureaucracy, and as with Wall Street, best friends with Washington insiders. (i.e. it's a cash cow for insiders due to government contracts.) In addition to this, and along the same lines, the bankers were also allowed to consume the brokers through the repeal of the Glass Steagall Act in 1999 under Clinton, which lead to new (and accelerated) currency printing means, better known as securitization, and in turn fostered the explosion in unregulated derivatives, with this bubble ultimately popping in 2008 / 2009 marked by the global meltdown in consumer credit growth and stock market indices. This was when greed turned to fear, if only for a moment in the full measure of time.

I say this because little fear exists in the financial markets once again, where in fact complacency measures have recently reached extremes not witnessed since 1987, just months prior to the stock market crash that occurred in the fall. And if it were not for the government picking up the slack for a broken consumer / investor, monetizing all markets from stocks to bonds these days, overall credit growth would be declining, which would be the end of the fiat currency economy. So, you better believe the ruling class and bureaucracy (if you can distinguish the two anymore) will stop at nothing in attempting to smooth out what the consumer can no longer supply in terms of credit growth, only the government deficits will grow (they are gambling the consumer will recover), as more public debt will demand increasing interest payments here. And if the consumer doesn't recover the markets don't seem to be worried as the expectation is 'no problem - the bureaucracy will find a way to monetize these payments through obfuscation'. As you know from our recent discussion on this subject the game right now is to get the markets believing the US is printing less money and curtailing its monetization practices evidenced in the Fed's withdrawal from the mortgage market, while moving forward Freddie Mac and Fannie Mae will simply pick up this ball with their blank check from Congress given as a Christmas present on December 24th of last year when nobody was looking.

So like I say, the appearance is market participants couldn't be happier (stocks were higher every day last week, and the NASDAQ is up nine days in a row, running like in March of the year 2000), however as we know from previous discussions on our faulty and fraudulent markets, nothing could be further from the truth. Therein, and to add insult to injury for those unaware of this condition and were shorting stocks over the past year (and longer), because bearish speculators have felt emboldened to hold puts on US stock indices over the past year (because the news is so bad), which have been reflected in persistently rising and high open interest put / call ratios (updated here), our price managing bureaucracy has been able to squeeze stocks higher in spite of deteriorating fundamentals, assaulting both the pocket books and sensibilities of these unfortunates. Every dog has their day however, and for the persistent bears, soon enough of the unfortunates with neither the will nor resources to maintain their bearish posture will likely fall to the wayside if history is a good guide (think options expiry this month, tax time selling in April, or seasonals in May that will mark a top in the post crash rebound), opening the door to a profitable short selling opportunity. And this telling chart of the Dow, with the timelines suggesting an important top could occur anytime, confirms this thinking. (See Figure 1)

Figure 1
Dow Jones Industrial Average 1980-2010 (top half of chart)
Dow Jones Industrial Average 1980-2010 (bottom half of chart)

The way things are stacking up, if stocks keep getting squeezed into options expiry on the 19th, we may just have a repeat of the year 2000 topping pattern (a blow-off into expiry), and for the same reason. (i.e. a short squeeze.) What's more, if the Dow doesn't hit a new high by then, which is possible due to falling open interest put / call ratios (see attached above), and the NASDAQ does, which is also possible due to still rising put / call ratios (see NDX and QQQQ), then, with this signature the same as the 2000 top (the Dow topped in January, like this year so far, and NASDAQ in March), one would be wise to respect such an observation, possibly looking for tests of the highs in April best case scenario. Such an outcome is supported by the monthly NASDAQ / Dow Ratio plot from the Chart Room shown below, with the indicators suggestive more gains should be expected. It won't likely make it back into bubble territory because so many other sentiment measures are at extremes, the liquidity is not there, and money supply growth constraints are not supportive of his view, however marginal additional gains are still possible. (See Figure 2)

Figure 2
NASDAQ:Dow Jones Industrial Average 1980-2010 (top half of chart)
NASDAQ:Dow Jones Industrial Average 1980-2010 (bottom half of chart)

Further to this, when looking at the declining open interest put / call ratios for the S&P 500 (SPX & SPY) and Dow, what should happen if the bearish tech speculators are the 'last men standing' in this regard, is a dull but relentless rally over the next two weeks that completely exhausts the bears (so they won't be back) and emboldens the bulls (since the anniversary of the last year's lows are past), removing the derivatives related artificial support this low volume rally has enjoyed all this time. How high is the high most likely to be if this is the case? The big double top in the S&P 500 (SPX) back in 2007 involved a slightly higher high, so 1155 or so on the SPX smacks of being 'very doable' in my books. Anything past that and this thing could get out of control, with this potential displayed on this next chart of the SPX / VIX (CBOE Volatility Index) Ratio, now percolating just under key monthly resistance. (i.e. meaning it would need to finish the month above resistance to trigger a breakout.) Here, if RSI (Relative Strength Indicator) were to convincingly break above indicated sinusoidal resistance, then the top could be much higher, somewhere in the 1200 to 1300 range, or even higher. Again, the probability of this occurring is relatively low, evidenced by the moon-shot already witnessed in ROC (Rate of Change), however stranger things have happened. (See Figure 3)

Figure 3
S&P500:VIX Volatility Index 1989-2010 (top half of chart)
S&P500:VIX Volatility Index 1989-2010 (bottom half of chart)

Since the release of the above commentary, my resolve regarding equities / commodities / precious metals moving higher due to liquidity escaping the bond markets(s) has grown stronger. In fact, in this regard we could be on the very cusp of an extreme inflation in equities as money flees bonds, which is a page not many are on yet, or are afraid to speak of with any degree of certainty. This is where we may be able to help you with confusing macro calls like this as we have developed a little used sentiment based method of determining probabilities accurately in forecasting the markets we cover (including gold, gold stocks, and the broad averages), which when coupled with a potentially significant change like the one described above, can provide the certainty in decision making you may desire. One can subscribe to our services by using the links provided below to find out more.

Unfortunately we cannot carry on past this point, as the remainder of this analysis is reserved for our subscribers. Of course if the above is the kind of analysis you are looking for this is easily remedied by visiting our continually improved web site to discover more about how our service can help you in not only this regard, but also in achieving your financial goals. For your information, our newly reconstructed site includes such improvements as automated subscriptions, improvements to trend identifying / professionally annotated charts, to the more detailed quote pages exclusively designed for independent investors who like to stay on top of things. Here, in addition to improving our advisory service, our aim is to also provide a resource center, one where you have access to well presented 'key' information concerning the markets we cover.

And if you have any questions, comments, or criticisms regarding the above, please feel free to drop us a line. We very much enjoy hearing from you on these matters.

Good investing all.



Captain Hook

Author: Captain Hook

Captain Hook

Treasure Chests is a market timing service specializing in value-based position trading in the precious metals and equity markets with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested in discovering more about how the strategies described above can enhance your wealth should visit our web site at Treasure Chests.

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