Stock World Weekly
by ilene - January 30th, 2011 8:23 am
Here’s this week’s Stock World Weekly. Enjoy! Comments welcome.
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DiggWhat Most People Don’t Realize About The Fed’s Superpowers
by ilene - January 27th, 2011 2:33 pm
Bob Prechter’s Conquer The Crash reveals whether the Fed really can rescue the US economy
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By Elliott Wave International
Since its creation in 1913, the primary intended role of the U.S. Federal Reserve Bank has been that of protector. In theory, the central bank was bestowed with the power to shape monetary policy in a way that would keep both booms and busts in check. The two main tools at its disposal — interest rates and money creation — would provide a "ceiling of normalcy" above expansions AND a "net of safety" below contractions.
To this day, the financial mainstream holds great faith in the Fed’s ability to fulfill its save-the-day duties — as these recent news items make plain:
- "Why Raising Fed Funds Rate Is Positive For Equities." (Seeking Alpha)
- "Fed’s Moves Lift All Asset Classes." (Associated Press)
- "US Stocks Erasing Losses: The aggressive moves of the Fed have been an important driver for the stabilization of stock prices." (Bloomberg)
But of all the variables the Fed creators took into account, there’s one glaring factor they neglected to consider: Namely, it cannot force consumers to spend, creditors to lend, or businesses to borrow. The events of 2007-2009 "credit crunch" and the subsequent "Great Recession" made that obvious. Remember how the government was upset at banks for sitting on the bailout funds instead of lending them out to consumers? And consumers weren’t exactly lining up on the street to get a loan, either.
The Fed’s inability to change social mood is the central theme in Chapter 13 of EWI President Bob Prechter’s NY Times business bestseller book Conquer the Crash. There, Bob describes the Fed’s strategy of lowering the federal funds rate to stimulate spending to be as effective as "pushing on a string." Writes Bob:
"The primary basis for today’s belief in perpetual prosperity and inflation with an occasional recession is what I call the ‘Potent Directors Fallacy.’ It is nearly impossible to find a treatise on macroeconomics today that does not assert or assume that the Federal Reserve Board has learned to control both our money and our economy. Many believe that it also possesses the immense power to manipulate the stock market. The very idea that it can do these things is false."
And so begins one of the most groundbreaking studies into the very real INABILITY of the Fed to fell the great bears of economic declines, or…
MARKETS DEFY GRAVITY
by ilene - January 27th, 2011 3:10 am
By Surly Trader
Since the beginning of December, the S&P 500 has yet to meaningfully break down below its 10 day moving average. We just like to blissfully crank upwards in valuations. The Dow has hit its momentous 12,000 level and the S&P was inches away from 1,300. Now that we have touched our psychological targets, maybe it is time we reassess how enthusiastic we have gotten. Instead of looking at P/E ratios on 2011 earnings forecasts, I have seen more and more analysts consider 2012 and 2013 forecasts…
I guess our 10 day moving average is a fixed positive slope
When it comes to the lesser of investment evils, it certainly still looks like equities are more attractive than bonds. The issue that I have is that most investors have set aside the significant tail risks that are out there. Not to belabor the point, but there is still significant risk in the Eurozone. Equity markets have ignored it, as well as concerns with local municipalities and states. These risks are real and will take quite a long time to resolve. While the VIX sits around 16 and realized volatility hovers near six year lows, we need to understand that risk flares come quickly and unexpectedly and there are plenty of issues that could precipitate are run.
The default spreads on the PIGS do not appear resolved to me so why is the Euro rallying?
I do not like to be negative, but it does get tiring when the arguments switch so fiercely from bearish to bullish stances. It seems to be the psychology of not wanting to be miss out when the market is rallying or not wanting to be the last one in when the market is tanking. Feast or Famine, no in-between.
Ambac Accues JP Morgan of Fraud in Ongoing Mortgage Suit
by ilene - January 25th, 2011 4:07 pm
Courtesy of Yves Smith of Naked Capitalism
One of the big reasons there have been so few fraud charges leveled against what looks like clear and widespread banking industry is that under the law, “fraud” is pretty difficult to prove. Needless to say, that puts commentators in a bit of a bind, because they can be depicted as being hysterical if they use the “f” words, since behavior that is often fraud by any common sense standard may be hard or impossible to prove in court.
The hurdle in litigation and prosecution is proving intent. Basically, the party who is being accused has to not only have done something bad, he has to have been demonstrably aware that he was up to no good. Thus po-faced claims of “I had no idea this was improper, my accountants/lawyers knew about it and didn’t say anything” or “everyone in the industry was doing it, so I had not reason to think this was irregular” is a “get out of jail free” card. Similarly, even if lower level employees knew that their company was up to stuff that stank, if the decision-makers can plausibly claim ignorance, again they can probably get away with it.
So it is gratifying in a perverse way to see a case in which the perp not only looks to have engaged in chicanery, but the facts make it pretty hard for him to say he didn’t know he was pulling a fast one. And even more fun, it involves JP Morgan, which has somehow managed to create the impression that it was better than all the other TARP banks, when on the mortgage front, there is plenty evidence to suggest that all the major banks have been up to their eyeballs in bad practices.
The case involves the bond insurer Ambac and the mortgage company EMC, which was the Bear Stearns conduit for buying mortgages to securitize and now thus part of JP Morgan. In 2010, reports surfaced that EMC had been falsifying mortgage data to keep its pipeline moving as fast as Bear wanted and contain costs.
But a suit by bond insurer Ambac alleges far more serious misbehavior. The discovery process in outstanding putback litigation has unearthed a scheme to defraud investors and Ambac and led the bond insurer to add fraud charges to its complaint. The Atlantic, which broke the 2010 story, gives a…
Stock World Weekly
by ilene - January 23rd, 2011 3:20 pm
Here’s the newest: Stock World Weekly Newsletter. Comments welcome! – Ilene
Archives here.
Big Top or Pee-Wee Concerns?
by ilene - January 19th, 2011 12:15 pm
Courtesy of Joshua M Brown, The Reformed Broker
Do we care about the little things anymore or are they merely trifling datapoints in an empirical sea of economic expansion? Are those calling for the Big Top mining for negative indicators or are they seeing things before the crowd?
Apple’s lack of follow-through after destroying earnings is the big iElephant in the room, but very few people notice or seem to mind. Momentum fave Cree ($CREE) rocked for 13 percent after earnings, Goldman Sachs ($GS) and Citi ($C) report light quarters…is this thing on?
How about, for example, what Mark Arbeter had to say about the extended nature of this tape. Arbeter is the Chief Technical Strategist as S&P so listen up.
From IBD:
“As of (Thursday), the NASDAQ 100 was almost 16% above its 200-day simple average, nearly equaling the overbought levels we saw in the middle of April,” Arbeter wrote in his weekly commentary. “The only other time in the last 10 years that the NASDAQ 100 was this overbought or extended was in the fall of 2007.”
Investor sentiment is overly bullish, which usually signals a correction is coming, Arbeter adds. Based on Fibonacci analysis, Arbeter believes the S&P 500 could decline to 1,190 or 1,130, down 8% to 12.6% from Friday’s close at 1,293.
Or how about the comments of another notable technician, Tom DeMark, as recorded in BusinessWeek this morning:
U.S. stocks are within a week of “a significant market top” that is likely to precede a drop of at least 11 percent in the Standard & Poor’s 500 Index, said Tom DeMark, creator of a set of market-timing indicators.
DeMark’s Sequential and Combo indicators, designed to identify market tops and bottoms, are giving a sell signal on the main U.S. stock benchmark for the first time since mid-2007, he said in a telephone interview. The S&P 500 began its 57 percent plunge from a record in October 2007.
I am an intermediate-to-long term bull, but I can’t help but be sensitive to these warning signs. They are multiplying.
Read Also:
Settling Prosecutions For Pennies on the Dollar Is a Type of Bailout
by ilene - January 15th, 2011 4:40 pm
Courtesy of Washington’s Blog
The following is an excerpt of my much longer roundup of the many covert ways the government is bailing out the giant banks.
Fraud As a Business Model
If you stop and think for a moment, it is obvious that failing to prosecute fraud is a bailout.
Nobel prize-winning economist George Akerlof demonstrated that if big companies aren’t held responsible for their actions, the government ends up bailing them out. So failure to prosecute directly leads to a bailout.
Moreover, as I noted last month:
Fraud benefits the wealthy more than the poor, because the big banks and big companies have the inside knowledge and the resources to leverage fraud into profits. Joseph Stiglitz noted in September that giants like Goldman are using their size to manipulate the market. The giants (especially Goldman Sachs) have also used high-frequency program trading (representing up to 70% of all stock trades) and high proportions of other trades as well). This not only distorts the markets, but which also lets the program trading giants take a sneak peak at what the real traders are buying and selling, and then trade on the insider information. See this,this, this, this and this.
Similarly, JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup, and Morgan Stanley together hold 80% of the country’s derivatives risk, and 96% of the exposure to credit derivatives. They use their dominance to manipulate the market.
Fraud disproportionally benefits the big players (and helps them to become big in the first place), increasing inequality and warping the market.
[And] Professor Black says that fraud is a large part of the mechanism through which bubbles are blown.
***
Finally, failure to prosecute
…
“The Fed No Longer Even Denies that the Purpose of Its Latest Blast of Bond Purchases … Is To Drive Up Wall Street”
by ilene - January 15th, 2011 4:36 pm
Courtesy of Washington’s Blog
The stated purpose of quantitative easing was to drive down interest rates on U.S. treasury bonds.
But as U.S. News and World Reported noted last month:
By now, you’ve probably heard that the Fed is purchasing $600 billion in treasuries in hopes that it will push interest rates even lower, spur lending, and help jump-start the economy. Two years ago, the Fed set the federal funds rate (the interest rate at which banks lend to each other) to virtually zero, and this second round of quantitative easing--commonly referred to as QE2--is one of the few tools it has left to help boost economic growth. In spite of all this, a funny thing has happened. Treasury yields have actually risen since the Fed’s announcement.
The following charts from Doug Short update this trend:
Of course, rather than admit that the Fed is failing at driving down rates, rising rates are now being heralded as a sign of success. As the New York Times reported Monday:
The trouble is [rates] they have risen since it was formally announced in November, leaving many in the markets puzzled about the value of the Fed’s bond-buying program.
***
But the biggest reason for the rise in interest rates was probably that the economy was, at last, growing faster. And that’s good news.
“Rates have risen for the reasons we were hoping for: investors are more optimistic about the recovery,” said Mr. Sack. “It is a good sign.”
Last November, after it started to become apparent that rates were moving in the wrong direction, Bernanke pulled a bait-and-switch, defending quantitative easing on other grounds:
…
Fed Releases New POMO Schedule, To Monetize $112 Billion In Bonds And Prop Up Stocks On 18 Out Of 19 Trading Days
by ilene - January 12th, 2011 3:13 pm
Courtesy of Tyler Durden
The New York Fed’s equity crash prevention team of Sack-Frost has just released its most recent POMO schedule. Over the next month, ending on February 9, the Fed will purchase about $112 billion in debt in 18 discrete operations. And for the first time unlike the prior two QE2 monthly schedules, there is not one dual POMO day. From the release: "Across all operations in the schedule listed below, the Desk plans to purchase approximately $112 billion. This represents $80 billion in purchases of the announced $600 billion purchase program and $32 billion in purchases associated with principal payments from agency debt and agency MBS expected to be received between mid-January and mid-February." The days when there is no POMO will be Monday, January 17 and Wednesday, January 26. All other days have a POMO operation scheduled.
Stock World Weekly
by ilene - January 2nd, 2011 8:18 am
Here’s the latest Stock World Weekly Newsletter, New Year’s Edition.
Feedback welcome — please leave comments, we value your input. - Ilene
Picture credit: William Banzai7
For Stock World Weekly archives, click here.
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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