July 24th, 2012
in Gary's blogging
The Sky Is Falling, This Time It Is Real
For the past umpteen months I have been witness to a strange development of sorts where the Global markets and financial matters slide and the US markets continue to rise.
This rumination is nothing new to my regular readers as I have made many references to this phenomenon in previous articles. I continue to wonder just what was going on then and how could it continue today in the face of reality of the financial misfortunes around the World. James Kostohryz in his article below, believes the US market investors that have kept the US markets up are in denial. I think it is a lot more than a simple denial. It should include the many manipulators on Wall Street, including the Fed's meddling, have been the mainstay of the bullish US market and not just the uninformed greedy 'sheeples'. The US markets are going to fall to new lows, that's a fact. The sky is falling; the question is how much, when and at what speed?
Goldman, the crowned head of manipulations and 'Muppet Bashing', is spewing forth bullish statements because I feel they, and others like them, have taken on enormous long positions are are trying to influence the cash crowd to buy into this mendacious bullish position. They believe, as other do, the cash crowd and large funds will be reluctant to take losses when the EU 'issues' come home to roost. We will see as that scenario is about to happen and I think it has already started.
Hat tip to a faithful reader “S”, the article below outlines the ridiculous decoupling the US markets are experiencing over the declining markets and financial matters in the rest of the World.
“Indeed, viewed objectively, the world currently stands at the precipice of an even greater crisis than the one in 2008-2009. You wouldn't know it by looking at US stock prices.
Many equity markets around the world reflect the grave danger of a new phase of global economic and financial crisis.
The most important thing to note is that the S&P 500 has radically decoupled from Spanish, Italian and Chinese markets since mid 2011. Since that time, the S&P 500 has been essentially flat while the three leading markets highlighted have been in the midst of brutal bear markets that show few signs of abating. Furthermore, fundamentally and technically, the three leading markets highlighted appear headed for even lower lows.
US investor apathy won't change the course of events in Europe and China. Nor will current complacency prevent the consequences of these crises to ultimately become manifest in US investor portfolios.
US stocks have yet to decline because the feared foreign crises have yet to transpire. However, equity indices in the key nations are clearly signaling a high likelihood that such crises will occur.”
The continuing poor news out of the EU should be scaring the wits out of US investors, but it didn't do much to the markets.”
Now that you have read the above article on 'Decoupling' several thoughts come to mind in trying to read which direction the US markets will take AND how much movement can be expected. The first is the size and scope of the 'investment' the US banks, Funds, investors, companies and the cash crowd have in the US market place. Simply put the total investment dollars is ginormous and dwarfs anything else in the World and the tendency is for this Goliath to continue to move forward. And like any very large physical entity, it is slow to move, as it has been doing, but once in motion it is difficult to stop, as we are witnessing lately. It should reverse as one might think, but it hasn't yet. But when it does finally set its course south, what can we expect? There is no easy solution that fits all investors with vastly different goals and funds. The millionaire’s issues are different than the soul about to retire with his life savings in his 401K. Other issues face government workers facing local government insolvency and cutting back on pension programs. That is the problem for financial experts and personal income specialist's to ponder, reflect and to wish they had said the right thing first.
When Lehman Brothers crashed in 2008 that event shook the World squarely on its financial foundation and the fallout of a declining market and recession began. There were many, many individuals who lost more than 50% on their investments during that period. There were those just retiring that got the surprise of their life when they saw their retirement funds collapse and virtually disappear.
That was then and today some analysts and bearish pundits speak of a repeat performance of the 2008 collapse coming to fruition, but with different player names. Other, like myself, are not quite so sure we are going to see the US markets go to hell in a hand basket in one sweeping motion if that is the case. This reasoning is in light of the massive amount of investment dollars that would have to be affected to create such a scenario. If a Goldman, Bank of America or Wells Fargo, et al, were to go belly up anytime soon, that would certainly be a negative money mover of extraordinary proportions easily greasing up the slide for markets to fall unabated.
However, this type of precipitous process is usually AFTER major financial declines have been already set in place and 'margin calls' make continuing any financial charades impossible, which is exactly what happened to Lehman. They got caught on the wrong side of the betting table because they were gambling on the predisposed 'fact' they can move the markets any time they want. Remember TBTF?
One has to wonder if there are any “Black Swan” financial disasters in the making at some of our largest banking institutions? You bet they are out there and you will get a forward looking view of a looming financial disaster in the making when the French banks start to default. We have already seen one incident called the LIBOR scandal. The proverbial chickens will come home to roost and hundreds of financial pundits will come out of the woodwork saying I told you so.
Not So Fast
Another thought is the speed in which market movements are to be expected. I have said repeatedly they will be measured and NOT exceed 2% at any one time excluding a 'Black Swan' moment. (That could include such things as military action in Iran or any other place in the World.) Disregarding the market manipulators for a moment, the cash crowd is smaller than it has ever been and is unlikely to create any panic movements. The 'Mattress Money' has long been out of the market and is not going to make any contribution to any market fall of epic portions. The continued 'not-so-good' and 'barely-improving' financial stats we see on a weekly basis will most likely keep the US markets on a somewhat even keel or at least pump air into the rotting hull of the US Economy. I don't think it will be enough to keep it afloat for long, but I don't see it sinking either.
Look at it this way, the investments already in place have nowhere to go – easily that is. Large investment funds can't dump like the cash crowd can do without disturbing the 'Force'. Doing so would not be in their favor and will be reluctant to change a position IF they don't have to.
The one thing that does concern me a lot in the words of the great philosopher and US Department Of Defense head, Rumsfeld, “there are always unknown unknowns, in addition to the known unknowns!” And that my friend is what bothers me the most.
When Is The Question
There have been numerous articles, including my own, stating an expected decline was imminent several months ago and that any hope for a summer rally was unlikely. Well, that decline fizzled out in early June and the summer rally was not expected to be anything like it has been up to now anyway. The 'Energizer Bunny' rally of 2012 surprised a lot of financial analysis, like myself, it its intensity and longevity. Every time one thought it was going to fall back, it just plowed ahead once more.
After the three days of relatively steep decline, has the long awaited decline actually begun or what? Being a bit 'gun shy' after my several gaffs of incorrect and faulty prognosticating, I am reluctant to say anything concrete as Mr. market seems to go out of his way to poke fingers at me and laugh. Well, that is the way of the market and one needs to suck it up and move forward.
I do remain bearish but in my own behalf, I have never put forward any more than 25% of my cash holdings to position myself in whatever current trend happen to tickle my fancy this year. I long ago dumped my dogs and recommended others to do the same and put myself in a 75% cash position. All trades this year have been profitable and current short holdings are in the black. The 25% remaining long term holdings have done well and continue to pay dividends. So I may have called market declines in haste, but my conservative investment stance has protected me, and I hope our premium subscribers as well, from serious losing positions both long and short.
Regardless, the question remains when is the US markets going to see a sustained decline start? I put forth to you that it has already started.
The single reason the markets have been bouncing around is that it has been news driven. Stupid unfounded rumors have made the market move many points higher on any given day and then make a halfhearted effort to retrace when shown to be false. Hopium and delusional put forth by politicians and the MSM alike have been freely flowing and have disturbed the 'natural' flow of market movements. Not that this phenomena is anything new, but the intensity of movements has been greatly enhanced by all of the reasons mentioned in this article. Manipulation of every sort, criminal exploitations of the markets and pure and unadulterated greed have made the US markets a gambling casino that upstages Las Vegas.
These market movements of late have made seasoned traders shudder at the only prospects are to guess. For those who can claim profit this year are thin as are the profits. Unless you are one of the HFT's with gazillions to trade with, this has been a decidedly poor year to make any profit – safely anyway as the prospects of an ever collapsing market is always on your mind.
It is unlikely the markets will see a 50% decline in the coming year although I wouldn't rule completely it out in light of the seriousness of just the Eurozone's problems alone. Many of our multinational companies rake in 40% of their profits overseas and anything depressing Europe, the BRICS or China alone WILL play havoc on their earnings report.
Outside of a World Financial Collapse, typically, September / November are the two months that see more market decline and negativity than any other single time in the year so I would naturally think in terms of a 'normal' market decline then. Those months are coming up as we enter August which is usually the ending of the 'Summer Rally' period depicting a decent from the July highs.
The fly in the ointment, so to speak, in the above premise is the German High Court's decision whether Ms. Merkel had the authority to make certain financial decision affecting the possible future of the German economy. This important market moving judgment will be handed down on September 12th, 2012 and WILL effect the markets. A decision that affirms her right to make these types of decisions will be VERY bullish and provide reasons, although thin and counter productive, for the markets to rise. The opposite will probably not have much effect as the markets will have already priced in that High Court decision.
The bottom line here is, regardless who is elected President, what the German's have to say or if China makes a hard or soft landing, is that the World economies including local city and state governments, are in poor shape and will depress markets and national banknotes around the World. Any hope of a World recovery is not expected to gain much footing towards recovery in 2013. The market numbers will reflect these woes more in sync once the decoupling is complete.
Remember, “The only fools bigger than those that are playing are those that think they are winning!” However, “The only fools bigger than those that are playing are those that are watching!”
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Written by Gary