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A Culture of Corruption

The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, January 11th, 2011.

It's a funny thing - actually it's not so funny for the poor lost and trusting souls that give their money to the crooks in New York to manage - but for some strange reason (greed) managed account returns don't seem to even come close to those enjoyed by money managers today, not even after a good year like 2010. And this is especially true if you include the fact that if money managers have a bad year, or worse, where they may go out of business, our central planners (and central banks) step in and bail them out, and executives at these companies are still paid fat bonuses which is all gravy (for screwing up), never mind a return on investment. This hardly seems fair considering most investors (especially the little guys) are never bailed out, but it's your own fault if you allow it to happen in knowing all too many of these characters take untenable risks with your retirement dreams because to them it's other people's money within a culture of corruption - and they simply don't give a damn because they know if trouble arises a bailed out would come - which accounts for the orgy of risk taking on Wall Street these days.

Yup - it's a consequence free environment for the big money managers these days, where the bigger you are (not the harder you fall) the bigger the bailout related bonus you can expect for screwing up next year. It's bureaucracy at it's finest, and if you are lucky (crooked) enough to be in its upper echelons, which we will call the bourgeoisie (a culture of corruption), then you get to go shopping at Louis Vuitton and drink Cristal, while the have-nots have ever less. This is why I find the babbling idiots on CNBC so funny when they question why retail investors don't return to the stock market. I don't think they see themselves or what they are doing. They think they can game anybody because the government and the bourgeoires continue to do it. But what they fail to realize is the economy is not so great outside of New York, and that at some point this will become evident even to them, not to mention the bourgeoires. Hopefully for them we won't have a repeat of what happened in the French Revolution - no? If this past weekend is any indication however, this might just be wishful thinking on their part(s).

So keep that economy going all you price-managing crazies, because if you don't, after cornering it into an eventual fiat related disaster, your very existence could be at stake. And they did exactly that, making sure stocks closed the week higher so that it could be pointed out the Trader's Almanac suggests when this occurs stocks are up 86% of the time. And if they can get the stock market to finish higher in the month January, never mind just the first week, the bureaucracy's price managers will have engineered yet another historical buy signal, although not as significant on a percentage basis. As you know however, this is exactly what we have been waiting for to stop the put buyers in their collective tracks because they would have little reason to continue repeating this behavior from this perspective, the Presidential Cycle (the third year is usually strong), or even just common sense, not that this brand of thinking ever matters in the stock market until it's too late. We will have more to say on this directly below.

In relation to our comments last week where we were suggesting a May low in the equity complex this year based on what we thought would be a similar pattern to that witnessed in 2000 (because of other similarities), I must digress and say the longer this topping process takes the less like that pattern the aftermath will be as well. And when you think about it, this makes sense in that our fiat currency based economy is far more hollowed out than it was in the year 2000, with our financial markets needing daily liquidity injections now just so they don't collapse. Therefore it should be no surprise stocks continue to get squeezed higher every week, however again, once the bureaucracy's price managers lose their rubes (short sellers) to squeeze, it should be recognized that short of significant further liquidity increases that actually send money supply change rates soaring, once the stock market (any equity market) bears are exhausted prices will come down anyway in this mature environment, an environment that now has far too many on the dole.

So if one is bearish, as you should be, then you actually want the entire month of January to be strong, because then surface dwelling speculators will look at this as an indication of prospects for the remainder of the year being bullish and be hesitant to buy puts, which would bring down US index open interest put / call ratios in theory. I say in theory because it's surprising just how determined bearish speculators have been to lose their money up until this point, so who really knows just how badly these guys need their heads caved in before they become exhausted. In fact on Friday speculators / hedgers came in and bought up a lot of QQQQ puts, sending the open interest put / call ratio much higher, and values soaring (relatively). Here is a snapshot of the NASDAQ 100 / Dow ratio so that you can see what I mean, where prices are in what appears to be a fifth wave blow-off, which is a direct result of all this put buying, making whatever top we see as a result of this activity significant. And below is an updated view of the NASDAQ (Comp) / Dow Ratio to show you the trade is attempting to break up towards extreme bubble making territory. (See Figure 1)

Figure 1

As you know however, if history is a good guide, the public will not return to the stock market within this generation, much to the chagrin of the New York types who want to skin them alive again, so the likelihood of another tech bubble the likes of the one witnessed in 2000 is low, meaning this push higher in tech stocks (and the larger equity complex) could be over as early as options expiry this month. After all, virtually nobody, except veterans like Arch Crawford (you can download his January letter here), Joe Granville, and Bob Hoye are expecting a top here, so this could never happen because they have been premature for so long - right? The thing is however many important tops have come in January (the Dow in 2000), and as Joe Granville points out prices should finally run out of steam 9-months after the internals. Further to this, in my opinion a large part of the reason stocks have been resilient for so long is because widely followed advisories the likes of above have been bearish, and their readers, largely comprised of thinning ranks of professionals with the public not in this market, have been acting on this notion, which accounts for all the put buying to this day. (See Figure 2)

Figure 2

So, with all things considered, and allowing for a test of such a top in the spring (like in 2000), we are taking the possibility of an important top in stocks here in January seriously, especially with tech stocks blowing off now. And we are emboldened in this regard with the recent breakdown of gold against all other measures of equities, from stocks to commodities, as can be seen above in the breakout of the S&P 500 (SPX) / Dow Ratio. Now as you know from recent commentaries speculators have become increasingly bearish on precious metals, which should cause a rebound going into options expiry on the 21st next week, however with everything else that's going on, not the least of which might be a top in the stock market as next Friday approaches, aside from speculators taking a good swipe at COMEX silver options expiry again in March, which is discussed here, again, perhaps one should be somewhat more cautious here too until at least some of the froth in the larger equity complex disappears. And of course if we get a sell signal in stocks, with a major one being a confirmed 3-day close below the 155-exponential moving average (the pink line) on the monthly SPX / VIX (CBOE Volatility Index) Ratio, pictured below, the perspective would escalated to one of heightened conservatism on precious metals too simply due to liquidity risks within the initial stages of such a sequence. (See Figure 3)

Figure 3

This being said, and aside from the prospect of a recovery in precious metals prices into next week then, it should be reiterated that past this, and despite further shenanigans on the part of our price managing bureaucracy / bourgeoisie (led by money printing), here too we will be watching what the speculators will be doing running into subsequent options expiries because if people actually start thinking deflation, then open interest put / call ratios could remain at elevated levels, which would not only keep the sector relatively buoyant, but more, such an outcome would aid in supporting the larger equity complex as well. (i.e. this would help stocks bounce after an initial sell-off into February.) Of course once the Dow / TSE (Toronto Stock Exchange) Ratio breaks out to the upside, and this eventuality looks ever-present, all bets should be off in this respect because this will be the biggest deflation signal you will witness for some time, and the reaction in the markets could be quite profound considering it's been a long time coming, with a great deal of pressure / energy built into the formula. This thing looks like it could breakout this month - no? (See Figure 4)

Figure 4

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 web site to discover more about how our service can help you in not only this regard, but also in achieving your financial goals. Along these lines, you should know your subscription to Treasure Chests would include daily commentary from either the myself or Dave Petch. As you may know, I cover macro-conditions, sector timing, and value oriented stock selection, while Dave covers the HUI, XOI, USD, SPX, and TNX technically each week. Mr. Petch is a world class Elliott Wave Theory technician.

In addition to this, you would have access to all archived commentaries, the Chart Room, exhibiting 100 annotated charts of the precious metals and stock markets, along with stock selection and sector outlook pages. 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 are interested in finding out more about how our advisory service would have kept you on the right side of the equity and precious metals markets these past years, please take some time to review a publicly available and extensive archive located here, where you will find our track record speaks for itself.

Naturally 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 and best of the season all.


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