Last Thursday I recorded a video (available to gold-level donors on Tickerforum) in which I pointed out the analog between the 2008 declines in the stock market and what we were seeing since the election.
There was a large difference in amplitude, but the timing and similarity in terms of where the market was, with a substantial level of congruence, striking.
My warning was quite simple -- the decline wasn't over in 2008 on Thanksgiving, of course, but you were playing with fire getting short in size coming into that expiration for the same reason you were last Friday -- the option skew was well into silly territory and the market itself was pretty-seriously oversold.
Those two ingredients don't always produce a rip-your-face-off move northbound, but they do frequently enough that it's unwise to bet against it with money you can't afford to lose.
Friday the market bottomed at 1343.35 with the /ES at 1340.25.
This morning we find the futures 30 handles, or approaching 3%, higher, and the futures are over +10 which is often a threshold for a "gap-and-go" rip.
I don't see a solution to the so-called "fiscal cliff", and everyone on CNBC is talking about "money on the sidelines." As in "buy buy buy" Cramer nonsense.
I love how everyone talks about how the market is "spring-loaded" when the move has already, to a significant degree, happened!
There is no actual solution to the fiscal cliff folks. As I have repeatedly pointed out what we keep screwing with are half-solutions and lies rather than anything that can actually solve the problem. The reason for this is quite simple in the main: We have lied for more than a decade about economic progress -- there has been none. It has all been borrowed and bought forward, and the ability to do that has now ended.
Paradigm shifts, when they happen, just are. The folks who recognized the housing bubble blowing up -- when I started yelling about Washington Mutual paying dividends with earnings that didn't really exist but rather were capitalized interest on houses that had already started to decline in value and were underwater the bell had rung. Yes, it took more than a year for the depths of the destruction that was to come to be recognized from that point, but the paradigm shift had already happened and in fact the shift occurred about a year prior to that when those home values peaked.
We're in the same situation now with fiscal reality. The driver of alleged "economic growth" over the last two decades was unbridled credit creation that presented a view of growth that was factually not happening. In point of fact were sliding slowly backward and accumulating debt instead of making progress. This exponential process is what set off the collapse in housing and the markets, and instead of addressing it we tried what was done in 2000 to shift and expand that leverage once again.
That experiment has failed; we now have enough data to know this is a fact, not an expectation.
What is the fair value of a market that has no exponential debt expansion in it? I don't know with certainty, but I know it's much lower than that for a market featuring that expansion. Is it half of a market with that expansion? Probably -- and likely more, because a "level" system is not what you get when things mean-revert -- you undershoot just as you overshot.
In short this is a nice Turkey week and those who piled in last week short are now staring at big red numbers this morning. But this was one of the best-telegraphed bounces with a hard analogue that wasn't that hard to recognize.
If you got caught by it step back and re-think both strategy and money management, and look for the corner when recognition returns. If not -- if you were on the ball, then enjoy the bright green numbers you woke up to this morning -- but don't fall in love with it for more than the next few weeks.
And if you're reading this and not a Tickerforum gold donor, consider joining us at the gold level of donorship and enjoy the trading videos along with much-enhanced access of the system.
A nasty set of facts you're probably not paying attention to:
Despite the Federal Government and Federal Reserve's best efforts to "re-ignite animal spirits" the expansion of leverage -- that is, debt -- in the economy has factually failed and is factually contracting against GDP.
The S&P went from about 100 to 1500 and the Dow from 1,000 to 14,000 predicated on this leverage expansion over the space of 30 years. That leverage expansion has ceased despite the stated intent and policy of Ben Bernanke to force Seniors and others into the market -- and to make them acquire more leverage.
Likewise, so-called "earnings expansion" was actually predicated on business leverage, and that underlay most of this "gain."
Finally, and most-ominously, tax receipts went up at a dramatic rate due to the same expansion of leverage. This is the "secret" of the so-called "Laffer Curve" (and is about to be exposed as the "driving force" as it reverses and renders people like Larry Kudlow, one of the curve's loudest apologists, disgraced fools.)
When the paradigm shifts so do the results.
The market is at least 50% overvalued, and may be overvalued by 80%.
So is land and so are houses.
Rochdale Securities LLC, the brokerage that employs bank analyst Dick Bove, is in advanced talks to save the firm after unauthorized trades in Apple Inc. (AAPL) went sour, said two people with knowledge of the negotiations.
Top Rochdale executives told potential investors that a trader bought $750 million to $1 billion in Apple shares last month without permission, the people said. The stock then dropped in value by a few million dollars and depleted the firm’s cushion against losses, the people said. Closely held Rochdale had $3.44 million of capital at the end of last year, according to a regulatory filing.
This tells you everything you need to know.
The company managed to purchase, somehow, two hundred times its capital worth of stock, a leverage ratio of (duh!) 200:1, which means a 1/2% decline in value would wipe out the entire capital book.
With what did the firm clear that trade? Its good looks?
Margin? What's that? 2:1? 5:1? 10:1? Oh no, there was no supervision at the exchange and clearing level at all. That much is clear because otherwise this trade could have never been made and it most-certainly could not have cleared at T + 3 settlement!
But it was and did, according to reports.
So again: How?
You think this is a one-off eh? That nobody else on the street has exposure like this, but things have moved "their way"? Based on exactly what? Would you care to present your evidence for this claim?
Let's be clear, just in case you missed it:
This is yet further evidence that the entirety of the market is, at present, stuffed full of alleged "positions" for which there is no capital whatsoever -- these positions are literally credit created out of thin air, and when, not if, something goes wrong the forced liquidation will lead to widespread destruction of firms and prices exactly as occurred in 2008 -- but worse!
Remember, Lehman was only geared 30:1.
From another user on the forum.... (credit to C4talyst)
Schumer and friends are trying to add a high-capacity (> 10 rounds) magazine ban to the cybersecurity bill. In the finest of Senate tradition, when you can't actually bring a bill honestly and pass it, you slip the crap you want into something else.
If this were to pass then high-capacity magazines would of course become extremely valuable.
So whether you own a gun or not, well.....
(Incidentally, the same thing happened after the former "assault weapon" ban. Pre-ban magazines and firearms got a lot more valuable in a big hurry......)
Supply and demand, you know.
Oh, and if you do own a gun the sponsors to which you should direct an appropriate response are:
Democratic Sens. Frank Lautenberg (N.J.), Barbara Boxer (Calif.), Jack Reed (R.I.), Bob Menendez (N.J.), Kirsten Gillibrand (N.Y.), Schumer and Dianne Feinstein (Calif.).
Here's my politically-incorrect response to all of them:
Morgan Stanley (MS) defended its role in Facebook Inc. (FB)’s initial public offering after a Massachusetts regulator subpoenaed the bank over talks between an analyst and investors about the social media company’s revenue outlook.
“Morgan Stanley followed the same procedures for the Facebook offering that it follows for all IPOs,” Pen Pendleton, a spokesman for the New York-based investment bank, said today in an e-mailed statement. “These procedures are in compliance with all applicable regulations.”
The question is twofold -- whether there was a breach of the "Chinese wall" that is supposed to exist between the research department and syndicate folks and secondly whether there was material research information provided to certain people but not others.
Whether the latter is actionable is somewhat tricky. An IPO has a "quiet period" where the firm and those involved in the offering are not supposed to be making public statements except through the registration documents. But Facebook filed an amendment to the S1 in which some changes were made.
I suspect there will be a load of fun around this event, given the poor performance of the IPO and the technical matters surrounding its trade, especially late confirms and similar problems. This, incidentally, also appears to have led to people being short when that's supposed to be impossible until the first trades settle (you can't short without a borrow, and you can't borrow shares that aren't yet in the hands of anyone.)
At least that's the theory; there are myriad reports that institutional clients and hedge funds are short and able to be short. Hmmmm... how do you short something you can't get a locate on as of yet because the first trades in the public market haven't settled? That's a question we ought to get answered as well.
This whole process stinks. I'd love to just simply stick up the "I told you so" banner and call it a day, but this entire mess outlines a few important facts, with the most-important being that Wall Street never gives a damn about you, the individual investor. The entire purpose of selling something is of course to make a profit, and in this case they sure did -- they maximized the amount the selling shareholders got, and the common man -- indeed, anyone who bought the IPO -- got the bag.
Have you figured it out yet America? What are you doing in this market, eh? Exactly how many times do you need to hear the touts tell you how "cheap" stocks are or how "investing" is something you should do -- and lose money -- before you wake the hell up?
If this isn't an object lesson up and down the line, from the apparent shorting of stock that doesn't exist in the public's hands yet to screwed up executions so nobody knew what they had to "late" updates to material information on the company's prospects to more, I don't know how much more clear it needs to be.
Don't worry, you only lost 26% in two and a half days if you bought at the open, or about 19% if you were lucky (dumb) enough to get an allocation.
That ought to make your whole year look good, right?
Where We Are, Where We're Heading (2013) - The annual 2013 Ticker
The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions.
NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANCIAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES.
The author may have a position in any company or security mentioned herein. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.
Looking for "The Best of Market Ticker"? Check out Ticker Classics.
Market charts, when present, used with permission of TD Ameritrade/ThinkOrSwim Inc. Neither TD Ameritrade or ThinkOrSwim have reviewed, approved or disapproved any content herein.
The Market Ticker content may be reproduced or excerpted online for non-commercial purposes provided full attribution is given and the original article source is linked to. Please contact Karl Denninger for reprint permission in other media or for commercial use.
Submissions or tips on matters of economic or political interest may be sent "over the transom" to The Editor at any time. To be considered for publication your submission must include full and correct contact information and be related to an economic or political matter of the day. All submissions become the property of The Market Ticker.