The Long Crisis

Archive for the ‘stocks’ Category

Finally the Securities and Exchange Commission [SEC] has filed fraud charges against a Wall Street firm that made billions of dollars while many Americans suffered the consequences of a housing market meltdown largely caused by the reckless and irresponsible actions of Goldman Sachs and other Wall Street firms.

Very likely, this action by the SEC will be one of many such actions as a flock of black swans that have been patiently circling above Wall Street move in for the kill. Surely, Goldman Sachs is one of the most hated financial firms in the world and politicians seeking populist support will pile on in earnest as the politically well-connected Goldman Sachs sees its support melt away under the heat of unleashed voter anger. Many Americans will rejoice as the SEC pursues its case against the arrogant and unrepentant Goldman Sachs.

Today, Friday, April 16, 2010 the Securities and Exchange Commission announced civil fraud charges against the gigantic Wall Street powerhouse and one of its executives. The SEC alleges Goldman failed to disclose that one of its clients helped create — and then bet against — subprime mortgage securities that Goldman sold to investors. In essence, Goldman is accused of pushing a mortgage investment that was fraudulently devised to fail.

The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). The SEC states that Goldman Sachs misled investors by not disclosing that hedge fund manager John Paulson reportedly made more than one billion dollars betting against the CDO that he helped Goldman Sachs to structure. Paulson’s hedge fund paid Goldman Sachs more than $15 million to structure the deal that his hedge fund then bet against.

SEC Enforcement Director Robert Khuzami said in a statement that “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”

“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” finance expert Sylvain R. Raynes told the New York Times about such deals. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”

While so far the SEC has brought fraud charges against Goldman for only one of its many CDO deals the SEC has under review a wide range of Goldman Sachs transactions. More than likely, Goldman Sachs is not the only Wall Street bank or firm subject to review.

The charges against Goldman Sachs and the use by the SEC of the word fraud has spooked a stock market that was already set up for a steep correction. At 1:35 PM the Dow Jones industrial averages was down about 150 points. The market immediately began to sell off after the Goldman Sachs, SEC news was released at about 10:30 AM. This could be the black Swan event that ends the bear market rally from the March 2009 lows. Very likely, after the worse financial debacle since the Great Depression there are other shoes to drop and other black Swan events that will occur during the foreseeable future.

At the very least, those long the stock market will have to re-evaluate the risk that being long stocks bears with Goldman Sachs and the entire financial sector once again under severe selling pressure. In my opinion, the current environment is very risky to be long stocks. Technical indicators were already signaling the likelihood of a steep sell off prior to the fraud charges being brought against Goldman Sachs.

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The United States is adding trillions of dollars to an already bloated national debt, crude oil is at a troublesome $86 a barrel, banks are sitting on trillions of dollars of overvalued and still depreciating home mortgage assets as the real estate market continues to flounder, gold at $1158 per ounce is signaling big trouble ahead, the sovereign debt issue has not been resolved and is actually just getting underway in earnest, unemployment is officially at 9.7%, more like 21% when computed as it was in the early 1980s, yet the DOW, S&P, and NASDAQ are making new highs almost everyday.

Our government is busy telling us that everything is just great and that happy days are here again. Should we believe them (are you kidding?) or is the fix on in the greatest stock market manipulation of all time? Could it be that in order to restore confidence in the economy the government is involved in the greatest confidence game in the history of the United States?

So is the DOW, S&P, and NASDAQ all going to keep going higher forever? Or are the teachings of a dead mathematician and other technical indicators that are stretched to the limit going to reverse this juggernaut of a market?

In this new revealing video I show you exactly what I mean about the stock market being dangerously overextended and how the indices could be very close to a very important tipping point.

Overextended Market

This is without a doubt, one of the most important videos I have seen in a long time. If you are concerned about your financial future and have long stock positions you don’t want to miss it. There is a high probability that in the near term those who think that the stock market is a one-way street will find that it does matter when a market is extended beyond technical breaking points. Future market action is likely to resemble that taken by a rubber band that is extended to the breaking point. Once a snapback occurs it is violent and severe.

As always, our videos are free to watch and there are no registration requirements.

Overextended Market

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The Dow Jones Industrial Averages popped through the psychologically important 11,000 level this morning and is trading at 11,020 as I write. Almost as if an alien force field of some sort has been pulling it along the S&P 500 has not closed down for more than two consecutive days in 10 weeks. The S&P 500 index is now nearly at the 1200 level.

In my opinion, the discrepancy between the recovery on Wall Street and in the stock market from the March 2009 lows to present levels and the struggling recovery, if you can even call it that, for Main Street has never been more pronounced. Clearly, even as stock market analysts and the usual crop of talking heads and market cheerleaders talk up a new bull market in the making something out of the ordinary is occurring. No doubt, some of the extraordinary amount of government supplied liquidity, well into the trillions of dollars, has found its way into the stock market and is propping up stock market evaluations around the world.

The fundamentals for the economy are still rather grim. With unemployment hanging tough at near the official 10% level, with another round of real estate foreclosures coming on stream as 2010 progresses, with the commercial real estate market sinking fast with little hope of recovery as capital, especially refinancing capital, remains scarce, and with the sovereign debt issue growing, 2010 and 2011 will likely prove to be very tough years for many world economies. In a world where financial problems associated with excessive debt and excessive leverage are being addressed by the issuance of even more debt and by the use of even more financial leverage it is difficult to see how long-term results will be anything but disastrous.

To be clear, I’m not suggesting that the US government has set up its own secret trading room and is directly manipulating the market by trading in stocks and indexes. I am suggesting that the government has made an extraordinary amount of very low cost capital available to Goldman Sachs, J.P. Morgan, and other government supported firms enjoying cozy relationships with the government, and that a significant amount of the low-cost capital being extended to those firms is being recycled back into stock markets. However, a day of reckoning is probably not too far away.

In the United States the Federal Reserve Bank’s balance sheet has deteriorated markedly as in an effort to stabilize banks and the financial markets the Fed has exchanged trillions of dollars in newly created cash for toxic assets of questionable, if any, value. The United States Treasury is increasing the nation’s debt burden at an unprecedented rate as it continues to auction off treasury notes and treasury bills. How long can the US government and other governments, such as the UK, get away with this confidence game and continue to find investors who are willing to continue to invest in securities of nations with increasing sovereign debt loads?

My guess, is not for much longer. Long term interest rates are beginning to increase which will only add to the problems of servicing and refinancing trillions of dollars of debt backed only by the promise of the debtor nations to repay. China and Japan, two nations currently participating in the United States debt issuance auctions that supply most of the capital, are already beginning to scale back their purchases as they worry about the soundness of US financial matters.

Sometime, probably in the not too distant future, long-term interest rates will begin to increase at alarming rates as it becomes more difficult to attract investment capital into US government securities. As it becomes more difficult for the US government to borrow money you can expect that the flood of government liquidity that has been propping up the stock market will suddenly end. When that happens, a stock market that is already extremely technically overbought will prove that indeed it is still a bear market, and that the rally from the March 2009 lows was only a bear market rally.

In my opinion, the worldwide deleveraging process still has a very long way to go before it reaches an equilibrium point. Current financial conditions around the world are unprecedented and will result in a transition to a new world, not a return to the old. It seems to me that Robert Prechter is correct in forecasting a long term period of deflation. The fact that it has not yet extended to the prices of stocks doesn’t mean at all that a long-term period of stock price deflation will not suddenly and violently appear. It is not a good time to be going long stocks.

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