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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For the last several weeks we’ve been very concerned that all the major indexes are in “thin air” and have exceeded some key Fibonacci retracement levels. But certainly, the poor price action over the past few days, with the Dow closing Friday at 10120. 26, down 115. 75 points, is a strong indication that the concerns are justified.

This new short video explores that and looks at a key Japanese candlestick formation that could really make a difference and be the first clue in the demise of the Dow. The fact that early in the trading day the Dow rallied over 100 points on news that GDP for the fourth quarter of 2009 expanded at a 5.7% rate and then reversed in the afternoon to finish about 53 points lower is certainly bearish price action.

In the video I’ll also show and share with you a specific number to look for in February. Should this level be broken, then it will signal a major reversal to the downside for the Dow. We are not talking about a minor correction here, but a complete trend reversal, one that will be very violent and catch many traders by surprise.

Watch the video you see if it all makes sense to you. As always our videos are free to watch and there is no need to register. Bear Market Wave 3 Video Enjoy the video and let us know what you think on our blog.

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In an interview with Reuters, Robert Prechter, president of research company Elliott Wave International in Gainesville, Georgia and known for predicting the 1987 stock market crash, said that the next leg of the bear market in stocks has probably begun. Prechter further says that stocks as well as gold and corporate bonds are likely to slide as the U.S. economy suffers long-term weakness.

For investors in stocks this is “the last chance to get out with the Dow in quintuple digits,” Prechter added. Prechter is forecasting a long-term deflationary environment for the US economy which may last until 2014 to 2015. Prechter is a highly regarded financial analyst and is considered a leading authority in the application of Elliott Wave theory.

According to Prechter there is a very good probability that the highs have been seen in the Dow Jones industrial averages and that the rally from the lows from March 2009, even though the rally retraced about 53% of the losses from the all-time high, was merely a rally in a long-term bear market. Prechter compares the advance to one that occurred in 1931 in 1932 that advanced an almost identical 52.9% before the market collapsed to new lows.

Prechter is forecasting that wave three of the bear market has probably started and before the bear market has been completed the March lows of March 2009 will be taken out. Wave three is the wave that travels the furtherest in the shortest amount of time. Many traders will be taken completely off guard as the wave begins and will suffer heavy losses as the wave progresses.

Prechter is forecasting that the likely bear move will be violent and extremely severe. According to Elliott wave theory, as explained by Prechter, the current bear market involves a super bear cycle and will be the most severe for at least the past 200 years. The ensuing wave of deflation will take no prisoners, and will decimate stocks, bonds, commodities, as well as real estate. In fact, the deflation will be so severe that he thinks the only investment that makes sense as an asset class will be cash.

In regard to the US dollar, Prechter forecast that a deflationary period of depression will bring strength to the currency. The reason for this is that in a depression bankruptcies, structured settlements, foreclosures, and debt liquidation, create losses and take dollars out of circulation. For example, if a real estate project worth $100 million goes into foreclosure and eventually sales for $50 million dollars, the difference of $50 million is simply lost.

The money does not appear in anyone else’s account, it has just disappeared into money heaven. The fact that a depression causes dollar destruction means that the remaining dollars have more value. In a depression, cash becomes king. Those who have cash find that their cash becomes more valuable as they can purchase just about everything at lower prices.

While it is far too early to say with certainty that Robert Prechter is once again right with his forecast the price action of the last several days strongly suggest that he must be taken seriously. For the stock market to fall about 555 points on the Dow, only to rally today by 23 lousy points, is extremely bearish price action. Over the past two weeks weakness in the gold market and commodities in general have correlated with renewed strength in the dollar. All of this price action is in line with Prechter’s forecast.

If Robert Prechter is correct about this being wave three in a bear stock market the next few weeks, and indeed all of 2010, will likely be an extremely painful period for stock market bulls. A wave 3 in a bear market typically will have sharp sell-offs followed by weak rallies, each followed by another sharp sell-off, until the wave is eventually completed. The price action of the past four trading days will conform to that pattern if another sharp sell-off takes place.

The price pattern of the next few days will be critical. Any further sharp brutal sell-off would be fair warning that we are in a wave three of a bear market. If Prechter is correct about this being the beginning of a bear super cycle the year 2010 will be one long remembered by stock market traders. Unfortunately, it will only be short sellers that will be able to talk about 2010 with a smile on their faces. Those who are long stocks during such a cycle will probably never want to talk about stocks again.

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For those of you who have been around for awhile in the investment world, you probably know that Doug Casey is a well known international sportsmen, speculator, and all-around investment guru with a darned good track record. The following is Doug Casey’s take on the present state of the stock market. While he doesn’t by any means give a date certain Doug strongly predicts that a stock market crash will take place in 2010.

The following article is from one of his publications, “Conversations with Casey”.
=======================================

Doug Casey: “Stock Market Set to Crash”

(Interviewed by Louis James, Editor, International Speculator)

L: So, what’s on your mind this week, Doug? I understand you’ve had a “guru moment”…

Doug: Well, it’s nothing but a gut feeling, but I think the stock market is riding for a big fall this year.

Everyone was afraid the world was going to come to an end a year ago, and it almost did. But governments all around the world stepped in and printed up trillions of their various currency units – it’s not just the United States. And still, retail price inflation hasn’t blossomed. It seems that governments are bent on keeping asset prices up to avert panic. They focus on controlling perception instead of fixing the problem. It stems from an economic version of the theory that all we need to fear is fear itself. As long as we have the right psychology, everything is going to be okay – total nonsense.

L: That old saw: as long as there’s confidence, all is well.

Doug: Yes. It’s the Wile E. Coyote theory of economics. As long as you never look down after running off a cliff chasing the roadrunner, you can keep treading air. Unfortunately, although the power of positive thinking may help in many ways, it’s of zero use if you continue living above your means and making stupid decisions.

L: Insolvency doesn’t seem to matter; as long as everyone has confidence that things will keep going, the experts believe they will. But in the real world, you can’t remain insolvent for long, even if “you” are the United States as a whole society.

Doug: Exactly. My thinking about the stock market is this: corporations have done as “well” as they have mainly by cutting expenses. Laying people off, that sort of thing. So the bottom lines have not fallen as far as we might expect – but the top line has been hit. Revenues are falling for corporations across the board.

L: And the market has to notice this reality sooner or later.

Doug: Yes. The world’s financial system has to adjust to a new reality, one with lower levels of consumption and differing types of production. The legions of unemployed are not going to go back to work anytime soon, at least not doing anything like and his team are thinking quad they were doing before the bubble burst. The economy is going to continue deleveraging. There’s going to be less debt to allow the purchase of all this stuff people have been buying, resulting in lower corporate earnings. So it’s hard to see revenues doing anything but continue to spiral downwards for years to come.

And then there are financial “accidents” waiting to happen.
======================================
For more information about Doug Casey, and what his team are thinking about the current investment climate go to his website, Casey Research.

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The Dow is still up nearly 60% from its March low. This means it has regained more than 50% of what it lost from the all time high. What are the insiders doing in this market? Are the insiders taking advantage of dips in the market from last year to buy bigger stakes in their own companies? Well, not exactly. They’re selling 18 times as many shares as they’re buying. What do they know that speculative traders do not?

The insiders know that their businesses are not really in such great shape. That the only way they have been able to maintain profit margins is by cutting staff and expenses to the bone. At most firms sales and revenues are down. With unemployment still raising and the housing market still falling it is hard for them to see anytime soon where additional sales and additions to the bottom line will come from.

Meanwhile, investors and traders have been busy hallucinating about an ongoing recovery in the real economy. They’ve bid up the price of shares as though they expected an almost immediate stunning period of growth. In general, earnings have held steady or due to severe cost cutting not declined very much but stock prices have gone up. Up quite a lot.

This has brought a 10-point increase in the P/E ratio, to greater than 27. That makes stocks at current levels expensive. Very expensive indeed.

What would justify such a lofty P/E? The answer is simple; only bottom line revenue and earnings growth. Where might growth come from? Now that is a good question. Perhaps President Obama will make the speech of his life and all will be fine by decree.

But we really don’t know. Stocks are priced as if investors expected profits to double next year. However, that is unlikely. Even in good times it usually takes profits 5 years to double. And then, only when they have a solid reason to double – such as higher sales and lower costs in a growing economy.

The conclusion to all of this? That’s easy. Insiders usually are a lot smarter than the average investor and rah rah CNBC informed trader. Selling stocks at current levels may be a very good insider trade idea. The insiders know their own businesses better than anyone.

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Meridith Whitney is one of the most respected financial analyst in the business. She was one of the few analyst who called the market top in 2008 and was bold and honest enough to make her views public.

In this interview on CNBC Meridith states that she has not been so bearish on the stock market in a year and that she can make no sense out of current evaluations.

Here are a few other points that Meridith makes in the interview:

* the banking sector is “not adequately capitalized today”
* sees another leg down in the residential real estate market when mortgage rates/prices begin moving lower. Meredith said she feels that there is still a much bigger risk related to residential mortgage exposure in 2010, rather than commercial.
* says that this market makes “no sense” to her and that there is no fundamentals behind the recent rally in stocks
* within the banking sector the major difference between the market today and last year is that there is no mark-to-market now.
* “banks will go back to tangible book value”
* sell the banks
* would sit on cash until another leg down in valuation, estimates
* “everything’s expensive right now”
* expecting a double dip recession, although the second part of “W” will not be as severe.

It is interesting that Meridith was speaking on a day when new highs for the rally move were being made for the year. It is good to keep in mind that over the past few years Meridith Whitney’s timing and market insights have been spot on.

Do not trust the rally in this market. Wall Street loves suckers who buy over valued stocks.

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The green shoots believers seem to be firmly in control this morning as General Motors files for a chapter 11 bankruptcy and the Dow skyrockets up by over 200 points as I write. Humans are a hopeful lot aren’t they?

The rally from the March lows of 666 on the S and P index has carried the S&P to above 940 and the Dow from 6517 to above 8700. Anyway you look at it that is an impressive rally. Still, it is a rally that doesn’t smell right as evidenced by the last two minute surge last Friday that took the averages straight up on a high volume surge going into the close. That surge was far from normal activity on an otherwise lackluster trading day.

Could it be that taxpayer money given to Goldman and others is finding its way back into the stock markets? Could it be that the government is busy fueling yet another bubble with trillions of dollars in fiat money?

The green shoots that the Obama administration and their very much under control TV talking heads love to gush about are the sort of green shoots that are of the less bad sort. For example, housing prices are still falling but falling at a slower pace than at the end of 2008. Unemployment is still increasing and will likely continue to increase for some time but is not increasing as fast as during the last quarter of 2008. Car sales are horrible and foreclosures continue but maybe, just maybe, they will pick up some fine day.

In a few words the economic fundamentals are still pretty terrible for the United States but Obama has done a masterful snow job on the American people and consumer confidence has soared. After all, GM will be a better company after it emerges from bankruptcy, right? Certainly, the US government will run GM better than automotive executives. Well, maybe better than the auto executives at GM for the past 50 years. How could it be any worse? Still in all of the world the history for government run auto companies is not good.

How long can the con continue? Given the trillions that the Obama administration is throwing at the economy, trillions that, since the treasury is broke, the government has to borrow or to create out of thin air, probably longer than you would reasonably think.

But who can say that creating green shoots with borrowed and with fiat money or that attacking problems of excessive leverage and debt levels by increasing leverage and debt levels is reasonable. The policies being implemented by the government may be increasing the American people’s confidence now but I have a sinking feeling that they will increase their misery later. Running 2 trillion
dollar deficits and even larger can not go unpunished forever.

When the next decline gets under way you will want to be out of the way. Better take advantage of the rally, as the big elite boys at Goldman Sacks and across elite land are doing, and raise cash while you can. Green shoots are fragile things. They can whither away and be no more in a New York minute. Still, at least for awhile the trillion of dollars in funny money seems to be in control.

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Just how accurate could the Fed’s bank stress tests be? A story in today’s Wall Street Journal states that banks won concessions on tests. In the end the Fed cut billions off some initial capital shortfall estimates. The procedure was at times heated; tempers are reported to have flared at Wells Fargo.

Following two weeks of intense bargaining the Federal Reserve significantly scaled back the size of the capital deficit facing some of the nation’s biggest banks shortly before concluding its stress tests. The delay from Monday to Thursday before releasing the test results was caused by last minute negotiations between the Fed and several banks.

In addition, according to bank and government officials, the Fed used a different measurement of bank capital levels than analysts and investors had been expecting, resulting in much smaller capital deficits. As a result, some analysis feel that the government indeed was painting a pretty face on a pig, including a generous amount of lipstick.

The Fed rejected some of the banks numbers but ultimately accepted some of the banks’ pleas. According to some sources shortly before the test results were unveiled Thursday, the capital shortfalls at some banks shrank, in some cases dramatically.

For example, Bank of America’s final gap was $33.9 billion, down from an earlier estimate of more than $50 billion, according to a person familiar with the negotiations.

According to Gerard Cassidy, an analyst with RBC Capital Markets, the 19 banks’ cumulative shortfall would have been more than $68 billion deeper if the government had used a better-known metric called tangible common equity, which accounts for unrealized losses, rather than Tier 1 common capital.

So as an investor how should one react to the run up in the bank stocks over the past few weeks? With the financials leading the way the stock market has rallied well over 35% in just nine weeks without a significant setback. To me the move looks highly artificial as if it has been based on some carefully managed news and PR releases from the Fed and others. Certainly, the market has acted like happy risk appetite days are here again or soon will be.

I strongly expect that the rally is a sharp rally in a bear market and is now over extended. With so many investors now confident of a V shaped recovery that likely is only wishful thinking, even without the stress test’s results and procedures open to question, a bone jarring renewed panic sell off is probably going to occur within a week or two.

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