Tuesday, December 7, 2010

The Tape - Truth or Dare

This current market has prompted me to have many 'internal' discussions on it. I was always taught that the stock market is the closest thing to a crystal ball one can find on the planet.  

I want to begin this post by stating that I am an ardent proponent of the tape as the final arbiter of all things financial. I believe the sum knowledge of the market is far greater than that of any one or group of men. Having said this, I also want to state that there are anomalies, black swans (thx Nassim), rogue waves, that defy logic and the numbers that so many rely and count on. 

Is it possible the vast majority participating in the tape are simply wrong at the worst possible time (major turning points)? What if the vast majority of participants in the tape, human or programmed by humans, have the wrong map?

It made me think of a story and old friend who taught me much shared with me. He is recently passed away and is missed very much. As a very successful person in many endeavours one of which was he was an accomplished pilot. Back when JFK junior's Piper went down on the East Coast we had a discussion about it the next day. He recounted the time he was flying his single engine to Cleveland, Ohio over lovely Lake Erie on an absolutely picture perfect summer day in July. Suddenly the alarms in the cockpit started going off. His eyes told him everything was okay, that he was flying into the clear blue skies above Cleveland, yet the instruments flashed imminent danger. As he was taught, he remembered to trust his instruments.  Luckily for him he did for the plane was flying into the clear blue all right, the clear blue of Lake Erie as he was in a nose dive headed straight into it!  

It made me recall my training in the Open Water course as a diver. Besides planning your dive and diving your plan you always and often check and trust your gauges. Like piloting an aircraft your eyes can and will deceive you, up looks like down, down looks like up. Now for a moment, try to imagine someone has put a magnet (or the like) next to your gauges and instruments. Would you still rely on them? Would you place you life on the line for them? Or in the case today with the markets you financial life?

It made me think of the current insiders of this market selling hand over fist as if in a stampede to get out. For me these insiders are like the indigenous animals who populated places like Banda Ache and Sri Lanka before the tsunami. None of them died. They all fled to higher ground. In Sri Lanka approximately 22,000 were killed by the tsunami but no dead animals could be found. I read that the indigenous native peoples of the Banda Aceh area -who many on Wall St. would consider savages or lets just say much lower on the food chain than they - noticed and heeded this warning from the wildlife and moved their villages fleeing to higher ground. In this case the masses (the market) said everything was okay even though underlying conditions flashed warnings like the tide receding among others. Some even ventured out into the retreated surf area to pick up stranded fish and shells etc., me thinks Jim Cramer and the Fast Money crowd on CNBC would roundly endorsed this activity, like buying the dip!

This current market is not only not creating jobs which is a must it is still shedding jobs. The municipal and state financial predicament only ensures this will get worse. This is fact no matter how much Steve Liesman and the rest of the shills on CNBC counter otherwise. 

Traders I have a ton of respect for continue to admonish that a market that responds bullishly to negative news is to be bought. I hear that loud and clear. I also am smart enough to know, no check that I am suspicious enough to recognize that a market that chooses to ignore facts and cling to fiction can turn on a dime and is more often than not most assuredly headed for disaster. It is not a matter of if but only a matter of when this happens.You can choose to believe the cheerleaders, shills and vested interest parties. Or you can choose to believe the facts. Facts like
  • the bankruptcy numbers, 
  • the foreclosure numbers, 
  • the living mortgage free numbers, 
  • the shadow housing inventory numbers, 
  • the record food stamp numbers, 
  • the income growth numbers, 
  • or most importantly the lack of employment growth numbers

The equity market seems to just not care not a whit about any of  this. It seems to believe that we can grow and justify current and future multiples without any job creation. I am here to tell you that this is abject and utter lunacy! CNBC can trot out an army of experts with more letters than most alphabets it still won't matter. Physics and math have laws, no matter what a Harvard trained MBA made Goldman partner has to say about them.  

During the complete and utter lunacy that was the dotcom/tech market companies with no earnings, no cash flow and gross revenues (sales numbers) that resembles a 'shoe repair in a garage' startup company and yet were rewarded with billion dollar market caps. Then as now as then you can choose to believe the tape or you can choose to believe your purported lying eyes. You can choose to  recognize that there are moments in time, where the tape has gone mad. The Uranium market in the 60's, the precious metals market of the late 70's, the Nikkei in the late 80's, the dot com market of the late 90's, the Greenspan debt and free credit induced housing market of late. 

Just as these markets mentioned cared nothing for their underlying circumstances and simply fed upon themselves as the lie was repeated over and over again this current market is no different. In each and every case, naysayers and critics were whack-a-mole'd by the believers and who keep repeating the mantra "but the tape says up". 

Bernie Madoff was a ponzi scheme pure and simple. It relied on people believing and repeating the lie. His firm ignored the bad news and traded higher, which according to the rules I and many traders out there were taught is bullish and hence was to be bought.  How did this work out? Could any of those people exit. How many thought they could before anything untowards happened?

Back to the magnet analogy. Is there a magnet next the gauges and instruments of this market, that magnet being the Fed, the treasury or their POMO errand boys on Wall St.? 

I don't know. 
What I do know is that the Fed is buying any and all debt paper. We had QE 1. We have now QE 2. 
Would you bet against QE 3?
Bernanke has publicly stated they will target equity prices. 

Market manipulation? 
Plunge protection team?
All too far fetched, right?

Has to the time come to break out the tin foil?

How many of you would have taken the revelations of Julian Assange from Wikileaks at face value had he made them? Free thinkers right? Open to free discussion? Can you say Vietnam and the Gulf of Tonkin?

So I ask again, is there a magnet next to the gauges that renders the charts invalid. Readers have emailed me commenting that I post fewer and fewer charts anymore. The answer I give is the same. Those charts are becoming less and less reliable. Almost to the point where they are boobie-trapped to ensnare you. But alas I have lived through this before where what you thought was your ally was your enemy and I shall live though this as well. 

In my opinion this market will end like it always has before, terribly and in tears, sparing very, very few.

Housekeeping notes;

I was stopped out of 1 unit of DZZ today at $8.04 for a loss of about 3/4 of a pt.
I was stopped out of a 2nd unit of DZZ today at $7.98 for a lost of 3/4 of a pt.

Good speculating to you all and please remember to never forget that "an investor is a speculator who made a mistake and will not admit it".

Open Positions:
Long 1 unit Direxion Large Cap 3X Bear ticker BGZ @ $19.34
Long 2 units Direxion Small Cap 3X Bear ticker TZA @ $60.30
Long 1 unit Direxion Emerging Mkts 3X Bear ticker EDZ @ $60.50
Long 2 units Direxion Financial 3X Bear ticker FAZ @ $19.65
Long 2 units Ultrashort Xinhua China ticker FXP @ $42.45
Long 1 unit Ultrashort Real Estate ticker SRS @ $49.10
Long 2 units Direxion Tech 3X Bear ticker TYP @ $52.60
Long 1 unit U.S. Dollar Bull ticker UUP @ $22.56 stop @ $21.44
Long 1 unit Powershares Gold Dbl Short ticker DZZ @ $8.38 stop @ $7.84
Long 1 unit Barclays 20yr Treas Bond ticker TLT @ $95.61 stop @ $94.69

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