Dow 10,000: Caveat Emptor

Well, they did it! They pushed the Dow back up over that magic number of 10,000. (Let’s save for another time the questions of why is that level so important, or what is the euphoria behind this sudden boost .)

More important tonight is the question “What is going to keep it there?”

A few days ago I published on my SeekingAlpha blog a chart showing that the Dow does not rise when unemployment is rising. And it should be obvious to all serious investors and traders that if employment is rising at all, it is only in the government sector - - - and perhaps many of those jobs are just part-time, like collecting a crowd to stand behind our President as he gives us his latest words of wisdom.

According to a Wall Street Journal article dated Oct 5, the unemployment rate is now bouncing against the 10% level. Private-sector payrolls are lower today than at the end of 1999. The U.S. needs to replace 7.2 million lost jobs, and population growth will require another 100,000 new jobs a month. Where are these going to come from?

Are tire manufacturers going to bring back to the U.S. their overseas plants so they can re-employ union workers here? Probably not until there are stringent tariffs on tires made in all the countries besides China. And that will precipitate a trade war, which is more likely to boost inflation than it would the Dow.

Are the steel mills in the rust-belt of Indiana, Ohio, Pennsylvania going to re-open and re-employ Steelworker Union members? Certainly not in the next five years, and more likely, never again. Those jobs are gone forever

Right now our country is facing one of the most important political debates in our history: Shall we, or shall we not, have government-mandated health care

The plans being debated are extremely complex, and only the Lord knows what will come out of the “sausage-maker machine” or what the ultimate cost will be.

But it will be a safe bet that:

you will not be allowed to purchase health insurance across State lines;

and

legal harassment of doctors and hospitals will be allowed to continue.

So much for “cost containment”.

At the risk of sounding overly skeptical, one cannot help thinking that it is in the best interest of the Obama Administration to have the country smiling and euphoric as this historic debate on healthcare winds down to its final vote. And what better way to create some euphoria than to boost the Dow back up to an historic milestone.

Those who doubt the ability of an Administration to “paint the tape,” so to speak, should review the origin and continuing existence of the President's Working Group on Financial Markets, the PWG - - - otherwise known as the Plunge Protection Team or PPT.

The PWG/PPT includes the Secretary of the Treasury, who serves as its chairman, and the Chairmen of the Board of Governors of the Federal Reserve System, Securities and Exchange Commission, and the Commodity Futures Trading Commission.

Despite President Obama’s pledge to run an open and transparent administration, the activities of this Group are not being disclosed. Since disclosure could only prove or disprove government intervention in the market, the shroud of secrecy can only add credence to the interventionist theory. And what are we to make of it if it is true?

This bubble will burst eventually, like all bubbles do. Even a government the size of ours cannot levitate a stock market indefinitely. There have to be earnings, or at least the expectation of them, to support stock prices. Yes, those companies selling goods overseas will show increased earnings as the dollar falls against foreign currencies, and gold, and oil. But as the dollar falls our imports become more costly, and in most economic texts this leads to inflation - - - unless of course we take a pledge and renounce all imports. Not very likely !

In spite of, or perhaps because of, this latest run-up of the Dow, our crystal ball is showing stagflation on the horizon, that ugly combination of inflation and continuing unemployment. To quote from Wikipedia:

central banks can cause inflation by permitting excessive growth of the money supply, and the government can cause stagnation by excessive regulation of goods markets and labor markets. Together, these factors can cause stagflation;

To this writer’s eyes, both these factors are already well in place.

A. The money supply has been increased beyond all previous records. Government debt is projected in the trillions so money supply cannot be reduced unless the U.S. eventually reneges on its pledge. (Bernanke’s mop-up plan is still just a question-mark.)

B. Excessive regulation has already been set in motion. On the international front read latest on tariffs imposed, and lack of follow-thru on pending trade agreements - all in payment to labor unions for their support in last November’s election. On domestic front read daily outpourings of the pending health-care legislation and its most probable impact.

Given these stark facts, prudent investors should be selling into this bubble. And while traders might be long for the short-term, they are certain to weight long-term trades to the short side. If ever there were a time for CAVEAT EMPTOR to be printed on your screen, it is today!

Comments

[Albertarocks:]

Great common sense article Fritz.

And you bet they've been "painting the tape". Throughout August, the average daily volume on Citigroup was an astounding 1.1 billion shares. Every single day for an entire month! But to top that, on Aug. 26th, the number of Citi shares that traded hands was 2.15 billion. BILLION! That represented a full 26% of all shares traded on the NYSE. Astonishing! And blatant! To say the pump jockeys were working overtime on that day would be an understatement.

>Given these stark facts, prudent investors should be selling into this bubble.<

Fritz, my friend, I've been selling into this charade off and on for a while now. I'm going to have to go out and sell my car pretty soon to buy a plate of beans if I keep it up any further. One thing I know with 100% certainty is that the day I capitulate and go long, will be the day the market puts in a high that will last for the next 6 years. I'll post a notice here on that day so everybody else can pile on and make a ton of money.

As long as we have an agreement then, that everybody will send all tips and gratuities, thank you cards and other tokens of appreciation of my sacrifice to Seeking Alpha so that they can be properly delivered to me, I'll let everybody know on the day that I finally give up and go long.

CAVEAT EMPTOR indeed!

Great article!

Oct 15 12:08 AM

[luv2makemonies:]

The Stock market these days only appease to the wealthy like
corporate CEOs and their cronies. With firms such as Goldman Sachs and hedge funds betting and manipulating the market for their own gains there is no room for the small individual investor who don't have the insiders insight to make any monies. We are just their lambs in the slaughter house of Wall Street.

Oct 15 12:12 AM

[Falconflight:]

Good contextual piece. Thanks!

Oct 15 12:46 AM

[Roger Knights:]

"At the risk of sounding overly skeptical, one cannot help thinking that it is in the best interest of the Obama Administration to have the country smiling and euphoric as this historic debate on healthcare winds down to its final vote. And what better way to create some euphoria than to boost the Dow back up to an historic milestone."

Not to mention cap-and-trade.

"Those who doubt the ability of an Administration to “paint the tape,” so to speak, should review the origin and continuing existence of the President's Working Group on Financial Markets, the PWG - - - otherwise known as the Plunge Protection Team or PPT."

See also: "What's driving equities? Proceeds from Permanent Open Market Operations?" seekingalpha.com/artic...

Oct 15 02:45 AM

[rick12345:]

It's the basic premise on which capitalism thrives - shifting money from the poor to the wealthy. This has been happening since the dawn of time and will continue to occur as long as we have a free market. Do you honestly for one minute believe that the US treasury can just spend trillions of dollars to prop up the market without anybody noticing ?
You conspiracy theorists really should get away from that "idiot" box a little more. Read something other than the New York Post once in a while.

Oct 15 04:52 AM

[jerrydd:]

It's really far worse as real inflation has been over 100% in that time so the $ and the Dow is only worth 50% as much. Are the repubs great or what? Let's vote them back in!! ;^P

Oct 15 10:04 AM

[Albertarocks:]

On Oct 15 04:52 AM rick12345 wrote:

> It's the basic premise on which capitalism thrives - shifting money
> from the poor to the wealthy. This has been happening since the dawn
> of time and will continue to occur as long as we have a free market.<

This has indeed been the goal of anyone trading goods throughout history, from the merchant selling his wares in the kasbah to the traveling salesman dealing in spices. And throughout time, any businessman caught stealing or cheating was quickly dispatched with the blade across his throat. It tended to keep people honest.

The basic premise upon which capitalism thrives is not, nor has it ever been "cheating and thievery'. The basic premise for success, wealth-building and survival in commerce, up until the acceptance of fractured reserve banking, had always been based on honor, building strong trading relationships, a shrewd business mind that understood the critical importance of a good reputation, and building valued friendships and business relationships along the way.

Your concept of "the basic premise on which capitalism thrives" is based on your view that the thieving techniques used by the modern banking oligarchs is the norm. It is not the norm. Their techniques are identical to those that in past years were answered with the blade. You really need to take a course in ethics because in any other era, you would not be a survivor.

Oct 15 11:27 AM

[H. T. Love:]

On Oct 15 11:27 AM Albertarocks wrote:

"Your concept of "the basic premise on which capitalism thrives" is based on your view that the thieving techniques used by the modern banking oligarchs is the norm. It is not the norm. Their techniques are identical to those that in past years were answered with the blade"

Very well put. And re-enforcing that, there was a computer simulation done many years ago that used "blind trades" in which it was conclusively demonstrated that in the long-run those who always treated others as those others treated them thrived and those who cheated whenever they thought they could were ultimately long-term losers.

The mechanism that caused this is that those who were honest with the ones honest with them were consistently treated honestly and those who cheated at every opportunity were cheated in return.

Scientific American, sometime in the late '80s, if I recall.

HardToLove

Oct 15 02:18 PM

[Michael Clark:]

Hard not to love that response, HTL.

(My wife's initials are HLT.) Honesty and decency do win in the end.


On Oct 15 02:18 PM H. T. Love wrote:

> On Oct 15 11:27 AM Albertarocks wrote:
>
> "Your concept of "the basic premise on which capitalism thrives"
> is based on your view that the thieving techniques used by the modern
> banking oligarchs is the norm. It is not the norm. Their techniques
> are identical to those that in past years were answered with the
> blade"
>
> Very well put. And re-enforcing that, there was a computer simulation
> done many years ago that used "blind trades" in which it was conclusively
> demonstrated that in the long-run those who always treated others
> as those others treated them thrived and those who cheated whenever
> they thought they could were ultimately long-term losers.
>
> The mechanism that caused this is that those who were honest with
> the ones honest with them were consistently treated honestly and
> those who cheated at every opportunity were cheated in return.<br/>
>
> Scientific American, sometime in the late '80s, if I recall.
>
> HardToLove

Oct 15 02:31 PM

[Michael Clark:]

When did Business and Ethics become adversarial? They don't have to be. It depends on what a society values more: the bottom line, or the decency of life and the quality of the human soul. (Oh, I forgot, science proved there is no such thing as the soul. Maybe that's where we need to start again.)

Oct 15 02:36 PM

[Albertarocks:]

On Oct 15 02:36 PM Michael Clark wrote:

> When did Business and Ethics become adversarial? They don't have
> to be. It depends on what a society values more: the bottom line,
> or the decency of life and the quality of the human soul. (Oh, I
> forgot, science proved there is no such thing as the soul. Maybe
> that's where we need to start again.)

Science be damned! You have a soul Michael and so does H.T.L. and a lot of other good folks who participate on SA. It's not difficult to make the distinction between those who value life, family, ethics and hope from those walking dead who thrive on the lifeblood of others.

>When did Business and Ethics become adversarial? They don't have to be.<

Are those not the words of a man who has his priorities straight? They are indeed!

Oct 15 03:02 PM

[Fritz Hotti...:]

Comments on my orig comment seem to have devolved into a discussion of Business and Ethics, which is all to the good. The better we understand the true forces that underpin our free enterprise system, the better off our country will eventually be.

Let me offer few words of counsel from my 1976-8 Business Ethics MBA course:
"It is the responsibility of the Board of Directors to see that their chosen management runs the enterprise in a fashion that gives equal concern to all the "stake-holders", meaning
customers, employees, shareholders, suppliers, local community, and the environment."

IMVHO, too many BOD's are taking care of themselves and Mgnt with bonuses, options, etc, and stake-holders be damned.

And that BOD we have voted into place in Wash, DC is no better.
Their basic goal appears to be creating sufficient groups dependent on govt largess in numbers large enough to insure success when their re-election votes are counted.

ps// Debate on term limits for another time - - - "with term limits the unelected staff will have control because it take the new-comers at least 9 months to be able to find their way to the lavatories." Quote from a friend who was Chief of Staff for House Appropriations Committee.

Oct 17 01:52 PM