Gary Tanashian's  Instablog

I read a piece this morning by Josh Brown, the Reformed Broker, in which he destroys the 1999 comparison for the stock market. He makes some excellent points about why the stock market is not only not over valued compared to 1999, but is actually a bargain. You should read it because we should all be considerate of rational views.

I also read The Fed is NOT Printing Money by Jesse's Cafe', which offers a view into a money creation process that is more geared toward the gaming of the financial markets through intermediary banks than it is the normal inflation of old. I mean seriously, I do not call Ben Bernanke an evil genius for nothing; it seems that he and his associates have taken monetary policy to the Nth degree and figured out how to paint inflation as non-inflationary. Our hero.

The point is that I think Josh Brown is 100% right. There is no mania in stocks. In fact, stocks' worst offense right now is that they are strenuously over bought and sponsored by 'dumb money' aggregates that are equal and opposite to one year ago, when the same dumb money was exactly as bearish as it is bullish today. As he notes, the mainstream public may no longer be interested in the markets, but whoever that dumb money is, they proved a good indicator on an imminent bull phase last May. Again, we present the proof compliments of Sentimentrader.com:

Smart-Dumb money sentiment 1 year ago

Smart-Dumb money sentiment today

I have absolutely no problem being bullish on the stock market because it is made up of companies both bad and good; very good. After Memorial Day, my wife will re-start her career at a currently non-public technology company about which we are very excited. Its technology began as the founder's MIT thesis and is now rolling out into major markets and outlets. One brilliant kid, an idea, a market and voila.

I totally believe in human progress and what great companies like Microsoft, Intel and later Google and Apple have brought us. I believe in the software systems that are making the burdensome healthcare system more manageable and great companies the world over that fill a need, improve lives and win out in the markets of public opinion and financial transaction.

But the point I think the Reformed Broker is missing is what underpins the market of stocks in these corporations. Looking at the stock market as a stand-alone, I tend to agree with his viewpoint. But when policy makers are woven into the fabric of the market to this degree, they must be factored. Questions must be asked like "why on earth, with this excellent and healthy stock market and sufficiently functioning economy are they continuing to repress interest rates by buying $85 billion in bonds per month?"

Aren't those bonds debt? Where did that debt come from? Does bloated debt not imply that the economy in which the stock market's components ply their trade is a leveraged thing, as opposed to an organically thriving thing? Why can't we just let the debt float on the open market and let it get resolved by the market if things are so good beneath the surface?

I think you know the answers to those questions. That is the main point of bears questioning the stock market's fundamentals. Not the old PE Ratio canard. We are now in the post-PE world. What matters is policy because it is policy that has created the seemingly healthy stock market. So which side are you on; the side that sees the stock market and the stock market only, or the side that sees the stock market within the context of the universe in which it exists?

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That something was a big smash in gold and especially silver over night and then a head spinning reversal. Exactly the kind of thing we look for to be buyers.

(click to enlarge)

Silver daily

Silver actually got near my target zone, which is 17-20. But there is a bump of long-term support elsewhere (noted this morning in an NFTRH update) that could hold for a rally or better. When items like gold and silver have been this badly decimated and people have come to hate a concept like honest money this vehemently (while being compelled to worship inflationary policy making), you need to give merit to the idea that the next rally could be the rally.

(click to enlarge)

Silver CoT

Silver's CoT data still shows some open interest by whatever gamers or evil interests there may be in the paper and digital markets, but its structure is very bullish. Yet until this morning, everybody hated silver.

Now, lack of follow-through and another flop would reset and extend the agony that honest money advocates have endured, but there seemed to be enough going on today in gold, silver and the associated stock indexes to stand up and take notice.

May/June is after all, the time frame we have been expecting for some pretty important changes in the macro markets. Did something happen today? We'll find out very shortly.

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Excerpted from Notes From the Rabbit Hole #237:

Young FrankenMarket Lives

In failing to take a "healthy" correction to the equivalent of SPX 1350 to 1450 from the upside target zone of 1550 to 1590, the market is now running on policy and momentum. Hence we now dub thee Young FrankenMarket; Ben Bernanke's creation, sustained by government and legacy MBA debt, following Alan Greenspan's monster that was stitched together with artificially low interest rates that ultimately manifested in a huge commercial credit bubble.

Payrolls came in at 165,000 and an over bought, over loved* market popped its cork and exploded into blue sky. It had to be more than an okay 'jobs' report that did the trick. It was likely the combination of a still inflating Fed (and ECB, Europe popped hard as well) with some data that was good enough, but not so good as to call into question the Fed's systematic inflation regime. This is Bernanke's FrankenMarket, created by policy.

After making bearish patterns and/or negatively diverging from the Dow and S&P 500, the Russell 2000, Nasdaq 100 and Semiconductors all broke to new all-time (RUT) or recovery (NDX, SOX) highs on Friday. This left one notable holdout, the often-watched Transports. Since I normally do not give much weight to Dow Theory, I'll not do so now. But it should be noted that the Trannies are not at new highs… yet [edit: They are now].

So it appears that recent writing I have done about a topping process may have been incorrect or at least, early. The current period reminds me a lot of Greenspan's monster that emerged from the credit bubble early last decade, FrankenMarket as I called it in the first public article I ever wrote.

I remember wanting to be bearish [in 2004] because bearish seemed like the honest way to be. You cannot after all create (print) a bull market and a sound economy to go with it, can you? Well, yes and no.

Through interest rate manipulation, Greenspan created a bull market that really wasn't (as measured in gold, which stripped out inflation's effects and gave a 'real' and bearish view by the Dow-Gold ratio).

As noted previously, the But It Is What It Is website name came in large part due to my realization that the bull (in nominal stock prices) should not be fought as I looked around and saw (non-gold bug) perma-bears being blown up left and right. Any gold bull who was also bearish the stock market likely did just fine. But the play was long gold, and avoid or long the stock market.

Today we are challenged with a different monster. This one is more dangerous to the honest money contingent because it appears the golden shield has melted down and stopped protecting people from the obvious inflation being promoted in service to liquefying the banks, propping the economy and promoting a stock market bubble.

But here we have to take a step back and realize that it was 10+ years of bull bull bull for gold. Who are we to say what type of corrections should be suffered along the way? Stripping out the emotion, what we have is a really smart (I'd say diabolical in a way that is not entirely negative) policy maker who has somehow either engineered a 'best of all worlds' Goldilocks environment or taken the horseshoe out of his ass and hung it up on the wall of his well-appointed office.

I think it might be the latter, which in less crude terms means that it was just time for a technical adjustment. I hate to qualify the pain real people are suffering as an "adjustment", but think about it. The negative energy at the bottom of markets and the economy in 2008/2009 was incredible. This very letter reproduced the Time Magazine Depression 2.0 'breadlines' cover in support of its then bullish orientation.

Markets may need to work their way through an equal and opposite upside blow off before all is said and done. Who knows when that will come? It could be next week or it could be next year. But it is a near certainty that sentiment will play a big role.

For now, the trends are the trends, there are few signs that anyone is getting concerned about inflation and hence, the inflation continues. It is the Alice in Wonderland market:

"Nothing would be what it is because everything would be what it isn't. And contrary-wise; what it is it wouldn't be, and what it wouldn't be, it would. You see?" -Alice

* AAII (Individual Inventors) had been an inexplicably skittish exception, as its members have fled to a bearish stance at the first sign of every recent minor correction. This had been a caveat to the bear case and the market will now try to suck them and any other holdouts in before a top is realized.

Notes From the Rabbit Hole has been following events with great interest since the Fed's QE regime kicked in to its new phase (III), and technical analysis has kept us on the right side. When I named the newsletter I did so with Alice's quote above in mind. Never has the idea of accepting what is contrary and counterintuitive been so important for everyone from speculators to savers to honest money advocates.

We remain intact first, and ready for opportunity - that "contrary-wise" could be big opportunity - second.

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