RCA

Will There Be an Obama Bounce?

On Jan 19 04:31 PM jenny wrote:

> Obama bounce this week, Obama Crash next week once people realize
> numbers haven't actually changed.

Jenny, you have the cycle right (bounce then reversal), but I believe it will last a little longer than a week.

Contrary to the original thesis by author, Kathy Lien, there will be a bounce. Ms Lien does pay homage to the unique situation of tomorrow's inauguration when she likens Obama to Kennedy. But what Ms. Lien fails to recognize is that the current inauguration scenario is unlike any we have ever seen.

There will be a euphoric bounce due to the fact the we are inaugurating our first black president ever, and this will receive additional momentum because of the hope and hype about Obama's infrastructure spending.

I believe this has the potential to carry the market for a couple of weeks, with the caveat that no bombshells are dropped by Treasury, the Fed, the OMB, or other government reports (I know, that is a big "if").

In late January or early February, however (bombshells or not) people will come to their senses as earnings reports continue to disappoint, and they realize that even "shovel-ready" projects will take months to have any impact on the economy. Fear will replace jubilation, and the Obama bounce will be recognized for what is always was - a bear-market rally based on irrational hope.

Our Economic Crisis: The Grand Experiment

On Dec 15 10:25 AM xmplary wrote:

> If we can't
> count on the people that are supposed to represent us, who can we
> trust?

Bingo!

Fundamentals Remain Negative This Week

On Dec 14 09:49 AM Herbert Hoover wrote:

> Sitting at 100% cash right now. I see no reason to buy stocks at
> $30 a share when they'll be at $22 in a couple months

And in a couple of months will you be saying, "I see no reason to buy stocks at $22 a share when they will be at $16 in a couple of months."?

Lower Markets Are Still to Come

It is, indeed, interesting that the market is showing signs of life. But don't put too much faith in any proclamation that the market has bottomed. It seems very likely to me that the DJIA will close out the year below 8000, and probably below 7400.

There is a popular notion that the market is ruled by greed and fear. As greed increases, the bulls gain control and the market rises. As fear dominates, the bears are out in force and the market falls. There are a couple of other parameters to this equation, however.

If you break the market into two distinct sectors, institutional investors and individual investors, it becomes apparent that the institutional part of the market is ruled by greed and caution, and the individual sector is controlled by hope and fear.

The institutions, being in greater control by virtue of size and amount of capital, also are privy to more information than the average individual. They therefore are not as susceptible to fear. They are greedy on the upside, and cautious, not fearful, on the downside.

Individuals are a very optimistic and hopeful lot. Their investment decisions are motivated more by hope and a belief that the "natural" state of affairs is a rising market. When it falters and breaks down, their hope gives way to fear. Unlike the institutions which are very pragmatic in their decisions, individuals are more emotional, and in a down market they become paralyzed by fear. That is why so many 401ks get wiped out in a market such as the one we have been experiencing.

What does all of this have to do with my feeling that the market is destined to be much lower at year end? My prediction is based on a belief that the recent rally in the market has been driven not by a lot of buying interest, but rather a lack of selling interest. The ever-hopeful individual investor still wants to believe in this rally, while the greedy institutions are quite willing to oblige this fantasy - for short while longer.

When you realize that the institutions, whose market commitments will always determine the market direction, are faced with a lot of "forced" selling between now an January, they have a vested interest in seeing the stock prices rise as much as possible before they put in their sell orders.

A simple way to accomplish this is to sit on the sidelines and let the small-money, the hopeful money, the imprudent money drive the market higher. By postponing their massive sales as much as possible, they are engineering a significantly higher market from which to extract as much as possible, and they are decoying the individuals into a belief that a real rally is under way. After a few more days of inaction, they will begin to put in their sell orders.

Since the institutions know when they are going to pull the trigger on their exodus, they might even be doing some buying in this bear market rally to capture some short term profits before the collapse. They are well positioned to fleece the small money on the way up before they shear them on the way down.

If this scenario plays out the way I think it will, we will rally the first part of this week. Then you will see a market that goes sideways for a few days, and then a decline will become obvious. At first it will seem like normal profit taking. After all, the pundits will say, it is perfectly normal in a rally for investors to claim some of their profits and take a look at new opportunities -- new stocks and sectors which may being showing leadership, etc.

Then the selling will ramp up to the point that it overwhelms the buyers, and we will see another precipitous decline, with the Dow undercutting 8000, and perhaps going much lower than that.

There are at least three reasons why heavy institutional selling is in the cards for December:

1. The hedge funds have a lot more redemptions coming before January. The hedges are not anywhere near normalization yet. In the interest of disclosure, I have to state that this assertion is more hypothesis than fact. I do not no have any figures on what reclamations are lurking. My gut feel is there are still quite a lot.

2. The mutual funds need to get their losers off of their prospectuses before the end of the year. And they have been holding lots of losers! It is a particularly cynical practice in the industry to hide a losing year or quarter by showing a raft of good stocks in their stable when a snapshot is taken of their holdings. Never mind that most of the quarter they were in losing positions, as long as the snapshot doesn't show these losers, they can actually look like they are well on their way to making money for their investors.

3. Year-end tax selling by many investors, large and small. There are many investors who have lost a lot of money this year, and the only way they can deduct those losses on their income taxes is to actually realize the losses. In other words they will be highly motivated to sell their big losers to establish their losses.

When the year-end selling hits, the hopeful individuals will be caught off guard again. Their hope will diminish and fear will again dominate. They are being groomed right now to grow the market so that it can be more profitably harvested by those in control of the market.

At some point we will see a true capitulation (we haven't seen it yet). When we do see it, it will be unmistakable. There won't be anyone asking "Is this the capitulation?" because it will declare itself loud and clear. The year-end selling will cause the markets to collapse, and the worsening economy will almost guarantee that climbing up from the capitulated bottom will be long and arduous.

Has the Market Become Immune to Bad News?

It is, indeed, interesting that the market is showing signs of life. But don't put too much faith in any proclamation that the market has bottomed. It seems very likely to me that the DJIA will close out the year below 8000, and probably below 7400.

There is popular notion that the market is ruled by greed and fear. As greed increases, the bulls gain control and the market rises. As fear dominates, the bears are out in force and the market falls. There are a couple of other parameters to this equation, however.

If you break the market into two distinct sectors, institutional investors and individual investors, it becomes apparent that the institutional part of the market is ruled by greed and caution, and the individual sector is controlled by hope and fear.

The institutions, being in greater control by virtue of size and amount of capital, also are privy to more information than the average individual. They therefore are not as susceptible to fear. They are greedy on the upside, and cautious, not fearful, on the downside.

Individuals are a very optimistic and hopeful lot. Their investment decisions are motivated more by hope and a belief that the "natural" state of affairs is a rising market. When it falters and breaks down, their hope gives way to fear. Unlike the institutions which are very pragmatic in their decisions, individuals are more emotional, and in a down market they become paralyzed by fear. That is why so many 401ks get wiped out in a market such as the one we have been experiencing.

What does all of this have to do with my feeling that the market is destined to be much lower at year end? My prediction is based on my belief that the recent rally in the market has been driven not by a lot of buying interest, but rather a lack of selling interest.

When you realize that the institutions, whose market commitments will always determine the market direction, are faced with a lot of "forced" selling between now an January, they have a vested interest in seeing the stock prices rise as much as possible before they put in their sell orders.

A simple way to accomplish this is to sit on the sidelines and let the small-money, the hopeful money, the imprudent money drive the market higher. By postponing their massive sales as much as possible, they are engineering a significantly higher market from which to extract as much as possible, and they are decoying the individuals into a belief that a real rally is under way. After a few more days of inaction, they will begin to put in their sell orders.

You will see a market that goes sideways for a few days, and then a decline will become obvious. At first it will seem like normal profit taking. After all, the pundits will say, it is perfectly normal in a rally for investors to claim some of their profits and take a look at new opportunities -- new sectors which may being showing leadership, etc.

Then the selling will ramp up to the point that it overwhelms the buyers, and we will see another precipitous decline, with the Dow undercutting 8000, and perhaps going much lower than that.

There are at least three reasons why heavy institutional selling is in the cards for December:

1. The hedge funds have a lot more redemptions coming before January. The hedges are not anywhere near normalization yet. In the interest of disclosure, I have to state that this assertion is more hypothesis than fact. I do not no have any figures on what reclamations are lurking. My gut feel is there are still quite a lot.

2. The mutual finds need to get their losers off of their prospectus before the end of the year. And they have been holding lots of losers! It is a particularly cynical practice in the industry to hide a losing year or quarter by showing a raft of good stocks in their stable when a snapshot is taken of their holdings. Never mind that most of the quarter they were in losing positions, as long as the snapshot doesn't show these losers, they can actually look like they are well on their way to making money for their investors.

3. Year-end tax selling by many investors, large and small. There are many investors who have lost a lot of money this year, and the only way they can deduct those losses on their income taxes is to actually realize the losses. In other words they will be highly motivated to sell their big losers to establish their losses.

When the year-end selling hits, the hopeful individuals will be caught off guard again. Their hope will diminish and fear will again dominate. They are being groomed right now to grow the market so that it can be more profitably harvested by those in control of the market.

At some point we will see a true capitulation (we haven't seen it yet). When we do see it, it will be unmistakable. There won't be anyone asking "Is this the capitulation?" because it will declare itself loud and clear. The year-end selling will cause the markets to collapse, and the worsening economy will almost guarantee that climbing up from the capitulated bottom will be long and arduous.

Low Rates, Big Problems

Peter, you wrote:

"The annual cost to the government in such a scenario would be $275 billion. But the subsidy will have to be provided in perpetuity, as the minute it is removed, mortgage rates would surge and housing prices would plummet. Of course, the mere existence of the subsidy will continue to create demand for mortgage credit, which the government will be forced to provide by printing even more money. This would set into place a self perpetuating spiral of rising inflation and mortgage demand, with practically 100% of mortgage money being provided by the government. Ultimately the whole scheme would collapse, as run-away inflation would completely destroy what would be left of our shattered economy."

The government is once again going down a path of tremendous risk and enormous consequences with no forethought. just as we started the war in Iraq without having a plan for post-Hussein Iraq, they are proposing this new folly with no regard for how it will conclude.

This is one more piece of evidence that the whiz kids in charge really have no plan. Reduced mortgage rates, and getting into the mortgage business is just the latest tactic du jour. They have goals and tactics, but are coming up woefully empty in strategy.

The Failure of TARP and the Government's Solution

On Nov 26 07:27 AM apppro wrote:

> 3. Institute some rules on what should be said on National TV to
> prevent rumor-mongering

WOW! Are we to sacrifice all of our liberties in addition to the concept of free markets?! Will we become The United Socialist States of America?

Four Commonsense Clues to a Genuine Market Bottom

On Nov 19 03:24 AM FB5000 wrote:

> Cramer is the gold standard of investment advice schlock. 5 Cramers
> is the ultimate schlock advice. You get a 3 Cramer rating.

Have you noticed that in the last week or two Cramer has reversed course? He formerly was "Stocks are cheap! Buy, buy buy!" But lately he's been saying, "Keep your powder dry," and "Techs are nowhere near the bottom yet." Can we use him as a contrarian indicator now and proclaim a bottom?

Unfortunately, I believe that Cramer just wants to get on the "me, too" bandwagon before he makes (an even bigger) fool of himself, and he doesn't really have a clue (as usual). We are nowhere near a bottom, yet.

A couple of remarks I heard today, both replete with scholarly and compelling arguments: "Stocks will fall 15-20% more" and "The DJIA will be at 6400 by the first week in December."

Check your own tea leaves, charts, and economic intuition and act accordingly.

Four Commonsense Clues to a Genuine Market Bottom

On Nov 19 01:26 AM TraderJoe100 wrote:

> So many people think this is the low...so, this is almost certain
> to be the low. How could so many be wrong?

Indeed! We should take a vote! That will tell us if we are at the bottom! :-)

Things Aren't as Bad as They Seem - Barron's

Re: "In fact, it's possible that the downturn could prove to be one of the briefest and mildest on record."

I've got news for the Barron's writer... The downturn has already long-passed the point where it could be considered "mild," let alone "one of the mildest on record" The people who believe this sophomoric analysis will be doomed to imprudent investment decisions which will undoubtedly separate them from their remaining assets.

What is Hank Paulson Thinking?

Thank you, Emerald!

We can whine and lament 'till we are blue in the face. We can curse the thieves and liars and play the blame game (I, too, can see a lot of malfeasance and corruption, and don't mind calling a spade a spade). But, at the end of the day (most likely this one!) we have to roll up our sleeves, do what we ought to do as Americans, and start bailing out this sinking boat.

It is not going to be fun and it is not going to be pleasant. It is going to be anything but fair and neither is it going to be easy. But unless we get our priorities straight (salvation instead of damnation) we are headed for economic meltdown and possibly anarchy.

Markets need to be as free as possible, but a little oversight is a good thing. It’s like the US doctrine during the cold war: Trust! (But verify). Our markets over the last decade could have benefitted by some appropriate oversight. But they had little, and now we are in a crisis.

I have been a republican all of my life (borderline libertarian!) but I also realize that the undeniable and inescapable consequence of absolute libertarianism is anarchy. At this juncture I'm not ready to face that, and I am betting that, nihilists notwithstanding, I am in the majority.

Complaints are dime a dozen and totally worthless unless they engender a motivation to fix the problem. Discontent is a natural human reaction to dire circumstance, but discontent without a commitment to action and sacrifice is useless at best, and cowardly at worst.

The America I grew up in and the America I love was created out of discontent, but was built by courageous men of action, not whiners.

I'm not suggesting that the many bright people who have offered intelligent rebuttals to Paulson' plan are in that latter category. Quite the contrary. The more well-reasoned alternatives to the Paulson bailout that can be proffered to congress, the better our chances at avoiding catastrophe.

We truly are at a watershed moment in American history. We can rise to the challenge and work at salvation of our economic system. Or we can degenerate into whining malcontents and work toward the damnation of the perpetrators. That latter course would certainly be morally satisfying. But the satisfaction would be short-lived as we find ourselves rushing into economic destruction and the mother of all depressions.

America, we are about to see what you are made of. Will you whimper and whine, shrinking away from hard choices into self-destruction? Or will you dig down deep into the inner core of commitment and fortitude that has been our hallmark at every critical juncture up until now?

I am optimistic.