Lincoln

Divining the Next Crisis: All Eyes on the Dollar

The regular waves of asset appreciation since July, and the decreasing magnitude of their advances on decreasing volume, reflect a market in the process of reflation. And just like blowing up a ball, each breath has less effect than the last as resistance builds. In this case the "air" appears to be the liquidity being added by the Fed, given to the primary broker dealers who are using it to buy equities. The "resistance" appears to be the lack of fundamentals justifying higher prices and, since it's only new buyers being artificially created (they have nearly free money and nowhere else to put it) and not any new sellers, it's taking higher prices to flush out the dwindling stock of willing asset sellers.

This is a very simple model, admittedly, but it seems plausible and we can watch the Treasury auctions for the upcoming week that are published beforehand on the TreasuryDirect.com web site. This asset price "push" acts like a linear term in an equation for broad market index prices. Against its effect is the resistance of fundamental value whose lack of change leads to a dwindling number of sellers (new sellers only coming with higher prices). But to this simple system adds the unstable terms that are both unpredictable in their timing and magnitude. In addition, should fundamentals be recognized as sour, new sellers will appear and prices drop. Nevertheless, until market players get wise (?) or panicked I look for decreasing waves of upward price movements, assuming the Fed keeps pumping in the money.

Wall Street: Dumb as It Ever Was

9.9% and 10.0% unemployment may be within round-off error, but "the sheeple" are an unstable system in which the 0.1 difference can be inflated to significance by propaganda and the amplification of collective behavior. It's wrong to throw shoes at the television and decry the public's lack of statistical literacy. In the realm of unstable systems near critical points small rock falls can create avalanches. Instead, throw shoes at the TV to decry the fabrication of an unstable system from one that could be controlled if it were not for avarice and ignorance. But so it is, and we're left to dodge the rockfall rather than chart a sensible course.

Market Ramps Up on Disappearing Volume

What are the implications of the volume/price moves correlation? One implication is that price and value are deviating from consensus in the extreme, what what happens next? Will: A) prices return to consensus, or B) consensus move to support prices. Something in between, of course, but which will predominate, and what is required to precipitate a new equilibrium?

Following Jeremy Grantham I am feeling that given the power of government propaganda and vested interests, consensus will likely move to support prices. This is supported by the current rally which is ipso facto unsupported by fundamentals.

Is a Case of Quant Trading Sabotage About to Destroy Goldman Sachs?

there has been a monotonic decline in last minute/first minute trading volume over the past week, and a surprising (to me) lack of last minute market support, especially on Thursday. Since we've come to associate this pattern with program trading, does this development at GS explain this pattern? Does this affect what some (like me) have come to expect from the gov't plunge protection strategy?

Goldman's Offering and the Recent Rally: Coincidence?

Just as there are mechanisms to manipulate the price of gold through the futures markets, I would suspect that there are similar means of manipulating equity markets. But as Jim Sinclair pointed out (www.gata.org/node/7375) these manipulations in gold futures fail to effect a change in the term structure (discounting future vs present delivery) in a manner that would support current gold price level. Because of this there are ways to expose the price fixing schemes.

I would like to know if there are similar mechanisms for affecting equities through manipulation of index futures, or other futures. And I would like to know if conflicts within the equity index future term structures reveal the strength of such equity manipulations, and their limitations. Knowing this could give insight into the limits of this rally.

It does seem like we see some strange price movements, and I think that some insight into the current rally would be gained by finding out the breadth and depth of the manipulation and, most importantly, it's cost. For gold we know a key element is the gold lease rate. Could there is a method for the Fed's footsoldiers it sustainably (i.e. at little risk to themselfs) boost the much larger (than gold) equity markets in a similar means?

Defining the McClellan Oscillator - Part III

I support your feeling that mechanical approaches to well-picked-through public data are lacking to empty in predictive value. I use the oscillator in context only, and the context is definitely not mechanical. For example, in the current rally -- that now seems to be fading -- the oscillator can contribute to observations on the strength of the rally, the breadth of the rally, and the particular sectors that participated in the rally. In this case we have relatively low volume rally that was led by weak sectors, and triggered by propaganda and, perhaps, market intervention. The rally also seemed unusual in that volume peaked at the beginning and the end of the trading days in a pattern that repeated for weeks. This seemed to reflect 1) the market's hanging on information that was being released either before or after market hours, and 2) an unusual participation perhaps related to program or day trading.

In this case the SP500 oscillator reflects, I think, something about the broader markets participation in the rally. What I'm looking for is to see the oscillator repeatedly return to the mid-range area. To me this "sputtering" implies weakness, and it confirms the weakness in the rally itself. What I'm trying to say is that I'm using the oscillator as a confirmatory indicator, and not as a predictive one. Does that make sense?

Greenhill's Skill of Lifting Talent Is Golden

These strike me as interesting ideas in a complicated industry. The industry is complicated because it's doubly reflexive: these company's success would seem to be as much related to the amount of funds they manage as it is to their success at managing it. Which is to say they need not only to manage their clients' funds well in an absolute sense, but they need to meet their clients' expectations of how they should be doing. And in that regard LAZ, being an older company (160+ years), might do better in stable times while GHL, only 12 years old and pandering to a younger crowd, might have clients who are more "trading friendly".

If their clients expect appreciation, stability, growth, or income then, well, these times may guarantee none of the above, in spite of the company's relative performance. Conversely, GHL might be better at meeting their clients expectations in roller coaster markets than LAZ. Given my expectations, that would be a point for GHL.

It's interesting to note that these firms share prices fell when the market fell, and I suspect that reflects both the market's projection of their ability to ride the market, and their clients' projections of their ability to match their expectations. In other words, these companies have a built-in kind of leverage: the market punishes their share value when their investments lose money, and their clients further punish their share value by withdrawing funds. In that regard you might also consider US Global (GROW), Frank Holm's company, which manages mutual funds. GROW's 6 month chart looks more like EVR than either of the other two. I have the misfortune to be long in GROW largely because I was impressed by Frank's hard work and sincerity; that gloss has worn off.

Given my own expectation of some big investment potholes down the road I would not want to be long in a boutique house when we hit one, but if EVR dropped 50% when the VIX was pushing 70 and Smith & Wesson was making new highs, then that would be the time.

More Investors Are Saying Bye-Bye to Buy and Hold

Physics describes something called a phase transition, and in a phase transition there is move from one ordered state to another. And as you approach this transition there is disorder, or chaos, on various scales.

The actual "transition" is identified as that point where the disorder is limitless, which is to say there are islands of order and disorder at all scales. Note I say ALL scales, and that means the transition is not characterized by a total disintegration, or a "powder" or a "mush". For example, the transition from water to ice is characterized by an equal (in some sense) distribution of liquid, grains, crystals, flakes, islands, sheets and blocks. In most cases this is a metastable state that passes quickly from all liquid to all solid, or whatever the two states may be. It's only during the transition itself that chaos reigns.

"Buy 'n hold" is a statement about the market's trend when the market is in a kind of "ordered" state. The alternative is not some well-defined opposite. That is to say, if buy 'n hold is failing that does not mean that day trading will succeed. The phase transition metaphor which would advise that there are opportunities and perils at all scales: buy 'n hold, sell 'n hold, day trade, week trade, growth-based, value-based, propaganda-based, technical, Forex, REITs, T-bills, Emerging Mkt, etc.

The lesson is that during a transition there will be increasingly less continuity, hence history cannot be your guide. Hence -- and this is my bottom line -- you must act on "real" information, valid strategy, and demonstrable insight. Everyone lacking these, no matter what their strategy, will get punished. It stands to reason that those who do their homework and are careful will be much safer than the majority who don't and aren't.

Gingerly Stepping Back into Commercial Real Estate Shorts

Based on P/E and D/E I don't find SLG as compelling as VNO and SPG, which are more optimistically distorted, and both of whose prices were overindulged in last weeks "party" to the same extent as SLG. Also, SLG's injured profit margin is more "out of the bag" than the healthier looking numbers from these other two. So why focus on SLG?

John Hussman: Fighting Recklessness with Recklessness

The notion of taxation without representation was clear for those involved with the Boston Tea Party in 1773. Now we have representation, but evidently not in all matters of taxation. The representation that was once comprehensive is now layered, and if the layer responsible for today's taxation without representation could be clarified in the public mind, then there would be cause for another tea party.

How to Profit from Market Manipulation

Harold, a very good piece. Well done. It confirms my suspicion that there are a growing number of us working to exploit these campaigns. I suggest when pursuing this line of reasoning in the future that you break out action points at the end. If not action points, then projections of how you see things playing out in the short term.

It's not entirely clear how much of what you say is profitable and can be predicted ahead of time, and how much is valuable only in retrospect and useful in building a larger understanding of current events. As we who trade know, much of these suspicions cannot be used for short term profit because of the spreads, but as they are woven together into a longer term projection the predicted moves become larger, the spreads less significant, and the opportunity to use this kind of information for profit grows.