Thursday, April 30, 2009

New York Composite Index

Since the bullish yapping on CNBC has reached absolutely complete levels of stupidity today, I thought we would repost the Andrews Media Lines view of the market from back in December 2006. For an explanation or more detail you can look in the archives. The chart is from the 1982 bear market low that led to the multi-decade bull market that has now ended in 2007. One out of bounds event, the massive blow off in the New York Composite Index, has led to another, the massive collapse of the New York Composite Index.

You might notice we retraced 61% of the entire advance from 1982 at this recent bottom. Since then we have risen almost exactly to the 50% retracement line. An area of substantial resistance. When the idiots on CNBC start their incessant babbling, it's usually time to start worrying.
posted by TimingLogic at 10:35 AM links to this post

Wednesday, April 29, 2009

The Dirty Dozen

Given the economic environment these asshats have now created, I think we should all celebrate with a baker's dozen. In other words, buy 12 get 1 free. So, let's throw in a 13th stooge - Lloyd Blankfein, the CEO of Goldman Sachs.
posted by TimingLogic at 1:26 PM links to this post

S&P 500 Update

If there is any doubt this is a trader's market, one simply has to look at the chart formation off of the March low. We showed this a week or so ago but let's look at an update pulled in the last few minutes. Traders are gaming this market and attempting to hold prices in this channel until we see the Fed's announcement or until the end of the month to lock in monthly gains.

I don't think we haven't mentioned Demark Sequential or Combo algorithms since 2006 and I don't really wish to take the time to explain them but you can certainly learn about them for the minor price of $64 here. I realize this is blasphemous to many traders but I'm not a big fan of Demark's work. The basis for everything I see is anecdotal baloney. But, he sure has sold a lot of books, received substantial sums on consulting and convinced most every quantitative trading firm or desk of the power of his algorithms. So regardless of whether it is baloney or not, it becomes somewhat of a self-fulfilling prophecy in an environment where traders dominate a market. And be assured, this is indeed a trader's market. And traders don't give a shit about what happens next month or next year or what the state of the underlying economy is or whether you lose your pension or any other macro concerns. So belly up to the bar for a new roll of chips and place your bets.

We have now hit a sell on both Sequential and Combo in the S&P. And because every quantitative trader on Wall Street or in any hedge fund on earth knows this, let's see what happens in coming weeks.
posted by TimingLogic at 12:01 PM links to this post

More Voodoo Economics In First Quarter GDP - More Spending And Less Producing

posted by TimingLogic at 8:44 AM links to this post

Sheila Bair Seeks Authority To Do What Congress And Treasury Won't Do - Bust Up Troubled Mega Wall Street Firms

posted by TimingLogic at 7:32 AM links to this post

Tuesday, April 28, 2009

Brain Dead Personified

I guess I should qualify this. I meant what type of bozo would schedule low flying airplane shots with fighter escort and not seek local NY approval or publicize the event so as to not incite panic.
posted by TimingLogic at 12:02 PM links to this post

The Real Truth Behind Insider Selling

I think it's fair to say many of the traditional sources of market sentiment that have become popular over the last handful of decades or even longer are not terribly useful since this bear market started. That's why I don't rely on anecdotal sentiment indicators. In fact, we wrote back in 2oo6 that sentiment data was likely to fail. And, it has.

The title link cites another indicator which is now being cited as a reason to be bearish on stocks. That being insider selling. Might I remind anyone that many were citing insiders that were supposedly buying finance stocks hand over fist before the market collapsed. That didn't work out too well now did it?

So Bloomberg reports that insiders are selling. Once again one has to understand the macro environment to understand what any data is actually telling us. I other words, looking at this data point and drawing thoughtless conclusions based on historical precedence is nothing more than garbage in => garbage out analysis. I will repeat this again for the sake of any new readers. We are witnessing an environment of forced selling. People, companies, countries. Might I add that the unwinding is occurring at a much higher rate among those that have benefited most from the economic environment over the last few decades - many of society's most successful are becoming substantially less successful and even penniless. Nothing typifies this statement any more than corporate executives that have typically perpetrated current economic ideology taught to them by our finest institutions of learning. In other words, corporate executives are typically ill-prepared for the economic reality facing us.

The fact that insiders are selling at a record pace tells us nothing about the future direction of stocks. Nada. Zilch. The concept that insiders are generally knowledgeable about their business may be true and it may not be true. It's really a case by case analysis. But it definitely wasn't true as a general rule. We watched this cycle smash corporate executives in the face time and time again. We highlighted this fact over and over and over again including our analysis of the PwC CEO survey where most CEO's were incredibly bullish just as the stock market was peaking.

What this data does tell us is that insiders are seeing their finances unwind and they are raising capital to meet their personal financial needs. Often because of overleverage or overconfidence in current economic ideology. We would be witnessing this deleveraging of executive finances at an incredibly higher pace were the Federal Reserve not backstopping the entire economy. Yet, while the Fed may be able to slow the process down, they cannot stop it. And the day may come when they are unable to even slow it down.

The future direction of stocks may be lower or it may be higher then lower or some combination probably unforeseen by most. But any relevance to the future of equities will not be divined, even anecdotally, by the actions of corporate insiders. In fact, I'll make you a wager. There will be no pick up in insider buying when the market finally does bottom and starts to rise. To that point, just as insiders are selling frantically, let's consider this. While I am concerned shorter term and remain very concerned about an eventual low of 200-450 on the S&P, we may have seen the stock market low for the year. Or close to it. The Fed has relieved a substantial pressure from the markets for some period of time and there are plenty of bulls that would love nothing better than to rub every bear's face in a pile of you know what. A retest of the lows or even marginal new lows is not impossible as I have outlined in our most recent charting posts. We shall see as more data reveals itself but as I wrote back at the beginning of the year, do not be wedded to any direction in the market unless you are an adept trader. And don't be fooled by charlatans quoting useless data such as insider selling. The markets are not the economy. Insider selling is the economy.

In closing, remember the entire global economy has lost nearly $50 trillion in wealth. And amongst the largest hit are corporate executives who bought into Pax Globalia hook, line and sinker. Sentiment readings of their behavior, much of which may even be forced behavior counter to their wants or desires, ie real sentiment, are completely worthless. And likely so has become this data point as a useful sentiment tool.
posted by TimingLogic at 7:07 AM links to this post

Monday, April 27, 2009

Mexico Is Teetering On The Precipice

-Unprecedented civil violence - at least in modern times
-The highest concentration of wealth in the world
-Little economic opportunity for most people
-Collapsing oil revenues
-Collapsing revenues sent back to Mexico from the U.S. via Mexican-heritage families
-A corrupt government
-An official announcement encouraging restricted travel from U.S. officials cutting off a substantial source of income, tourism
-Its stock market is down 5% today
-The supposed epicenter of the swine flu outbreak
-The country experienced a magnitude 6 earthquake today

Mexico has all of the makings of a boiling cauldron of volatility. Can it get any worse? We are bugs in a jar. And now it appears mother nature is shaking the jar.
posted by TimingLogic at 1:24 PM links to this post

World Health Organization Q&A On Swine Flu

Make sure you take precautions until this crisis passes.
posted by TimingLogic at 10:07 AM links to this post

Sunday, April 26, 2009

Volatility Rears Its Head - New Flu Virus A Major Pandemic Concern

Times of great volatility often include rare natural phenomena. Coincidence? I think not. On Friday news of a deadly new flu virus hit the front page of newspapers.

The greater the population density of humanity, the higher the risk of a pandemic of some sort. I don't know whether it will happen in my lifetime but there will be another pandemic at some point. Nature is very good at wreaking havoc from time to time. It doesn't help that we are giving her more ammunition with our cavalier attitude towards bioscience.

I've referenced naturally occurring volatility phenomena a few times on here without going into much detail - whale beachings and volcanic thunderstorm activity are the two I recall at the moment. A rather esoteric bit of data as it pertains to this new flu virus is that extraterrestrial forms of energy such as gamma-ray bursts or certain types of energy from the sun have the ability to mutate DNA here on earth. Obviously, this new virus is the result of a mutation. Recently NASA has been investigating new found and unidentified sources of extraterrestrial energy here on earth. Couple this with earth's weakened dynamo and its associated magnetosphere and we are at greater risk for extraterrestrial sources of energy impacting earth whether it be via mutation or other unknown consequences.

So are the heightened risks of pandemics over the last handful of years related to extraterrestrial forces? Nobody knows because our knowledge is nearly nonexistent on the matter.

As an aside, it might also be interesting to note that there is some evidence viruses are a building block of life in addition to a pestilence as they are viewed today. ie, The possibility exists that much of who we are was determined by incorporating viral codes into our body. Some have even hypothesized emotions. If emotions, why not the ever elusive consciousness? And what might enable these building blocks? Genetic mutations impacted by the universe's invisible hand?

Regardless of any potential tie into this current viral outbreak, I firmly believe our view of science and reality is mostly myth pieced together by our tiny little minds. Our foundations of scientific truth aren't even microscopically measurable compared to the truths of the universe. What I am saying is much of science is not science at all. We base entire disciplines of science on abstract theories presented by a handful of genius or original thought throughout history. That is, until someone comes along with a more compelling theory and some reasonable ability to lend proof to it. Even so, the data is often curve fitted. In other words, the data is often mapped against conclusions we seek to validate or simplified interpretations we have the ability to grasp. This is really no different than the curve-fitting science associated with Wall Street's Frankenstein finance models. They worked until they didn't. And many will never work again because they weren't really science at all.

Pure science is one of the most noble endeavors of mankind - the search for truth and knowledge - but our knowledge is a very thin veneer that masks our scientific frailty. And, frankly the frailty of life. The constant politicization and exploitation of science for profit or gain, with no regards for risks, will always create unpredictable consequences in the world be it nuclear weapons, "financial innovation" or something else. Ironically, it is the ignorance of those who have little understanding of or respect for science who most often seek to exploit it for reasons other than its purity or ability to do good. Biological weapons, nuclear bombs, Frankenstein finance, genetically modified foods - just a few of the attempts by those who would wish to use science to threaten humanity rather than advance it.

I will leave you with one thought to consider as it pertains to this new flu virus. Is humanity's definition of life an accurate one? Or, in fact, are we missing the very fact that the universe around us, including mother earth, is part of a greater life force? Or more pointedly, that we are deeply connected to a living energy of the universe? One that has created us? Has unrecognized impacts upon us? Charts a course for our existence of which we have little control?

Remember last year we wrote of the potential for extraterrestrial sources of energy being a root cause of volatility. So what really is volatility? It is a change in the predictable. And, what is the greatest act of volatility this planet has ever experienced? Why, of course, I could think of two. One would be the creation of this planet. The second might be the never-ending creation and destruction of life and new forms of life. Could volatility simply be the universe's immeasurable life force acting in ways we clearly do not understand?

Maybe one of these days we'll get into some esoteric discussions on volatility. But, for now they are way off-topic and there are way too many other relevant discussion points.
posted by TimingLogic at 7:43 AM links to this post

Saturday, April 25, 2009

The Euro Versus The Dollar

Re my remarks yesterday, one final post on the chart-o-rama.

posted by TimingLogic at 9:17 AM links to this post

Friday, April 24, 2009

Paul Potts

Let's leave for the weekend with an uplifting post.

I'm sure many of you have now heard of Susan Boyle. (If not, Youtube her.) Many have probably missed Paul Potts, a sensational talent on Britain's reality-show semi-equivalent of American Idol from a few years ago.

Paul, an obscure gentleman in his late thirties who worked at Carphone Warehouse in Britain, calmly walks out and tells the judges he is going to perform a classical arias reserved for the world's greatest tenors. One of the judges, who has no such talent (isn't it always this way), promptly discounts Paul's remarks with a stereotypical gaze.

Paul promptly belts out an amazing performance. In fact, his performance is the most emotionally-stirring operatic arias I have ever had the pleasure of watching. Almost unbelievably, on a reality show.

I could write a book on economics surrounding the Paul Potts of this world. One that would turn much of current economic ideology on its head. But, let's leave that for later and enjoy Paul's performance for what it is. I hope Paul's performance inspires you as much as it did me. Thank you Paul.

By the way, Paul's recordings have now sold millions globally.
posted by TimingLogic at 4:57 PM links to this post

A Sobering Reminder Of Why Government Transparency And An Independent Press Is So Important To A Democratic Society

posted by TimingLogic at 2:54 PM links to this post

The New Bull Market In Banks?

This is probably the last chart I will show this week. I might put up one more tomorrow. But our two week chart fest is ending. Re all of the charts we have shown, this is a very useful nonproprietary visual I can share with you.

Markets tend to have an equilibrium point and linear regression analysis is helpful in determining where this equilibrium lies. A linear regression trendline is calculated to be a straight line that 'best fits' price between a starting point and an ending point in time. Error channels are calculated by plotting parallel lines above and below a linear regression trendline. In other words, a visual representation of mathematically calculated trendlines aka linear regression and its associated error channels.

Error analysis is helpful in determining where extremes lie as determined by error channels that are plotted a specified number of standard errors away from a linear regression trendline. Error channels can show if prices are cycling higher or lower than the linear regression trendline (equilibrium) and if a change in trend may be about to occur. Got that? It's simple. Even if you aren't a math whiz.

Semi-recently we highlighted the massive volume increase that has occurred in the XLF financial ETF over the last two years or so. Above is the linear regression trendline and its upper and lower error channels for the favorite ETF of traders since this mess began. The ETF holdings include most of the major screw ups on Wall Street.

Of course, the XLF is pretty doggone close to zero so we can't hold this channel forever. Does that mean we have hit a market bottom? No. And we will indirectly discuss one of the reasons why in a post on Germany over the next week or so.

Yappers telling us over and over again that the market has bottomed in the last two years have eaten enough turd sandwiches to last a lifetime. When a post mortem is written on this environment, most will claim that they called the bottom. What they won't tell you is that they called a dozen bottoms. These publicity hounds can't seem to stop themselves from impulsively looking more and more ridiculous. How often does someone have to be wrong before they eat a few doses of humble pie? Obviously when it's other people's money, it's an endless process. In other words, never.

As soon as the boy cries wolf (the market has bottomed) and no one listens, then we'll likely have hit a bottom.
posted by TimingLogic at 8:57 AM links to this post

Thursday, April 23, 2009

S&P Chart Off Of The March Low

I wanted to give readers a chart-based perspective on this rally since my two week Chart-You-to-Deathapalooza is wrapping up this week.

Much of this move has seemed contrived to many including myself. That we had a rally is surely not really surprising given we have been anticipating one could develop since late last year. While market action seems surprisingly erratic and often unusual, pricing action is purely as expected and technical in tone. ie, I see few signs of manipulation above and beyond the normal activities of traders. One must remember that most activity in the market is purely that of traders or speculators. It is not long-term buyers.

There are some minor signs I might interpret as extreme manipulation. Those include futures-driven pricing action and substantially odd activity on incredible volume in banks. Remember, when Citi hit 99 cents, we withdrew our negative perspective on bank equities for the first time. Our perspective moved to neutral or unbiased. It wasn't that I was or am bullish as I remarked at the time. It is rather a position of external factors - when the largest banks in the U.S. are selling for nickels and dimes, exogenous circumstances would most likely dictate their future.

I would not be surprised if the Fed or Treasury were buying bank stocks when they hit their February lows. When the banking sector is in unparalleled crisis, I would consider it a matter of national security and national interest for the government to possibly intervene. Frankly, other than some people being jammed out of their short positions, it would not have bothered me were the government stepping into the market and buying bank stocks on an emergency basis. That is, as long as it is a one-time or limited event that is eventually released to the public along with a clear explanation of why it was done and what circumstances it might be undertaken in the future. I want transformative change and regulation in the financial industry but I don't want to see a collapse of society as being the driver of it. I don't really think anyone else does either regardless of the fact irrational emotions may often dictate otherwise.

So, does this chart look familiar? The parallel channel marked out a five wave count very similar to the other charts I showed last week. This one is on an intraday chart. The others were on a daily chart spanning months.
posted by TimingLogic at 12:51 PM links to this post

A Trader Favorite - Apple Computer

In the spirit of our chartapalooza which will end this week, let's take a look at Apple Computer from the March low. Apple is a favorite of traders - it is liquid and highly volatile. Plus it disproportionately impacts the Nasdaq 100 Index so there are many strategies one can employ using the stock such as a strategy we highlighted a few years ago - spread trading.

Apple's stock has been on a moon shot. It is up over 50% in a little over a month. This move is being driven purely by traders playing this price channel. They are shooting for $129-ish on the stock. We shall see if they get there. From the high yesterday, we are less than $4 away.

As you can see from the red linear regression line, price is losing some momentum relative to its price channel. Buy and hold investors off of the March lows are likely to get their butt handed to them. As we have highlighted quite a few times, this stock is a pig.

Yapping hubris about iPhones, iPods and iMacs has no foundation in reality. The company has great products but what does that have to do with the stock? The reality is Wall Street has pumped the Apple story to drive liquidity and main street investor participation. Not because the stock is a good investment.

My downside target remains somewhere south of $38 as we have highlighted numerous times.
posted by TimingLogic at 7:43 AM links to this post

Wednesday, April 22, 2009

Longer Term S&P 500 Chart Update

I haven't shown this chart before but I did show a very similar Andrews Pitchfork chart of the New York Stock Exchange back in December of 2006. That post highlighted the probability of a substantial top developing in the NYSE. Which was indeed accurate. (You can find the post by looking in the December 2006 archives or searching the site for Andrews Pitchfork. I would encourage you to review that post if you haven't already.)

The above chart is similar to the December 2006 post in that we are looking at the S&P from the 1982 stock market low that marked the end of a multi-decade bear market starting in 1966. The 1982 low formed the foundation for the greatest bull market in history lasting until 2000 or 2007 depending on the measurement criteria. ie, The S&P and Nasdaq bull market ended in 2000 yet the NYSE and CRB bull market ended in 2007. As we have written on numerous occasions and in different contexts, these tops are likely to last a generation. Or as we wrote specifically as it pertained to commodities - possibly thirty or more years. Or as we wrote with regards to oil, I believe it is highly reasonable to conclude we have set the all-time peak in the price of oil. Sorry peak oilers, we have been critical of your voodoo science often on here. Including when the oil bubble was still going up.

The above trendline off of the 1982 price low has held for twenty seven years and counting. You will notice the trendline was pierced with the recent 2009 correction. But, the trendline has held. As we have written on here, major trendlines are first points of repulsion then points of breakage. So when we hit that line in February, traders started buying (repulsion). But, as we wrote in another post regarding a different S&P trendline, a retest of that low would result in the trendline breaking due to overriding fundamentals. And, indeed that trendline did ultimately break. This trendline will almost assuredly break as well. It's simply a matter of when.

All of the prattling that this rally is telling us the fundamentals are improving is nonsense. We may have stabilized at some lower economic level with all of the infusion of capital into the economy, but there are no signs of anything improving substantially other than more debt. Debt to solve a problem aided by too much debt. That's rich. This rally is not based on a capitulation low caused by associated fundamentals. It was a technical trader's low after hitting this trendline. Bottoms to an environment such as this will most surely be made on fundamentals not Wall Street gaming the market and getting on the boob tube to chortle about the bear market being over.

Shorter term, it will be interesting to see if the market can hold above the upper trendline that was recently pierced.
posted by TimingLogic at 9:57 AM links to this post

Morgan Stanley Cuts Dividend 81%

posted by TimingLogic at 9:33 AM links to this post

The Profit Magicians Of Wall Street

Andrew Ross Sorkin's look at the fantasy earnings announced within the banking sector.

This bankster profit mumbo jumbo has to be about the most ridiculous attempt at sentiment engineering I could have ever imagined. The reality is if the Fed werent't backstopping the entire financial system, no major Wall Street firms would be in business today let alone be able to engineer statements of profit.

Humpty Dumpty over at Goldman Sachs gets more wobbly by the day. Wishing to repay the TARP money by offering $5 billion in debt for no productive purpose? Goldman got all of those free gifts via AIG and other shady dealings and they still need to raise money to pay back the Treasury? What I can't believe is the markets are subscribing to this offering. Adding balance sheet risk for no useful business purpose? I see Goldman has really learned a lesson from their incompetence. That lesson appears to be that more incompetence is justified. Is this supposed to be construed as positive? In this environment would such as asinine debt offering be possible without the Fed propping up the entire credit market?

Something is terribly wrong when millions of Americans rot without access to capital yet Goldman Sachs can float $5 billion in debt for absolutely no productive purpose. What did Cheech and Chong say? "If it looks like dog shit, smells like dog shit and tastes like dog shit......................
posted by TimingLogic at 6:17 AM links to this post

Tuesday, April 21, 2009

Fortune 500 Worst Year In History - Bring Back A Trust Buster

I wrote a post back in 2006 about monopolies causing or contributing to the Great Depression. And, guess what? We are right back to where we started. Effectively deregulating the anti-trust laws in this country have had a catastrophic effect on the economy, jobs and free markets.

It's time to dust off those old antitrust laws that were passed for a reason. All of the firms at the top of this list should be busted up. Time to bring back a trust buster. The fact that the Federal Reserve and Treasury are making completely incompetent decisions by asking oligopolies to take over failed oligopolies with this financial crisis is an egregious and heinous act in the face of antitrust laws.

Goldman Sachs, Morgan Stanley, Citigroup, JP Morgan Chase and Bank of America would be at the top of my list. Of course, we have been wailing on this very fact since these completely incompetent organizations and the asshats who run them started taking down the economy and using terrorist tactics to extort money from poor people to bail them out.
posted by TimingLogic at 2:30 PM links to this post

Government Watchdog Agency - Public-Private Partnership Open To Fraud, Waste, Collusion & Money Laundering

I can't even begin to put into words how morally bankrupt I believe this public-private partnership scheme is that Geithner is proposing. Now a government watchdog agency is speaking out in a report.
posted by TimingLogic at 9:56 AM links to this post

Nearing Completion Of A Bearish Formation In The VIX

This week I am going to put up a fair amount of chart posts as a follow up to last week's many chart posts. Charting is something I don't do as much of as I used to but we are going to experience a renaissance with a continuation of a "Chart You to Deathapalooza".

Many are pointing to a declining VIX as a confirmation this crisis had passed. The VIX was at all time lows before this crisis started. How did that work for you as a sign of future economic prosperity? In other words, a falling or low VIX is completely useless as a future indicator. Since it is inversely correlated to equities, it is no different than stating the stock market was going up in 2007, so the future must surely be bright. Oh, I forgot. People were actually stating that in 2007. The same people now citing a falling VIX as bullish. Do people really get paid for this?

The VIX is working out a falling wedge pattern. If this pattern resolves itself in a classical manner, it will result in a VIX eventually rising to at least 60. In other words, more substantial future declines for stocks and a retest of the old highs in the VIX.

Much of the 'investor class' has bought hook, line and sinker that this crisis has passed. They have plowed into government-backed securities (loosely defined to be pretty much anything with a certificate anymore.) and driven rates and spreads down to levels that aren't sustainable in a normal climate, let alone the crisis we are witnessing. But then the investor class missed this crisis completely until it had decimated their portfolios and our investments they were to be managing. Post facto they became experts at what the government should do to fix it - bail out the investor class. Isn't that rich! Government cannot look to Wall Street for answers to this crisis. It must look to main street.

Effective government policy could help deal with this crisis. Instead, as we have said repeatedly, the government is extending this crisis and banks are creating future losses as I write this. Too many are guessing that the reduction in volatility as a sign the crisis has passed. The VIX is telling us we are in the eye of the storm.

Ancient mariners knew the sea was most calm before the storm.

posted by TimingLogic at 7:34 AM links to this post

Monday, April 20, 2009

Winds Of Change - The Federal Reserve Act To Be Reviewed?

An interesting development over the weekend. Especially since Paul Volcker is an insider in the Obama administration. See stories here and here.
posted by TimingLogic at 9:27 AM links to this post

Sunday, April 19, 2009

A Major Geographical Event - New Mountain Ranges In China

More evidence of the coming bust in China. On a secondary note, there is finally concern that China's purchases of US assets are waning. This is hardly a shock. Some are now remarking that China is instead buying other assets in lieu of US government debt. On the macro level this thesis shows a clear misunderstanding of the simple fact that the global equilibrium is permanently broken.

Even though you would never know it by what is reported in the U.S. press, Chinese officials don't wake up every morning and decide to buy U.S. assets simply because they find paltry yields and fiscally irresponsible spend-happy dunces in Washington quite compelling. Why does everything have to be so complicated? The purchases are falling because China's economy is imploding.
posted by TimingLogic at 7:29 AM links to this post

Germany To Ban Genetically Modified Corn

This couldn't happen soon enough as far as I'm concerned. I would like to see all genetically modified foods banned. Everywhere. We see a lot of sci-fi movies recently where humanity revels in its scientific achievement and ultimately damns humanity with some unintended consequences. Don't believe that isn't possible as we've talked of on here before. Mother nature doesn't like to be tampered with and collapsing bee populations, as an example, almost certainly have at their root cause some man made mess. Seed DNA impregnated with chemicals has what long term consequence? The only scientific answer is we don't know. I'm not really anxious to find out either. That doesn't even take into account that the world's food production can be controlled by firms seeking to make substantial profit at the expense of people in underprivileged economic circumstances.

If you want to watch a very disturbing documentary about influence-peddling and corruption in the genetically-modified food safety debate, search Google for "The World According to Monsanto". It has been a few years since I watched it but as I recall the documentary was popular outside of the U.S. but somehow kept from being aired in the U.S. or something along these lines. What a surprise. No different than the bankster lobbyists influence-peddling that led to our banking laws being overturned for personal profits.

I believe the full length documentary is on Google Video.
posted by TimingLogic at 7:17 AM links to this post

Saturday, April 18, 2009

California's Economy Officially Joining The Midwest's Depression

posted by TimingLogic at 7:57 AM links to this post

Friday, April 17, 2009

Is The Rally Losing Its Mojo?

As it pertains to market analysis, volatility is the most substantially underappreciated tool in both trading and economics.

So let's look at a volatility algorithm against the S&P over the past month. If I could blow the chart up large enough to put more data on it, you would see substantially larger volatility spikes during the first few weeks of this rally. Volatility has wained substantially over the past three weeks. In fact, in the first few weeks of this rally, every major push upward was preceded by a substantial volatility spike in the first hour of the day's trading as shown by the green arrows and explained by the green text box. Over the past three weeks we have much weaker volatility as shown by the blue arrows and the explained by the blue text box. The point? Lower volatility often results in upward price discovery failures. (In the first few minutes of today's market, while not on the chart pulled yesterday, volatility has turned lower again.

There are obviously two ways to interpret this data. One, the market is resting before another move higher and, two, the market has very little mojo over the last three weeks but is floating higher for various reasons. Not the least of which is the stabilization afforded Wall Street by Washington. As we have said, the real secret sauce of Wall Street's brilliance is and always has been the Federal Reserve. Without more and more liquidity provided by the Fed or "made up" by Wall Street's phony "innovations", the basis for most of their investment and trading models are completely invalid. And, all of the baloney being used to argue we are at a substantial upward turning point in the economy is nothing more than talking to the hand.

Disregard the lower three blue horizontal lines. They are not relevant.
posted by TimingLogic at 9:53 AM links to this post

Thursday, April 16, 2009

Goldman Sachs, Copper, S&P And Semiconductor Five Wave Counts

This is a follow up to Tuesday's post on the Shanghai Composite. You will need to read that post to understand the relevance of this post.

Do you see anything similar in the post of the Shanghai Composite and that of Goldman Sachs, copper, the Philadelphia Semiconductor Index and the S&P 500 below? I didn't fill in wave counts for anything other than the S&P but you can visually attempt to do so. The waves are clearly there and are incredibly similar to the Shanghai Composite. The only difference is the Fibonacci ratio counts - an esoteric issue you don't need to worry about while simply identifying the patterns.

First off Goldman Sachs' rise from $47 to $130 a share is simply a sign of liquidity returning to the markets and trader's games. I would argue there is no logic or fundamental rationale for a $130 stock price. I don't know exactly what a logical stock price is for Goldman but then neither does anyone else because of the lack of transparency. So this move almost certainly has a high correlation to traders gaming the market. I consider Goldman's move higher to be positive for the bears. Given they also cut their dividend, the higher price simply means they may have a better entrance price to short Goldman at some point in the future and to pay less dividends doing so. Remember, law-abiding short sellers (ie not naked short sellers) did not run the financial system into the ground or cause stock prices to collapse. In fact, it's pretty obvious the ban on short selling last year at least partially caused the collapse in banking stocks. Something the SEC now admits. So, if Goldman's stock ends up cratering again, and I believe there is a good chance it is going substantially lower at some point, it won't be because any legal short-selling. It will be because Goldman doesn't have a sustainable business model or has made more mistakes than are evident today. Something I wrote of when the world was fawning over Goldman's perceived brilliance and I believe still holds true. Mergers & acquisitions and proprietary trading or speculating in financial markets using cheap taxpayer bailout money doesn't exactly have a bright future in my estimation. Neither does cheap money from the Federal Reserve for the same activities. In fact, it wouldn't have any future if the government would simply enforce the Sherman Act and re-regulate financial markets. Regardless, I have a sneaking suspicion the market will take care of all of these issues regardless of what the government does and when. It's actually more than a sneaking suspicion but at this point, I'm tired of being tired writing about the government's lack of will power to address these growing crises. When the market takes care of issues because government won't, you will see the end result. We already see that very reason as a foundation for the high joblessness, unsound financial systems, the global economic implosion and a collapse in asset prices.

The rise in copper over the last few months has been cited recently as a return to health of the global economy. In fact, at least one thing it is pointing to is what we have written of as it pertains to this rally - financial firms front-running credit coupled with no demand for capital, a point we have highlighted repeatedly for years.

If rational regulation and transparency were restored to the commodity futures markets around the globe, we could be much more confident commodity moves represented underlying economic demand. Short of that, many of these moves simply represent an expansion of credit whether it is in the US or elsewhere. Eventually I expect copper could easily drop 75% from current prices by the time this cycle ends. That is on top of the 50% drop to date. (70% drop to date but taken into account its rally since December, 50% from current prices.) Prices at these levels won't last forever for a variety of reasons. Not the least of which is true underlying demand. In other words, I don't share the enthusiasm for copper being blabbered by the same financial idiots who told us how great the global economy was while we were writing the exact opposite. Remember, their hyena calls were followed the largest commodity bust in history. It's not over. And it can't be stopped.

That the first two stocks have jumped outside of their patterns is not a concern at this point. It is simply the fifth and final exhaustion wave taking form at an appropriate price ratio. That is, if these patterns are indeed going to resolve themselves as I would expect. We shall see if a re-evaluation is necessary in the future.

And, now the Philadelphia semiconductor index.

Finally, let's look at the S&P 500 - the mother of all global indices. Its five wave count is substantially more difficult to recognize. In fact, upon an initial look, it may appear as nothing more than chop. Yet, the pattern is clearly evident if I draw it. The movements in October were false lows not confirmed by some of my other data so the pattern starts off of the November low. This pattern is substantially weaker than the Shanghai Composite or any of the other patterns and I consider this an anecdotally ominous sign for the global economy. Of course, I can say this because much of the other data I actually rely on is ominous. In other words, I am not using a chart pattern to guide my rationale. 860-ish is one possible completion point on the S&P pattern. We hit 860 on Tuesday. Let's watch as the future unfolds.

In closing, I don't place trades based on patterns but I definitely watch my trading models for confirmation when I see them.

Charts were pulled on Tuesday so they are a few days old. That's really irrelevant. Charts courtesy of the wonderful
posted by TimingLogic at 8:57 AM links to this post

Wednesday, April 15, 2009

Industrial Output The Lowest Since World War II

Remember our discussions long ago about the risks in utility stocks? When the world was in love with them? Amongst more detailed remarks we wrote they were "The biggest bubble in their history".

Have you ever heard of deregulation in the utilities business - an opportunity for utility companies to partake in asinine business ventures using substantial amounts of debt? Ventures where utility executives generally had no clue as to what they were doing? Yet banksters and the bond markets (really banksters as well) were more than willing to lend large sums of money to management that had no experience in what they were doing? Ever heard of Enron? Sort of sounds familiar eh? Like our rantings on deregulation of the finance industry while the world was partying hard. Funny thing about deregulation. And, why did wholesale deregulation happen? Ask your friendly Washington politician. I'm sure they have a better answer than lobbyist and political donations by special interests. I guess I'm just not capable of understanding the highly intelligent debates we had in our country about what deregulation was good for the American people. You remember debates on substantive issues? They are used in a democracy to determine the path of society. You know. Like how to move forward in dealing with this crisis using methods other than throwing trillions at the banksters courtesy of those same politicians.

And, what happens when the core business of utilities is no longer generating enough cash flow to cover these obligations for these asinine adventures? Possibly due to a substantial drop in, hmm, let's say industrial production? Just a thought. Don't be fooled by the foolish commentariat of Wall Street fools. This is not a housing crisis or a banking crisis. This is a permanent shift in the underlying economy as we have written ad nauseam. There are plenty more parties to attend.
posted by TimingLogic at 9:39 AM links to this post

It's Not Yours To Give - Washington Ideology And Paul Krugman's Recent Times Article

Paul Krugman is an economist who seems to delight more in political commentary than any necessarily insightful perspective on how to solve the economic crisis before us. Why wouldn't he? There is little fame in economics. Krugman is a favorite of the prevailing Democratic ideology now that the world is going to be saved from Republicans. (Who is going to save us from the Democrats?)

I applaud Krugman for his life accomplishments including an economics Nobel Prize - often used as support for why we should listen to his political commentary. A position that is completely illogical unless you believe economists somehow have some great insight into what is best for our government. Something I find totally hilarious since yapping economists have generally supported our economic model over the last few decades regardless of their political affiliation or accomplishment. Additionally, need I remind anyone that the 1970s, considered a depressionary environment by many and clearly agreed to as the worst economic environment since the Great Depression, was, in large part, a result of the failed economic policies of economic Nobel Laureates in the 1960s. By now I think we all understand the esteemed history of economics. It's what put us in this crisis, put us in the crisis of the 1970s and put us into the Great Depression.

If Krugman wants to talk about how to rebuild the economy by rejecting failed policies he supported, I would wholeheartedly embrace such writings. (If you need some ideas on how to turn the economy, I have plenty that haven't been discussed.) But, unless I am missing something, Krugman had little clarity into the severity of the environment surrounding us before it happened. Sounds vaguely familiar to the financial management we have seen on Wall Street. The difference being he wasn't running a company.

Krugman is very good at confusing political rhetoric with clear-headed economic policy. In fact, I don't see anything remotely similar to economics in this article. Instead he marginalizes anyone who is concerned with the tyranny of massive future tax burdens. First by implying any good Democrat supports higher taxes and seemingly any decisions made in Washington by Democratic politicians. Second, by seemingly associating anyone not in lock step with his political ideology as being irrelevant. In fact, as I understand Krugman's article, he seems to argue the "tea party" resentment that is brewing across America is somehow tied to completely unrelated failed policy of the modern day Republican ideology. In other words, that Republican failures in other areas of governance are a reason why we should all support his ideology and marginalize anyone who disagrees. An unreasoned argument I find even more ridiculous than the Republican ideology he argues against. While we all have a right to express their opinion, this, to me, is a clear case of browbeating so well perfected by politicians rather than any relevance to economics. How did we get to the point where people would label anyone concerned about runaway spending or debt loads that are clearly jeopardizing the future of this country? That we are all rich Republicans who don't give a damn about anyone else? Well, no one has written more about the injustices facing the American people than I. And, I am sure as hell not a rich Republican. But, then I don't subscribe to any political ideology other than a government that works for the people and is fiscally responsible.

Need I remind Mr. Krugman or anyone else that this country was founded in some large part on a building resentment of undue meddling and taxes levied by the British empire? The tax burden at the time of the American Revolution, while substantially different in its makeup today, is generally considered to be about 50% lower than today's tax rates. And this is not taking into account the massive increase in future burdens which politicians of both parties are piling on to the often poor, marginalized and downtrodden of this country - at least half of whom are likely loyal Democrats. In other words, I think it may be fair to conclude Mr. Krugman would have been writing in defense of the British empire's fiscal policies in 1776. Because then as today policies were generally supportive of the most favored games of politicians - empire building and bailing out the ruling elite with strong political ties. Is today really any different than what happened two hundred years ago? Seriously? British royalty spending frivolously to support meddling policies around the world and an unsustainable lifestyle of a ruling elite on the backs of Americans? And now American politicians spending frivolously over the last five decades for the same purpose - political favors for the well-connected and constant meddling in a foreign policy that has bankrupted our country?

Were current policy or money spent to develop the capital stock of society and to provide economic opportunity or social programs for Americans, I would clearly draw a different perspective. Were Mr. Krugman to repudiate current political ideology and adopt a "people first" perspective in politics, I might even vote for him were he to run for public office. Instead there seems to be some reasoned attempt at rationalizing the trillions of dollars in debt we have is a result of endless interventions in other countries, military bases in the vast majority of the world's countries and burdens to support a ruling class - a policy that is pervasive in Washington regardless of party affiliation. We should all feel happy now that included in these ideologies are a few crumbs now thrown at the people?

Maybe economists who wish to preach political rhetoric should read a bit of history before ridiculing Americans with what I view as essentially grammatically-correct blabber. This country has more than enough ability to support a government for the people. Instead it is broke because the rights and needs of the people have been marginalized. And, most nearly any politician in Washington with any tenure has supported marginalizing its constituency. We need a policy of butter not guns. I never voted for an empire. I never voted to bail out people making hundreds to thousands of times more than me.

I would appreciate a self-proclaimed progessive such as Mr. Krugman adopting a public policy position based on sound economics rather than arguing a position based on political ideology and marginalization. But, in order to do so, maybe some people would benefit from a history lesson by reading the Constitution. Then by reading another timelessly classic piece titled it's Not Yours To Give. Below are a few quotes.

The power of collecting and disbursing money at pleasure is the most dangerous power that can be entrusted to man, particularly under our system of collecting revenue by a tariff, which reaches every man in the country, no matter how poor he may be, and the poorer he is the more he pays in proportion to his means. What is worse, it presses upon him without his knowledge where the weight centers, for there is not a man in the United States who can ever guess how much he pays to the government. So you see, that while you are contributing to relieve one, you are drawing it from thousands who are even worse off than he. If you had the right to give anything, the amount was simply a matter of discretion with you, and you had as much right to give $20,000,000 as $20,000. If you have the right to give to one, you have the right to give to all; and, as the Constitution neither defines charity nor stipulates the amount, you are at liberty to give to any and everything which you may believe, or profess to believe, is a charity, and to any amount you may think proper. You will very easily perceive what a wide door this would open for fraud and corruption and favoritism, on the one hand, and for robbing the people on the other.

I think it's quite apparent Washington policy over the last few decades, regardless of party affiliation, could very well rise to the standard of fraud, corruption, favoritism and robbing the people as cited above. Now maybe Mr. Krugman and others endorsing similar political ideology would be so kind as to clearly articulate why any American, regardless of political affiliation, would wish to support greater burdens under the current precept of hapless leadership and spend-happy dunces so prevalent in Washington?

Are you sure you are on the right side of the issues Mr. Krugman? Or would you be so inclined to lead the revolution in new ideas we need in this country? A revolution of ideas based on sound economics instead of the political preaching of marginalization.
posted by TimingLogic at 7:27 AM links to this post

Tuesday, April 14, 2009

Goldman Sachs Reports Strong Profits

posted by TimingLogic at 10:21 AM links to this post

Shanghai Composite Five Wave Count - Alfred E. Neuman Still Has The Microphone

Plenty of Alfred E. Neumans over the last few weeks stating the U.S. economy has turned the corner. Plenty more Alfred E. Neumans at the last G20 tea sipping party telling us the global economy has turned the corner. When in the annals of history have politicians, keepers of the status quo, ever correctly called a turn in the future of an economy? Or realized the world has permanently shifted beneath them? Those are rhetorical questions because the answer is clearly never. Not to discount the ability of many politicians in attendance. They just don't have the ability to wave wands and make all of their prior mistakes go away.

Plenty of Alfred E. Neumans over the last few months telling us the Chinese economy has turned the corner as well. Above is a chart of the Shanghai Composite. The index may be in the process of completing a typical counter trend five wave rally off of its October lows. If this pattern does develop, the minimum downside target for the Shanghai Composite would be a retest of the October low. Should that low be broken, the next downside target would be about 1150 or about a 50% fall from here. The pattern has completed itself at last Thursday's price level but time could play a role in extending a topping process. Or we could see a new price and time level develop before the pattern resolves itself. In other words, pattern recognition is not a trading tool and is art more than science so we shall see what happens in coming weeks and months.

Because governments have been spending like drunken sailors to stave off a depression, the world has yet to reveal its true self. It will in due time. In the mean time the Alfred E. Neumans of the world are still getting plenty of press because there appears to be some apparent uncertainty as to whether politicians and central bankers can save the world economy. The key word is apparent. In this case apparent is quite apparently useless.

Don't lose site of the fact that one of our main theses has always been the largest messes in the global economy will develop outside of the United States. And the largest mess is almost certainly China - depression dead ahead. On that note, its leaders continue to do everything possible to ensure a worst case outcome. (American politicians, regardless of party affiliation, aren't far behind.) That should not be surprising to any long time readers- Alfred E. Neuman has taken up permanent residence in China.

For those who have been with me over the last four year calendar years, none of the anticipated outcomes we have written of have changed. In other words, the future is going to be substantially more interesting than anything seen to date. In the mean time there seems to be no shortage of Mad Magazine cover shots be it world leaders or Wall Street pundits.
posted by TimingLogic at 7:43 AM links to this post

Tuesday, April 07, 2009

Finance Industry Control Fraud - It's Time To Take Back Our Economy And Our Country From Corrupt Wall Street Banksters

--Have you ever wondered why society has bailed out Wall Street again and again and gain over the last century? With enough money that would give every American a home, a free college education, free health care, a retirement pension and save Social Security? Yet, we never seem to get transformational reform.
--Have you ever wondered why our "free trade" agreements benefit financial institutions who mint billions in profits while financing trade that destroyed much of our manufacturing might and our industrial wage base under the guise of free markets?
--Have you ever wondered why Wall Street firms were allowed to invest with reckless abandon in commodities without government crackdowns? Even though people around the world were even starving from its impact?
--Have you ever wondered why this legalized gambling crisis in derivatives developed? A crisis completely contained within Wall Street? Truly legalized gambling using our society's bank deposits? Something that no sane person would have never allowed to develop?
--Have you ever wondered why Wall Street firms were allowed to lever up to incredible levels of margin not even seen before the financial collapse in 1929? And destabilize our economy and destroy our national savings?
--Have you ever wondered how private equity was able to get access to endless cheap financing to do trillions and trillions of dollars of buyout deals that had absolutely no economic value? Deals that are now imploding? Deals that will ultimately cost America much more than the housing crisis in both tangible and intangible terms?
--Have you ever wondered why there is no government voice holding the financial industry accountable for the greatest frauds this country has ever seen? Not only in this crisis but every financial crisis?
--Have you ever wondered why GM has to grovel for a few billion dollars to actually save a wealth-creating business while the government has thrown $12 trillion at banks without batting an eye?
--Have you ever wondered how so many opaque scams threatening a nation's savings could be run right under regulator's noses? Including mortgage backed securities, off exchange trading, credit default swaps, Madoff's Ponzi scheme, derivatives, leveraged buyouts, leveraged balance sheets and on and on?
--Have you ever wondered why every major Wall Street firm just so happened to be insolvent at the same time?
--Have you ever wondered why every major bank in the U.S. would have failed by now without the tyranny of future burdens on American citizens courtesy of government bailouts? All in the name of "required to save our banking system"?
--Have you ever wondered how Enron, a highly regulated company in a highly regulated industry, could actually survive and even thrive with its financial Ponzi scheme? A scheme many knew was a scheme as it was being executed?
--Have you ever wondered why senior executives were able to loot companies of what is cumulatively hundreds of billions if not trillions of dollars for the past few decades while real wages declined for most Americans?
--Have you ever wondered why 30 million Americans are on food stamps while Wall Street paid themselves hundreds of billions of dollars in bonuses for destroying our economy? Enough capital in the economy to provide private sector jobs for those 30 million Americans?
--Have you ever wondered why financial firms were able to prey on citizens with any number of shady practices that became more and more corrupt over the decades? Be that credit card schemes, predatory lending, housing schemes or any other number of crises?
--Have you ever wondered why financial firms and senior executives were allowed to set the economic agenda for decades? An agenda that led to a self-fulfilling prophecy of economic collapse?
--Have you ever wondered why taxpayer money was allowed to be used to pay bankrupt financial executives billions in bonuses with taxpayer bailouts, yet government officials ostracized auto workers making $40,000 a year and demanded they take pay cuts?
--Have you ever wondered how all CEOs saw their economic value increase exponentially over the decades while the productive work of employees that actually created corporate wealth grew at well below the rate of inflation or even didn't grow at all?

Have you ever wondered? Have you ever really wondered? We aren't going to see our financials pundit talk about any of this because it jeopardizes their book of business. The status quo. The bias for self-preservation or even personal gain is too intense to honor truth. Quite frankly, this is why we should look beyond voices entrenched in the current financial system for answers on our path forward. Now that Wall Street has been laid bare we now sees the American economy is experiencing the greatest financial crisis in its history. This country is in a fight for its future and powerful interests are lined up to prevent the transformational change necessary.

When this crisis first started there was a common argument by many on Wall Street that this environment could not be a result of conscious wrongful deeds because it involved an entire industry. How could an entire industry be complicit in wrongdoing? It's simply impossible. It had to be a black swan. A once in a lifetime event that could not be predicted. Or so it has been wrongly stated by those either seeking to suppress the truth or those blinded by a misguided and even manipulated belief system.

I've seen so much deception in the press blaming housing speculators, spend happy consumers, housing appraisers, smaller mortgage companies and quite a few other "groups". As we have stated, there is no such thing as a consumer-led recession. It is an economic fallacy. That said, it is the responsibility of the government to protect the people via consumer protection laws. And the Constitutional duty of the press to educate the people. Both have failed in their duty. Instead Americans were encouraged, even miseducated, to adopt a lifestyle that suited Wall Street. Did individuals make mistakes? Sure they did. But they often did so because a government allowed and even encouraged it. No society can protect itself when miseducated. And, I do mean miseducated. Who exclusively benefited from this environment? What this deceptive blame game, either planted by special interests with the microphone or ignorantly posited, fails to take into account is that all of these resources in the economy were needed by Wall Street to steal from society. One might consider the possibility that greater and greater absorption of credit by Americans is needed to create a perfect fraud.

Where am I going with this? 2009 has become a time to talk about a book I read about a year ago. A book that elucidated much of the web of deceit and misinformation before us. Why write about it now? Well, a few reasons. Primarily because the author, William Black, was just on Bill Moyers a few days ago. And because we have finally seen this crisis gain enough momentum that the sovereign are awakening to a very disconcerting reality. A reality that includes the intertwined complicity of government and Wall Street. In other words, much of society is now ready to accept an alternative truth. One that would have been generally rejected a few years ago. Ironically, Moyer's interview with Black has seemingly gone unreported by the blogosphere and the press. (As an educational tool, I highly recommend Bill Moyers's weekly show and I absolutely encourage everyone to watch the William Black interview in particular.)

The theme of this post is based on the academic work of Mr. Black. And, specifically about this ground-breaking research in a book titled The Best Way to Rob a Bank Is to Own One - How corporate executives and politicians looted the S&L industry.

Before I continue, I feel the need to preface much of the content of this post. I am well aware of conspiratorial notions and an undercurrent of radical ideas that are often proliferated on the internet. There are many voices on the internet who often feel marginalized by society. And, with that comes a never-ending cry of wrongdoing or conspiracy. As I have said before, I don't subscribe to conspiracy theories. I subscribe to fact and theory that can be quantified beyond a reasonable doubt. And, when additional data is available to supersede existing fact and theory, then I will adjust my positions accordingly. The point is that William Black is not a fringe element in society. He is not a conspiracy theorist. In fact, Black is a highly esteemed fraud expert and economics & law professor whose research and knowledge is highly prized in the fraud prevention community. Black actually became a fraud expert through various and substantial positions in United States government banking and regulatory agencies. This includes being the deputy director of the very commission created by the United States Congress to identify the root causes of the last financial crisis that rocked this country's financial system to its core. In other words, when William Black talks, everyone in society should listen.

Black's book is an academic and research work about a type of financial fraud that he terms as Control Fraud. Control Fraud is a fraud perpetrated by those who control corporations and then use said corporations as a weapon or shield against prosecution. In more simple terms, fraud which uses positions of authority and power as a shield by manipulating laws and government to avoid prosecution. Fraud such as seen in the S&L crisis of the 1980s or Enron a decade later or possibly the crisis we see today. From Black's academic work we might surmise boards of directors, CEOs and senior executives could possibly be the "control" points in such schemes.

bu - reau - crat : an official who works by fixed routine without exercising intelligent judgement.

I tend to believe the majority of power elite (bureaucrats) in Washington are simply doing what they have always done. They are serving the system without any particular judgement. And, they are often doing so for self-interest. Whether this is a Congressperson, officials at the SEC, Office of Thrift Supervision, Comptroller of the Currency or Treasury. That is, they either seek money for re-election in a system that encourages said behavior and/or seek relationships that will benefit them when they leave office. In other words, most people unthinkingly serve a broken system as Thoreau told us in Civil Disobedience. So I tend to give most government officials a pass. They simply operate within a structure that has morphed into one that promotes self-interest over the common good. A system that needs to be completely transformed to promote the common good over self-interest. Black's research and first hand experience draws a more ominous conclusion of government corruption. At this point we are mincing words. Regardless of whether it is a system that is broken or individuals in the government that are corrupt or both, the end result has the same impact - a broken economic model. But the bankers and their lobbyists, that is a different story. They knew exactly what they were doing. They had a plan and they needed a compliant government to achieve it. They were paying billions of dollars for favors to gain an environment where they could overturn laws to do as they pleased with society's money. It was for nothing but personal financial gain. It is as happened with ancient Rome when greed and self-interest amongst the elite ultimately destroyed society. Now because of this corruption, the United States is, for all practical purposes, insolvent.

To date this banking crisis has been left without any reasonable explanation by government. There are many people with various explanations as to what created this crisis but these have all been incomplete perspectives using limited information gained by looking through the rubble in the rear view mirror. Or, often symptomatic issues such as derivatives which are really irrelevant to any root cause analysis. More ominous in all of this chatter is the seeming lack of urgency or desire to understand what has happened by either government or business leaders. Instead, amazingly all we hear is that exogenous events have led to an unforeseen crisis. A crisis that has left everyone, including Wall Street, as its victim.

What I find most ridiculous is a recent argument posited by politicians that no laws were broken. Implying we should come together as a nation and move past this crisis. To do what it takes to clean it up without a public investigation or understanding of what happened or how to prevent it in the future. That is, other than shallow calls for regulation. Regulation we had before government dismantled it at the request of Wall Street. Well, need I remind anyone that slavery was perfectly legal as well. Nor were laws broken when Japanese Americans were forced into internment camps and had their livelihood destroyed during World War II. Or, that women weren't allowed to vote. And, if I really want to make an extreme point about laws often serving the state's wishes and not being representative of truth, Hitler didn't break any laws either. Now, I am not comparing anything in this environment to Hitler. I am making a point about truth and the rule of law. Wall Street firms and their lobbyists paid government officials via lobbying, campaign contributions and promises of riches when they left office. And, they did so for the sole purpose of rewriting and dismantling our regulatory codes across a wide swath of the economy. These changes impacted wages, executive compensation, unregulated capital, risky financial schemes, defacto industrial policy, Social Security, economic opportunity, etc. Of course there were no laws broken. Wall Street and major corporations simply paid to have the rules rewritten so that their fraud would be perfectly legal. But, the acts were indeed criminal or corrupt or both.

Remember as we have often written, a bureaucracy never leads change. Instead, as we have noted more than once, a bureaucracy's primary objective is to sustain the bureaucracy. The status quo. Self-preservation. We have never seen change in this country that was not the result of direct and significant political struggles by the sovereign. Never. There is no enlightened government. There has never been an enlightened government at any time in history. Anywhere. There is only an enlightened people. Why would the state seek to change a system that is serving its needs perfectly well?

The crisis Black writes about took place over twenty years ago. That crisis was fueled by Control Fraud. A fraud he clearly articulates is still at work in the economy today. Twenty years after the initial fraud he gets an audience with Bill Moyers. Yet, has he been invited to CNN? Fox? CNBC? ABC? NBC? CBS? In prime time where tens of millions of viewers can become educated as to potential causes of this crisis? No. He's on a reasonably obscure late night public television program. Personally, I believe Black's work needs to be seen by every American. Needs to be aired on every news source. Not because his work is necessarily a complete truth. Or that all of his research is completely accurate. I am not in a position to make that statement. But, I am in a position to state that his work educates the sovereign as to what is possible with a private banking system able to influence public policy, society's beliefs, government and our livelihood as a nation. And, as our founding fathers told us, the sovereign must be educated to lead a nation. And, indeed, it is the sovereign who must lead this nation. Not Wall Street. And, not politicians seeking personal gain at public expense. In this case, a public airing and accountability is necessary to recover from this calamity. That is, permanently clean up Washington and to do so with Constitutional amendments that can never be broken without the oversight and will of the sovereign. The bureaucracy will resist at all cost.

Below are some specific excerpts from the book to enlighten you to the general concepts Black discusses in his research. That said, the book is a substantial work and these excerpts don't do his research justice. It is the only complete explanation I have encountered for the mess that engulfs Wall Street and much of the economic environment in which we live. Remember, this is not some type of ex post facto account of what happened on Wall Street written with the benefit of hindsight. There is no other source of research or scholarly work that so clearly exposes the causes of the crisis before us. William Black told us this was going to happen and he saw the seeds of crisis decades before it happened. You are likely to be astonished because he actually anticipated in very specific terms what we are witnessing today. For many, Black's work will destroy much of their belief system. But, then that is a primary goal of my blog. Because, to become enlightened, one must first release unsubstantiated beliefs. To transform society, society must first realize a transformation is necessary. And, society is quickly realizing, regardless of what is reported in the press, there are many apparent truths they can easily draw from their own inductions. New truths. Ultimate truth.

I would highly recommend Mr. Black's very original and lucid work. You can likely find his book at your local library or any book store. And, I would highly recommend everyone share a link to Bill Moyer's interview with Mr. Black. An educated society is an enlightened society.

Book excerpts:

A control fraud is a company run by a criminal who uses it as a weapon and shield to defraud others and makes it difficult to detect and punish the fraud. Fraud is theft by deception: one creates and exploits trust to cheat others. That is one of the reasons the ongoing wave of corporate fraud is so devastating: fraud erodes trust. Trust is vital to making markets, societies, polities, and relationships work, so fraud is particularly pernicious. In a financial context, less trust means more risk, and more risk causes lower asset values.

.... To use a term from economics, fraud causes terrible "negative externalities" because it inflicts injury on those who were not parties to the fraudulent transaction.
Control frauds are financial superpredators that cause vastly larger losses than blue-collar thieves. They cause catastrophic business failures. Control frauds can occur in waves that imperil the general economy. Control frauds do not simply defeat internal and external controls such as outside auditors. They pervert intended controls into allies.

.... the accountants "made the money" (albeit fictitiously). All of the S&L control frauds were accounting frauds. All of them were able to get clean audit opinions from top-tier audit firms, typically for many years. No audit firm exposed an S&L control fraud.
Individual control frauds should be a central regulatory concern because they cause massive losses. The worst aspect of control frauds is that they can cluster.

..... Economists distinguish between systemic risk that applies generally to an industry and risks that are unique to a particular company. Systemic risks can endanger a regional or even a national economy. Systemic risks pose a danger of creating many control frauds. In the S&L case, the systemic risk in 1979 was to interest rates. S&L assets were long term fixed-rate mortgages, but depositors could withdraw their money from the S&L at any time. If interest rates rose sharply, every S&L would be insolvent.
In 1979, the Federal Reserve became convinced that it only had the will to stop inflation. Chairman Paul Volcker doubled interest rates. By mid-1982, on a market-value basis, the S&L industry was insolvent by $150 billion. This maximized the incentive to engage in reactive control fraud and make it far cheaper for opportunists to purchase an S&L. These factors ensured that there would be an upsurge in control fraud, but the cover-up of the industry's mass insolvency, deregulation, and desupervision combined to create the perfect environment for a wave of control frauds.

Criminologists call environment that produces crime "criminogenic".
Control fraud's investments are concentrated and driven by fraud, not markets. This causes systemic regional, or even national, economic problems. One of the remarkable things about the S&L debacle is how alike the control frauds were. Almost all of them concentrated in large, speculative real estate investments, typically the construction of commercial office buildings. Because the control frauds grew at astonishing rates, this quickly produced a glut of commercial real estate in markets where the control frauds were dominant. Moreover, being Ponzi schemes, they increased their speculative real estate loans even as vacancy rates reached record levels and real estate values collapsed. Waves of control frauds produce bubbles that must collapse. They delay the collapse by continuing to lend, thus hyperinflating the bubble. The bigger the bubble and the longer it continues, the worst the problems it causes. The control frauds were major contributors to, not victims of, the real estate recessions in Texas and Arizona in the 1980s.

What we have, then, is a triple concentration. Systemic risk causes control frauds to occur at the same time. They concentrate in the particular industries that foster the best criminogenic environments. They also concentrate investments best suited for accounting fraud. That triple concentration means that waves of control fraud will create, inflate, and extend bubbles.

Pontell's systems-capacity theory can help us limit or even prevent future waves of control fraud. Systems capacity refers to the inability of the prosecutorial or regulatory system to cope with crime of misconduct adequately because of resource limitations. ....It is a self-fulfilling prophecy that government will be ineffective if one designs it to be ineffective. ....... One of the great advantages of control frauds is their ability to cause the firm to make political contributions. Audacious control frauds use this ability to help shape their regulatory environment. They seek to undercut effective regulation. There is no "Brotherhood of Burglars" that has apparent respectability and regularly lobbies for restrictions on the quality of door locks or the number of police assigned to neighborhood patrols. Deregulation can aid control fraud in four ways. It can radically change the environment because we are poor at predicting untested dynamic events. ... Third, deregulation may allow investment in assets that lack a readily ascertainable market value. One of the keys to accounting fraud is to find such assets...... Fourth, deregulation may provide the authority to enter into reciprocal (fraudulent) transactions used to transmute bad investments into good ones. It may also provide the authority to create an entity that will be used as a straw party. (Sounds like legalized money laundering to me.)

Mr. Black has presented us a great work of research. A work that should be used as one of the inputs to a framework of transformational oversight and regulation of the finance industry and necessary changes into transparency and oversight of our government.

In closing, Thomas Jefferson's perspectives on State's Rights as a check against a hegemonic federal government were indeed more than prescient. The lack of appreciation for State's Rights has allowed concentrated power in Washington to all but obliterate State's Rights and accordingly many Jeffersonian ideals that placed the sovereign above government. And, many other ideals seekers of truth hold dear. This must not be allowed.

The time has come to take back our economy and our country from an elitist culture of exclusion. To restore the ideals of freedom and opportunity based on merit. On democracy. The only way this will happen is by sovereign participation in the democratic process to force transformational change on an elitist culture robbing our country of its wealth and the people of their economic livelihood. We the people.......
posted by TimingLogic at 7:17 AM links to this post

Monday, April 06, 2009

Top Government Watchdog - Bank Bailouts Are Flawed. Fire Wall Street CEOs

Ms. Warren gets my vote for new Treasury Secretary.
posted by TimingLogic at 2:05 PM links to this post

Finally - Someone On Wall Street Who Understands The Banking Reality

In our post from ten days or so ago on why Geithner's bank plan will fail, we effectively wrote that the unwinding wasn't finished. That new bad assets continued to pile up on bank balance sheets. Although we did so using a more rigorous argument than a single sentence. On Friday a Goldman analyst acknowledged reality. And, although his remarks were central to the mark-to-market accounting shenanigans, they are also applicable to why the Treasury's public-private partnership will fail. The recursive unwinding we have written about for a few years now still remains the primary economic trend.
posted by TimingLogic at 10:17 AM links to this post

Saturday, April 04, 2009

More Wall Street Players Who Contributed To This Crisis Appointed To Government

posted by TimingLogic at 11:23 AM links to this post

Friday, April 03, 2009

Mark-To-Market Rules Changes - More Bankster & Lobbyist Shenanigans

"What disturbs me most about the FASB action is they appear to be bowing to outrageous threats from members of Congress who are beholden to corporate supporters." -- Former SEC Chairman Arthur Levitt

I'm sure I don't need to explain the mark-to-market accounting issue since all of us have become accounting experts over the last year with regards to the Wall Street fiasco. In a nutshell mark-to-market is an accounting principle that requires companys to value their assets based on observable data rather than more arbitrary assumptions. You know, like 2+2=4. Observable data tells us 2+2=4 is likely to be true when looking at a corporate balance sheet. Of course, if you question if 2 is really 2, then it becomes more arbitrary. It's pretty much that simple.

Yesterday, the standards board for accounting changed the rules after tremendous pressure from politicians. I'm not an accountant and generally don't care what accounting standards are used were it not for the circumstances under which the rules are now being changed. It is important to note that mark-to-market was implemented because under the old standards the banksters were able to create one hell of a mess that almost brought down the American economy in the 1980s. And, because of the mess in Japan's banking system that started around 1990. So to change the rules today is simply an attempt to brush the current mess under the rug with the action of a pen. But, this time the situation is substantially different. The root cause of this environment isn't a real estate crisis. Nor is it a banking crisis. As I have written time and again, these are symptoms. And much as they may wish to, Congress isn't going to be able to sweep this mess under the rug by politicizing accounting standards.

It's no surprise the U.S. Chamber of Commerce and the American Banker's Association are behind lobbying efforts to change mark-to-market accounting standards. Both of these organizations represent substantial lobbying efforts in Washington. Lobbying efforts that I would argue have contributed greatly to root causes of this crisis. Lobbyists are most often not aligned with the primary rights of the sovereign, representative government, investor transparency or the search for truth.

There is a reason why we have an apolitical accounting standards group. As ridiculous as it may sound, it's the same basic reason we have a Constitution and a Bill of Rights. It is because politicians are not to be trusted. That politicians are now meddling in the affairs of an independent accounting and rules-setting organization on behalf of self-interested lobbyists is extremely disconcerting. Frankly, I would go so far as to say it is morally bankrupt or worse. For those who thought we would achieve some new level of enlightenment in Washington if all we did was change the political party in power, welcome to your new reality.

As Washington meddles in a topic they know nothing about for the intent of political favors and lobbyist contributions, it is important to remember one very important point that absolutely will not be changed by waving of a magical new accounting wand. As we wrote last year, Goldman Sachs, as an example, has tremendously more level three assets than they do capital. Giving Goldman or any other bank the leeway to mark these assets at arbitrary value accomplishes what exactly? Since there is no transparency into what these assets are, could some of these assets be intangible assets? Financial wizardry and derivatives? And that even tangible assets are toxic securitized assets? In other words, banks and their lobbyists don't want us to see what's on their books because we might uncover the truth - that book value isn't really $110 a share in the case of Goldman? And possibly that we should not be pumping trillions of dollars into institutions that really should be shut down? That these mega institutions are being propped up for political reasons rather than for the benefit of the sovereign? Just a few possibilities to consider.

Does this now mean I get to mark my house to any value so as to pay whatever taxes or mortgage payment I wish? Or maybe my car? Or, if I have no income, do I get to mark my credit card balances to a value I feel I will be able to pay? All of these markets are distressed and there is a plausible reason to do so. Is this mark-to-market controversy really any different? Banks now get to fudge their books. Why can't the American people?

Banks may have some legitimate argument that real estate or other tangible assets have somewhat of an arbitrary future value. That an asset's value at maturity may be higher than mark-to-market. In normal times I will grant it could be a legitimate argument. But not in this environment. This isn't the key driver behind this politicization of accounting and auditing standards anyway. It's really about Wall Street's Frankenstein finance. By the way, commercial and residential real estate around the world is already trading down more than 50% in many cases. Corporate bonds are pointing to substantial future bankruptcies around the globe. So, good luck on that arbitrary future value in lieu of mark-to-market. With the accounting rules change we are now living the movie Night of the Living Dead. Meet your new zombie bankster courtesy of politicians.

You might also be interested to know that the Center for Audit Quality or CAQ has issued a statement criticizing the SEC's political involvement in accounting integrity. Basically, the CAQ is a representative voice of corporate audit quality for Certified Public Accountants & corporate auditors. It's governing board is comprised of the chairpeople of every major accounting firm. You get the idea. Society relies on these people to enforce transparent and accurate corporate auditing standards.

I sent an email to a close friend who is the Director of Audit & Sarbanes-Oxley at a major multinational corporation to get an off the record opinion on the politicization of mark-to-market. Conversations between this person and the company's Chief Financial Officer yielded this remark.

"I think that is ridiculous and a classic example of "shooting the messenger". Mark to Market accounting, simply stated, is a requirement that investments (for example, mortgage-backed securities) be stated at their fair market value in an entity's financial statements. If those investments decline in value over time, then they must be written down to the lower value. This is a fundamental concept within financial reporting.

Congress is now getting involved because some constituents don't like the end result. Some are calling for a revision to Mark to Market accounting such that those losses may be deferred in hopes that those investments recover in value someday."

FASB's rule change is more financial engineering that reduces transparency. Has anything really changed in Washington since the Democrats won control? Our economy continues to be one that is financially engineered and its apparent politicians wish to keep it that way. Care to guess the reasons why?

What have we learned from Enron? Apparently nothing. But I think what we are now learning is that reality and truth are from a bygone era. That this crisis will become worse unless the people demand transformational changes. Remember Newton's Third Law. For every action there is an opposite but equal reaction. Or put another way, there is no free lunch. Politicians are playing with fire. And, we the people will suffer because of it because tinkering with accounting standards will have negative and unintended consequences.
posted by TimingLogic at 5:57 PM links to this post