Thursday, March 08, 2012

Nasdaq Transports Are Telling The Real Story - Is Massively Levered Market Demand Nearing A Tipping Point?

Actually, the Dow Transports as of Tuesday have a zero percent return for 2012.   And, the Nasdaq Transports aren't anywhere close to the 2008 top.  In fact, in the mini collapse last fall, the Nasdaq Transports actually hit price levels seen in May of 2009.  That would be two months after the collapse of 2008 bottomed.  In other words, the Nasdaq Transports as of last fall had made no gain in three calendar years and were closing in on the 2009 collapse lows.  Ahem.   Aren't transports supposed to confirm that what is being produced by a robust economy is actually being shipped?  Well, in a normal world, that would be true.  But this isn't normal.  The stock market reflects the underlying economy and that now that financial is the economy.   The actual price value of transports, or any stocks for that matter, really means nothing.  The Nasdaq Transports don't reflect any kind of reality except this one:  they are well below their 2008 highs because there isn't enough liquidity/demand in markets to ramp their prices as high as they were back in 2008.   Wall Street has been able to lift certain stock market averages and certain stocks using leveraged derivatives but liquidity without that leverage would have the major averages well lower than they are today.  Well lower.

Just a comment for new readers.  Our long time downside target for the S&P is 200-450.  We didn't hit that in 2008.  I see nothing in any of my work that points to us not hitting those values or something near to them at some point in coming years.  That valuation would represent some semblance of fair value.  Also, to pull another statement we have made on here before, market participants are becoming fat, dull and lazy again.  There is a perception after three years of free money to gamble that the Federal Reserve will always bail out the financial markets.  And, that means the investor class believe markets will quickly return to their favor and what they perceive as normal, just as happened post 2000 and post 2008.  Today's stock market is wildly more expensive than in 1929 and the lack of recognition of this fact shows how systemically-incompetent everyone on Wall Street truly is.  E-v-e-r-y-o-n-e.

So, if we have been writing for the last three years that the bailout of Wall Street had an unintended consequence of allowing Wall Street to trade counterparties out of financial markets, essentially by stealing all of their money because the game is rigged in their favor.  And this market is being levitated by record balance sheet leverage of hedge funds and Wall Street banks through the use of derivatives to manufacture artificial or levered financial market demand.  In other words, given the wild overvaluation of these assets and more importantly their worthless paper derivative contracts, that the financial community is once again holding highly leveraged toxic trash.  But, this time just like in 2008, they have no one to trade them to.  Because they traded counterparties out of financial markets.  Just a reaffirmation of what we have written numerous times.

So, on that note, just something to think about.  IBM has been responsible for just shy of 20% of the Dow's move in the last handful of months.  One stock.  Because of the way the Dow is calculated, IBM provides the largest moves in the Dow with the smallest percentage gain of any Dow stock.  Were the Dow an equally-weighted index, IBM would have provided 1% of the Dow's move.  So, has IBM been going up because of fundamentals or because the market averages are being manipulated higher by financial criminals?  And, there isn't enough liquidity or demand to trade the entire market higher so individual stocks with this highest return on the averages are being used to give the appearance of market strength?  Or is it  herd mentality of mutual fund managers and hedge funds that are buying IBM because Buffett did?  Regardless, I believe IBM is putting in a major top in the first half of this year.  Possibly the top of my life time.  Or, depending on how the future unfolds, it's ultimate top.  Forever.  There are many outcomes to this crisis where that is most than possible but even plausible.  We'll talk more of that in my upcoming Buffett-IBM post.

Okay, so how about another question?  What happens if derivatives leverage blows up in the hands of Wall Street banks?  You know, like LTCM or 2008's mortgage-levered products or possibly default swaps on Europe or commodities or something else?.  That means all of that leverage used to manufacture artificial demand in financial markets is going to unwind more quickly than you could can read this sentence.  We have written since starting this blog that markets will move well too fast for anyone to respond.  And, that is exactly what has happened ever since.  What if derivatives blow up, as we and many others have said they eventually will, and society finally recognizes that derivatives are truly weapons of mass destruction (Buffett is right) and they are banned from our banks as they should be?  At that point, where is the fundamental demand going to come from to resupply the lost demand of leverage and derivatives that was used to drive stock/commodity prices higher?  Hahaha.  I'll tell you where it will come from.  Nowhere.   You know what that means?  There may be no appreciable financial market recovery the next time we come crashing down.  A Wall Street bust is coming without a change in our economic model.  Wall Street has created their own fate through their endless corruption, greed and arrogance.  As we have written countless times in the last seven years, we are in the largest financial bubble the world has ever seen.  We'll eventually see a thinning of the herd as happened with real estate agents, Internet bubble companies, homebuilders and the like.  Except this time mammon will eat Wall Street itself.

Marc Faber and Warren Buffett have both come out recently to make bullish comments on equities.  Faber's rationale is that the Fed will keep printing money.  Well, first of all, that isn't really happening.  They are simply expanding their balance sheet as we have written time and again.  The Federal Reserve doesn't have the granted authority to print.  But, they will likely get it at some point from Congress to monetize certain debts.  At the same time Faber also expects the derivatives market to crash at some point.  Well, Faber clearly shows that he hasn't looked far enough onto the chess board.  Because a collapse in derivatives means a collapse in demand for stocks, gold and other financial markets.  And, it doesn't matter how much the Fed prints, without record leverage provided by derivatives, financial market prices will collapse because underlying economic demand has collapsed and has been replaced by financial leverage.  And Buffett?  Well, he must be getting senile is the only rationale I can figure for his bullishness.   As brilliant (and to a certain degree lucky or being in the right place at the right time as most far overachieving economic success is.)  as he has been at investing, he's too invested in status quo thinking.  There are countless historical examples of when heretofore perceived brilliance lost everything because they deluded themselves into the mind's endless rationalizations.

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posted by TimingLogic at 11:12 AM

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