Research To Think About

Research to think about 1) 2) 3) 4) 5) 6) 7)

May 30, 09: what will happen after May? Stocks are too expensive! End may 09: correction isn’t coming yet May 09: US Bank shares being pumped and dumped May 09: on Market Manipulations May 09: PE Ratios are too high! 1 May 09: Why Rally is unsustainable April 09: Explaining Generational Bottoms

http://seekingalpha.com/article/140367-sell-in-may-not-thistime?source=article_sb_picks With trading in May finished, we can look back at the month in its entirety and definitively say the old market adage,”Sell in May and Go Away” was wrong as could be. The month of May was the third straight month of positive returns in the U.S. equity indexes, the first such streak since August through October of 2007. The S&P 500 finished more than 5% higher for the month, in comparison to the 9.4% gain in April and the 8.5% gain in March. The rally in equities has indeed been impressive as the S&P is up more than 25% in the past three months, and an amazing 38% from the low point in early March. It was not just stocks that enjoyed May, but crude oil also posted a huge 29% gain in May, its largest one month gain since 1999. The price of crude finished the month just shy of $67 per barrel, even as OPEC decided that no further supply cuts were necessary. Oil was not alone either as in general commodities were all propelled higher by the devaluation of the dollar. The basic materials index (IYM) gained close to 14% on the month, which outpaced even gold, the traditional hedge against inflation as SPDR Gold Trust (GLD) was up about 10%. The combination of the dollar’s rapid decline and the prospect of economic growth on the horizon has propelled commodities to rebound quite strongly. The question now is what to expect for the summer months ahead. At Ockham, we are not market timers and think that it is foolish for anyone to claim they know where the market is headed in the short term. However, here are some observations that we think may be important to keep in mind over the coming months. The stock market is no longer cheap. An argument could’ve been made that the market was cheap in Feburary, March, and April, but it is increasingly hard to justify any longer. Remember, this is very different than saying the market is headed down, but we believe that the gains of the past few months are still vulnerable. According to Barron’s online, the S&P 500 is far more expensive than it was a year ago according to a standard price-earnings ratio. A year ago when the S&P 500 was in the high 1300’s the P/E ratio was about 22x, but given the massive declines in corporate earnings expectations Barron’s pegs the P/E at 123x! These numbers are as of May 25th so next week could go either way but you get the gist. Our internal calculation of the S&P 500 valuation is not quite as extreme as Barrons, but it is hovering at about 46 times current earnings. Obviously, our earnings

expectations have not fallen quite as far as Barron’s, but according to our estimates we are seeing earnings that have declined 79% since the peak in 2007 and 72% from one year ago. The fundamentals of equities have not improved in the last few months enough to justify these gains, in fact most indicators have not improved much at all but the perception is that the worst is behind us and growth will ensue. That may be the case, and we certainly hope it is, but it demonstrates to us that the market is currently trading on emotion and psychology rather than based on fundamental improvements. Investor sentiment and consumer confidence have both improved markedly over the past three months. The hope of better days ahead has been a powerful driver and could continue until corporate earnings truly do start to rebound. However, if the economy hits a bump and fear, uncertainty, and doubt start to creep back into the picture the recent market rally could very easily turn to dust because it was built on sentiment and not fundamentals. Both sentiment and fundamentals are a completely legitimate and necessary components to market action, but in comparison to fundamentals, sentiment can be extremely fickle. How long can “better than expected” be enough to carry the recent gains in the equity indexes? We are of the opinion that the current rally has been largely devoid of fundamental improvement, which makes it all the more vulnerable. At Ockham, we quote Ben Graham often, and this seems a very appropriate time to reference his Security Analysis: “Stock markets behave like a voting machine in the short term, while in the long term they act like a weighing machine.” -=-=-=

Telltale Signs That a Significant Correction Isn't Imminent As has been the case for a while now, in regard to financial stories reported in the media, a breaking story is reported that is often followed by a completely contradictory story just several weeks later. The latest example of this is the following. On May 6, Friedman, Billings, Ramsey Group analyst Paul Miller stated that J.P. Morgan Chase & Co. (JPM) “would probably be the only one of the 12 commercial banks submitting to the stress tests that won’t need more capital.” Several weeks later, on June 1st, J.P. Morgan Chase (JPM) announced that it planned to raise $5 billion in a secondary offering. Other large financial institutions, such as American Express (AXP) and Prudential Financial (PRU) also announced respective secondary offerings of $1.25 billion and $500 million. In my May 12th article, “US Bank Shares: The Pump is Almost Over, Get Ready for the Dump”, I noted the “urgency of many financial institutions to complete their secondary public offerings of stock and debt as soon as possible.” However, given that one of the biggest beneficiaries of this crisis, JP Morgan, has just announced a secondary offering that may not be completed until the end of June, we can now be

assured that the markets will not experience an extended correction until JP Morgan has completed its secondary offering. Thus for now, we can expect this US market rally to continue or at least to channel up and down for a little while longer without an extended downturn until JP Morgan and other large financial institutions have completed their secondary offerings. While volatile trading days over the next couple weeks is not out of the question, and even likely, I believe that the volatility will remain range bound in the very short-term. Since JP Morgan just announced its intentions to raise capital yesterday, it is highly unlikely that we will see a strong, sustained downward trend in US markets commence for at least another couple of weeks if not a couple more months. However, other important “triggers” in the international world outside of the US will determine if we see this sustained downward trend in a couple of weeks versus a couple more months. The US stock market is a vastly different creature from the US economy, and due to massive government intervention, the US stock market can continue to rise for extended periods of time even while the fundamentals of the economy continue to deteriorate. There is no experienced, diligent observer of US stock market behavior that will deny the existence of huge anomalies in market behavior in recent weeks that point to massive intervention. Just consider this video (Dan Schaffer, May 14 2009 at FoxBusiness.com) where the commentator notes that during one recent trading day, an estimated $10 to $20 billion entered the US markets and traded S&P futures contracts to prop up general US market indexes during the last 7 minutes of the trading session. In response to this massive injection of capital in the last 7 minutes of market trading, the analyst states, “Who has that kind of money to move the market?” The answer, of course, is the Plunge Protection Team. I, myself, in carefully monitoring US stock market behavior in recent weeks, have seen these same massive anomalies indicative of market intervention specifically in the trading behavior of many large US financial stocks. Though the bottom title in this video states, “Is the Rally Over?”, there is little doubt and should be little argument over the fact that the US Federal Reserve and the US government will not allow the rally to end until their favored financial institutions have had adequate time to complete their secondary offerings at artificially propped-up share prices. Do I still believe a very large correction is inevitable in the future? Of course. And when it happens, it will most likely be a very drastic event. But certainly, the Plunge Protection Team will not allow the downturn to commence until after all large US financial institutions have had a chance to complete their secondary offerings. US Bank Shares - The Pump is Almost Over, Get Ready for the Dump May 12th, 2009 For the past couple of weeks, bank shares have grown in share price faster than a steroid-induced bicep. There has not been much reported by the media in terms of

negative news about the US financial industry from Ben Bernanke, bank CEOs, or even the Federal Reserve, even though the bank stress tests resembled a public relations campaign much more than a stress test. Despite the rosy picture painted by the financial media of the US banking industry and the consensus that “the worst is behind us now” by financial executives, the 3-ring circus that is the US Federal Reserve, the US financial industry, and the US Treasury still can’t seem to get their stories straight. Consider the following highlights (or lowlights depending on your viewpoint) from a story released by Bloomberg on May 11th: “Bank of New York Mellon Corp., Capital One Financial Corp., U.S. Bancorp and BB&T Corp. will sell shares to repay U.S. aid after stress tests showed they don’t need additional cushion against a deeper recession. BNY Mellon, the world’s largest custody bank, said today it will sell $1 billion of stock in a public offering and may use the funds to repurchase preferred shares sold to the U.S. Treasury under the Troubled Asset Relief Program. Capital One said it would sell 56 million shares of common stock to raise as much as $1.55 billion, U.S. Bancorp said its sale would total about $2.5 billion and BB&T began a public offering of $1.5 billion of stock while reducing its dividend.” “Regulators examining the 19 largest U.S. lenders last week said the four firms wouldn’t need more capital to survive a deeper, longer recession. U.S. Bancorp Chief Executive Officer Richard Davis and BB&T CEO Kelly King had both said they wanted to repay their $6.6 billion and $3.1 billion in TARP funds as quickly as possible. BNY Mellon got $3 billion from TARP.” “This was something that was really hanging over the group, so a lot of peoples’ viewpoint on it is that, ‘Hey, the worst-case scenario got taken out, this group’s going to still be around,’” said Kevin Fitzsimmons, a Sandler O’Neill & Partners LP analyst. “Capital One, the McLean, Virginia-based credit-card lender that received $3.56 billion from TARP, said in a statement it would sell shares at $27.75 each, an 11 percent discount to the bank’s $31.34 closing price on May 8. The shares dropped $4.24, or 14 percent, to $27.10 at 4:03 p.m. in New York Stock Exchange composite trading.” “KeyCorp, which the government deemed needed an additional $1.8 billion in capital after the stress test, today registered to sell as much as $750 million in common shares. The bank said it expects to raise about $739.4 million from the offering after expenses and commissions.” “Cleveland-based KeyCorp, which last month slashed its dividend to 1 cent, said that because of the economic and regulatory environment the company didn’t expect to increase the quarterly dividend “for the foreseeable future and could further reduce or eliminate our common shares dividend.” “We firmly believe this action is in the long-term best interests of our shareholders and our company because of the risk and uncertainty associated with being a TARP

participant,” BB&T’s CEO Kelly King said in a statement. King said the decision to cut the dividend was “the worst day in my 37-year career.” “Banks that accepted TARP money are subject to government oversight and restrictions on compensation that that they say put them at a disadvantage to competitors. Banks that want to repay the funds must get approval from the government and show they can sell debt in the public market without federal backing.” “U.S. Bancorp also plans to sell $1 billion of five-year notes without a government guarantee as soon as today, according to a person familiar with the offering who declined to be identified because terms aren’t set.” “Wells Fargo & Co., which the government said needed $13.7 billion in additional capital, raised $8.6 billion selling shares last week, more than planned. Goldman Sachs Group Inc. in April, before stress test results were released, said it would raise $5 billion to repay federal rescue funds. Principal Financial Group Inc., the Des Moines, Iowa-based life insurer, today said it would offer 42.3 million shares to raise funds for “general corporate purposes.” “Morgan Stanley last week raised $8 billion by selling stock and debt. The stress tests found that New York-based Morgan Stanley needed $1.8 billion in additional common equity as a buffer against potential losses.” So let’s analyze the most pertinent points from above: Bank of New York Mellon Corp., Capital One Financial Corp., U.S. Bancorp and BB&T Corp. will sell shares to repay U.S. aid after stress tests showed they don’t need additional cushion against a deeper recession. If there is a better example of an oxymoron, I don’t know one. So if these four financial institutions don’t need any more capital whatsoever, why do they need to execute significant secondary offerings that will inevitably massively dilute shareholder value. If they are so well capitalized as the stress test results indicated, why can’t they repay the TARP money from operational earnings? Banks that accepted TARP money are subject to government oversight and restrictions on compensation. BB&T’s CEO Kelly King stated that he was cutting dividends and diluting shareholder value by offering another $1.5 billion of stock to help payback TARP money more quickly because it was in the best interests of shareholders. US Bancorp is conducting a secondary offering of $2.5 billion of new shares as well as an additional $1 billion offering of corporate debt and Capital One is offering $1.55 billion of more shares. Since when is slashing dividends and diluting shareholder stock in the best interests of shareholders, unless the shareholders are the executives that have used this pump & dump scheme to dump stock at artificially high prices and now can begin the process of paying back TARP money so they can start raising their compensation levels to obscene, exorbitant amounts again? To date, Wells Fargo & Morgan Stanley have moved the quickest of all financial institutions to use their artificially elevated stock prices to already complete respective secondary offerings of stock (& debt) of $8.6 billion and $8 billion.

Capital One issued a statement regarding a secondary offering of shares at $27.75 each, an 11 percent discount to the bank’s $31.34 closing price on May 8. An 11% discount to market prices at the time of a secondary public offering announcement is huge and always in the worst interest of current shareholders. It is not rare for wellrun companies to issue secondary offerings that are even above market share price in the interest of protecting their current shareholders. A 2% or 3% discount is sometimes understandable, but by offering a huge discount through a massive secondary offering, executives reveal the belief that their shares are overvalued. In a pump and dump scheme, there is always a phase II. Note the urgency of many financial institutions to complete their secondary public offerings of stock and debt as soon as possible. This urgency is a classic sign of a pump and dump scheme as it signifies that the rapid rise in current bank share prices have been built on zero fundamentals and is thus unsustainable. Now that the pump scheme is largely in play already or in some instances, has even been completed, get ready for phase II - the dump. Question; “If there is a better example of an oxymoron, I don’t know one. So if these four financial institutions don’t need any more capital whatsoever, why do they need to execute significant secondary offerings that will inevitably massively dilute shareholder value. If they are so well capitalized as the stress test results indicated, why can’t they repay the TARP money from operational earnings?” Answer; “Banks that accepted TARP money are subject to government oversight and restrictions on compensation that that they say put them at a disadvantage to competitors. Banks that want to repay the funds must get approval from the government (((((and show they can sell debt in the public market without federal backing.)))))” Securitized debt was abused now banks have to play nice as they repackage debt revenue from idiots like us who love to overspend. The banking industry has two tools, inflate (low interest rates to stimulate false growth) and deflation (job loss to cool down commodity price). There is no ‘free market’.

Manipulation: How Markets Really Work by Stephen Lendman Friday, 29 May 2009

The government's visible hand and insiders control markets and manipulate them up or down for profit - all of them, including stocks, bonds, commodities and currencies. Wall Street's mantra is that markets move randomly and reflect the collective wisdom of investors. The truth is quite opposite. The government's visible hand and insiders control markets and manipulate them up or down for profit - all of them, including stocks, bonds, commodities and currencies.

It's financial fraud or what former high-level Wall Street insider and former Assistant HUD Secretary Catherine Austin Fitts calls "pump and dump," defined as "artificially inflating the price of a stock or other security through promotion, in order to sell at the inflated price," then profit more on the downside by short-selling. "This practice is illegal under securities law, yet it is particularly common," and in today's volatile markets likely ongoing daily. Why? Because the profits are enormous, in good and bad times, and when carried to extremes like now, Fitts calls it "pump(ing) and dump(ing) of the entire American economy," duping the public, fleecing trillions from them, and it's more than just "a process designed to wipe out the middle class. This is genocide (by other means) - a much more subtle and lethal version than ever before perpetrated by the scoundrels of our history texts." Fitts explains that much more than market manipulation goes on. She describes a "financial coup d'etat, including fraudulent housing (and other bubbles), pump and dump schemes, naked short selling, precious metals price suppression, and active intervention in the markets by the government and central bank" along with insiders. It's a government-business partnership for enormous profits through "legislation, contracts, regulation (or lack of it), financing, (and) subsidies." More still overall by rigging the game for the powerful, while at the same time harming the public so cleverly that few understand what's happening. Market Rigging Mechanisms - The Plunge Protection Team On March 18, 1989, Ronald Reagan's Executive Order 12631 created the Working Group on Financial Markets (WGFM) commonly known as the Plunge Protection Team (PPT). It consisted of the following officials or their designees: • • • • •

the President; the Treasury Secretary as chairman; the Fed chairman; the SEC chairman; and the Commodity Futures Trading Commission chairman.

Under Sec. 2, its "Purposes and Functions" were stated as follows: (2) "Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and maintaining investor confidence, the Working Group shall identify and consider: 1. the major issues raised by the numerous studies on the events (pertaining to the) October 19, 1987 (market crash and consider) recommendations that have the potential to achieve the goals noted above; and 2. ....governmental (and other) actions under existing laws and regulations....that are appropriate to carry out these recommendations." In August 2005, Canada-based Sprott Asset Management (SAM) principals John Embry and Andrew Hepburn headlined their report on the US government's

"surreptitious" market interventions: "Move Over, Adam Smith - The Visible Hand of Uncle Sam" to prevent "destabilizing stock market declines. Comprising key government agencies, stock exchanges and large Wall Street firms," this group "is significant because the government has never admitted to private-sector membership in the Working Group," nor is it hinting that manipulation works both ways - to stop or create panic. "Current mythology holds that (equity) prices rise and fall on the basis of market forces alone. Such sentiments appear to be seriously mistaken....And as official rhetoric continues to toe the free market line, manipulation has become increasingly apparent....with the active participation of selected investment banks and brokerage houses" - the Wall Street giants. In 2004, Texas Hedge Report principals Steven McIntyre and Todd Stein said "Almost every floor trader on the NYSE, NYMEX, CBOT and CME will admit to having seen the PPT in action in one form or another over the years" - violating the traditional notion that markets move randomly and reflect popular sentiment. Worse still, according to SAM principals Embry and Hepburn, "the government's unwillingness to disclose its activities has rendered it very difficult to have a debate on the merits of such a policy," if there are any. Further, "virtually no one ever mentions government intervention publicly....Our primary concern is that what apparently started as a stopgap measure may have morphed into a serious moral hazard situation." Worst of all, if government and Wall Street collude to pump and dump markets, individuals and small investment firms can get trampled, and that's exactly what happened in late 2008 and early 2009, with much more to come as the greatest economic crisis since the Great Depression plays out over many more months. That said, the PPT might more aptly be called the PPDT - The Plunge Protection/Destruction Team, depending on which way it moves markets at any time. Investors beware. Manipulating markets is commonplace and as old as investing. Only the tools are more sophisticated and amounts involved greater. In her book, "Morgan: American Financier," Jean Strouse explained his role in the Panic of 1907, the result of stock market and real estate speculation that caused a market crash, bank runs, and hysteria. To restore confidence, JP Morgan and the Treasury Secretary organized a group of financiers to transfer funds to troubled banks and buy stocks. At the time, rumors were rampant that they orchestrated the panic for speculative profits and their main goals: • •

the 1908 National Monetary Commission to stabilize financial markets as a precursor to the Federal Reserve; and the 1910 Jekyll Island meeting where powerful financial figures met in secret for nine days and created the private banking cartel Federal Reserve System, later congressionally established on December 23, 1913 and signed into law by Woodrow Wilson.

Morgan died early that year but profited hugely from the 1907 Panic. It let him expand his steel empire by buying the Tennessee Coal and Iron Company for about $45 million, an asset thought to be worth around $700 million. Today, similar schemes are more than ever common in the wake of the global economic crisis creating opportunities to buy assets cheap by bankers flush with bailout cash. Aided by PPT market rigging, it's simpler than ever. Wharton Professor Itay Goldstein and Said Business School and Lincoln College, Oxford University Professor Alexander Guembel discussed price manipulation in their paper titled "Manipulation and the Allocational Role of Prices." They showed how traders effect prices on the downside through "bear raids," and concluded: "We basically describe a theory of how bear raid manipulation works....What we show here is that by selling (a stock or more effectively short-selling it), you have a real effect on the firm. The connection with real value is the new thing....This is the crucial element," but they claim the process only works on the downside, not driving shares up. In fact, high-volume program trading, analyst recommendations, positive or negative media reports, and other devices do it both ways. Also key is that a company's stock price and true worth can be highly divergent. In other words, healthy or sick firms may be way-over or under-valued depending on market and economic conditions and how manipulative traders wish to price them, short or longer term. The idea that equity prices reflect true value or that markets move randomly (up or down) is rubbish. They never have and more than ever don't now. The Exchange Stabilization Fund (ESF) The 1934 Gold Reserve Act created the US Treasury's ESF. Section 7 of the 1944 Bretton Woods Agreements made its operations permanent. As originally established, the Treasury ran the Fund outside of congressional oversight "to keep sharp swings in the dollar's exchange rate from (disrupting) financial markets" through manipulation. Its operations now include stabilizing foreign currencies, extending credit lines to foreign governments, and last September to guaranteeing money market funds against losses for up to $50 billion. In 1995, the Clinton administration used the fund to provide Mexico a $20 billion credit line to stabilize the peso at a time of economic crisis, and earlier administrations extended loans or credit lines to China, Brazil, Ecuador, Iceland and Liberia. The Treasury's web site also states that: "By law, the Secretary has considerable discretion in the use of ESF resources. The legal basis of the ESF is the Gold Reserve Act of 1934. As amended in the late 1970s....the Secretary (per) approval of the President, may deal in gold, foreign exchange, and other instruments of credit and securities."

In other words, ESF is a slush fund for whatever purposes the Treasury wishes, including ones it may not wish to disclose, such as manipulating markets, directing funds to the IMF and providing them with strings to borrowers as the Treasury's site explains: "....Treasury has often linked the availability of ESF financing to a borrower's use of the credit facilities of the IMF, both to support the IMF's role and to strengthen assurances that there will be timely repayment of ESF financing." The Counterparty Risk Management Policy Group (CRMPG) Established in 1999 in the wake of the Long Term Capital Management (LTCM) crisis, it manipulates markets to benefit giant Wall Street firms and high-level insiders. According to one account, it was to curb future crises by: • • •

letting giant financial institutions collude through large-scale program trading to move markets up or down as they wish; bailing out its members in financial trouble; and manipulating markets short or longer-term with government approval at the expense of small investors none the wiser and often getting trampled.

In August 2008, CRMPG III issued a report titled "Containing Systemic Risk: The Road to Reform." It was deceptive on its face in stating that CRMPG "was designed to focus its primary attention on the steps that must be taken by the private sector to reduce the frequency and/or severity of future financial shocks while recognizing that such future shocks are inevitable, in part because it is literally impossible to anticipate the specific timing and triggers of such events." In fact, the "private sector" creates "financial shocks" to open markets, remove competition, and consolidate for greater power by buying damaged assets cheap. Financial history has numerous examples of preying on the weak, crushing competition, socializing risks, privatizing profits, redistributing wealth upward to a financial oligarchy, creating "tollbooth economies" in debt bondage according to Michael Hudson, and overall getting a "free lunch" at the public's expense. CRMPG explains financial excesses and crises this way: "At the end of the day, (their) root cause....on both the upside and the downside of the cycle is collective human behavior: unbridled optimism on the upside and fear on the downside, all in a setting in which it is literally impossible to anticipate when optimism gives rise to fear or fear gives rise to optimism...." "What is needed, therefore, is a form of private initiative that will complement official oversight in encouraging industry-wide practices that will help mitigate systemic risk. The recommendations of the Report have been framed with that objective in mind." In other words, let foxes guard the henhouse to keep inventing new ways to extract gains (a "free lunch") in increasingly larger amounts - "in the interest of helping to contain systemic risk factors and promote greater stability."

Or as Orwell might have said: instability is stability, creating systemic risk is containing it, sloping playing fields are level ones, extracting the greatest profit is sharing it, and what benefits the few helps everyone. Michel Chossudovsky explains that: "triggering market collapse(s) can be a very profitable undertaking. (Evidence suggests) that the Security and Exchange Commission (SEC) regulators have created an environment which supports speculative transactions (through) futures, options, index funds, derivative securities (and short-selling), etc. (that) make money when the stock market crumbles....foreknowledge and inside information (create golden profit opportunities for) powerful speculators" able to move markets up or down with the public none the wiser. As a result, concentrated wealth and "financial power resulting from market manipulation is unprecedented" with small investors' savings, IRAs, pensions, 401ks, and futures being decimated from it. Deconstructing So-Called "Green Shoots" Daily the corporate media trumpet them to lull the unwary into believing the global economic crisis is ebbing and recovery is on the way. Not according to longtime market analyst Bob Chapman who calls green shoots "Poison Ivy" and economist Nouriel Roubini saying they're "yellow weeds" at a time there's lots more pain ahead. For many months and in a recent commentary he refers to "the worst financial crisis, economic crisis and recession since the Great Depression....the consensus is now becoming optimistic again and says that we are going to go from minus 6 percent growth to positive growth in the second half of the year....my views are much more bearish....The problems of the financial system are severe. Many banks are still insolvent." We're "piling public debt on top of private debt to socialize the losses; and at some point the back of (the) government('s) balance sheet is going to break, and if that happens, it's going to be a disaster." Short of that, he, Chapman, and others see the risks going forward as daunting. As for the recent stock market rise, they both call it a "sucker's rally" that will reverse as the US economy keeps contracting and the financial system suffers unexpected or manipulated shocks. Highly respected market analyst Louise Yamada agrees. As Randall Forsyth reported in the May 25 issue of Barron's Up and Down Wall Street column: "It is almost uncanny the degree to which 2002-08 has tracked 1932-38, 'Yamada writes in her latest note to clients.' " Her "Alternate Hypothesis" compares this structural bear market to 1929-42: • •

"the dot-com collapse parallels the Great Crash and its aftermath," followed by the 2003-07 recovery, similar to 1933-37; then the late 2008 - early March 2009 collapse tracks a similar 1937-38 trajectory, after which a strong rally followed much like today;

•

•

then in November 1938, the market dropped 22% followed by a 26% rise and a series of further ups and downs - down 28%, up 23%, down 16%, up 13%, and a final 29% decline ending in 1942; from the 1938 high ("analogous to where we are now," she says), stock prices fell 41% to a final bottom.

Are we at one today as market touts claim? No according to Yamada - top-ranked among her peers in 2001, 2002, 2003 and 2004 when she worked at Citigroup's Smith Barney division. Since 2005, she's headed her own independent research company. She says structural bear markets typically last 13 - 16 years so this one has a long way to go before "complet(ing) the repair process." She calls the current rebound "a bungee jump," very typical of bear markets. Numerous ones occurred during the Great Depression, 8 alone from 1929 - 1932, some deceptively strong. Expect market manipulators today to produce similar price action going forward - to enrich themselves while trampling on the unwary, well-advised to protect their dollars from becoming quarters or dimes. -=-=-=-= Guys it is always about valuation the P and the E. The valuations are too extremely high. Current S&P operating earnings consensus forecasts are $43 Top Down, and Bottoms up $54. Based on average of the two forecasts- $48.5 - it is a PE of 20- way way too high. Much higher than all historical PE averages (as below). The reported earnings (the true/actual earnings) top down forecast for 2010 are only $35.6 – for a forward PE of – 26.5. All these are super bubble PEs. To get a perspective here are historical PEs (based on actual reported earnings, yearend): S&P PE average 1936-08 - 16 S&P PE average 1960-08 - 17.1 L10 PE average 1969-08 - 16 (L10 is avg. of last 10 PEs by Shiller) Bear Market PEs 1974-84 - Average: 9.47 (high 12.4, low 7.3) Bear Market PEs 1948-53 - Average: 8.4 (high 11.0, low 5.9) For a market and economy like this I will attribute a PE of at most 10- a typical bear market/recession average. If you are a perma bull you can have a PE of at best 12 – that would take you to 12x$48.5 – 582, so a potential of 38% fall from yesterday’s 945 close. Note: All data as compiled and published by Standards & Poor’s, May 29. Economy is not doing well (even as per the Fed) - so we should not be expecting any significant upward revisions in earnings. Actually earnings forecast have gone down over the last 3 months. (So much for the green shoots). Chasing technicals and trends always gets you in trouble, fundamentals always prevail. Meanwhile “the markets can stay irrational…”

-=-=--=

Why This Rally Is Unsustainable (May 1, 2009) http://seekingalpha.com/article/134482-why-this-rally-is-unsustainable The S&P 500 is now up 31.0% off of its March 6 lows around 666. Europe's Dow Jones Stoxx 600 Index has broken even YTD. But since the announcement of the Public-Private Investment Program (PPIP) on March 23, the equity market's rally has been defined by a rising channel on low volume. There have been no high-volume breakouts, the uptrend's channel's slope is very low, and the market has trended approximately sideways since April 9. Readers may notice I mentioned the possibility of a rally to Dow 9000 back around the PPIP announcement. I mentioned this because if the Fed and Treasury were intent on printing our way out of this starting as soon as possible, their combined priceinflating powers would be unstoppable. There is no check or balance to the Federal Reserve and there has never been an audit of its balance sheet. However, since the PPIP's announcement, the equity market has not shown traditional bullish technical movement. A slow ascending channel on low volume indicates a sloppy, bleeding market to the upside, nothing more than a setup for big downside action. Also, gold went down since the PPIP's announcement, which didn't add confluence to the price-inflating thesis behind the Dow 9000. This is why I turned bearish on the market, expecting a drastic sell-off, possibly to March lows and maybe below. With such low volume, how is this market continuing its slow, yet upward ascent? Quant fund deleveraging has become the reason of choice to which this market movement has been attributed. Quants tend to short stocks with weak fundamentals and relative weakness versus indices, and quant deleveraging should manifest in weak stocks seeing dramatic share surges as quants scramble to cover shorts to lessen market exposure. And that's exactly what's happened. Stocks like XL Capital (XL), American Capital (ACAS), Vornado Realty (VNO), and Liz Claiborne (LIZ) showed massive rallies since March lows, leading the market and far outpacing stronger, more fundamentally-strong stocks, even ones with high beta. Even Crocs (CROX) enjoyed a 50DMA breakout. This is highly indicative of a "short squeeze" bear bounce, rather than a sustainable bottoming rally, which is characterized by new market leaders and sectors showing relative strength against previous leaders and breaking out of tight bases formed over several months. Even if perennial short candidates are being squeezed, why? Why are quants deleveraging so quickly into this rally? It seems like the initial rally igniters caught quants (and reality in fact) surprised. I am of course talking about the Citigroup (C), Bank of America (BAC), and JPMorganChase (JPM) memos/releases announcing returns to profitability for the banks. Then came the earnings reports to back them. As many of you know by now, these announcements were all a load of hot air, as illegal AIG (AIG) wholesale portfolio unwinds financed the one-time "fixed-income trading" revenues that boosted all of the earnings and FASB accounting gimmickry allowed writedowns to take a minimal cut from positive surprises.

On top of that, however, ZeroHedge pointed out the significant role Goldman Sachs (GS)'s program trading arm is having during this rally. With 1 billion shares principal traded becoming a weekly regular for Goldman and its principal/customer facilitation+agency maintaining a ratio above 5x, Goldman has been massively increasing its participation (in its principal trading, at that) while other quants and program trading arms are quickly deleveraging. The conspiracy theorist in me wants to say the Fed/PPT is throwing kool-aid capital at the market through administration girlfriend Goldman Sachs to drive up the market and force short covering. Of course, this is timed perfectly, as banks offer BS earnings reports financed by illegal AIG transactions aided and abetted by the Fed and Treasury. But of course, only the conspiracy theorist in me would ever dare make such an assertion. So how does this all come together? The rally starts primarily with the AIG unwinds. AIG was bailed out by the Federal Reserve in September 2008 as bankruptcy was deemed a systemic risk because of AIG's massive counterparty obligations in the CDS arena. The liquidity extended by the Fed to AIG was meant to allow CDS settlements to counterparties at significant haircuts, but with enough payment to prevent a systemic crisis. But were haircuts taken or were these trades settled at 100% face value with massive profits to counterparty banks? Former New York Attorney General Elliot Spitzer clearly seems to think not, as he wrote in his terrific article The Real AIG Scandal. All of the hooplah has led TARP's inspector general Neil Barofsky to launch an investigation into the extent of contract settlement repayments. Bank of New York Mellon (BK) missed earnings estimates by $0.10 in the middle of amazing Q1 numbers from the other big banks. Such is the result when you aren't eligible for AIG counterparty money. Especially interesting is Goldman Sachs's counterparty relationship to AIG (from which it received $12.9B), an issue delved into as early as last September itself in the NY Times. But I digress. The AIG CDS unwind trades were allowed by new trade protocols given by the ISDA, the only regulator of the OTC CDS market. In turn, these massive unwinds (financed by the taxpayer, who paid for the initial AIG bailout and all credit lines extended since) yielded huge one-time profits for banks, who flaunted them like no tomorrow. After releasing "leaked" memos (the first of which was from Citi on March 10, the rally's first day) asserting first-quarter profitability, banks saw huge rallies in their stocks. At this point off of the lows, the rally was merely an oversold bounce and its sustainability was very much in question. And in fact, looking back now, any sideline capital that was infused into financials on the news of these memos was misallocated, as the memos presented one-time illegal gains as indicators of sustainable turnarounds in bank earnings. The market rallied on the news and started selling off around S&P 800, at January cycle lows and index 50DMAs. This is where I expected the rally to end, as previous support (January lows) tends to offer resistance once broken and important moving averages like the 50DMA offer important buy/sell points, depending on the market. Then came news of the PPIP and the market once again soared. Since then, the market has rallied just over 6% on very low volume. This is where the quant dislocation comes into play. Quants, who make market-neutral high-frequency scalp trades on leverage to produce returns, were caught short in a strong rally. Again, the rally itself was initially catalyzed by bank announcements that attempted to present

unsustainable profits as sustainable, so the rally in effect of the news would also be just that-- unsustainable. But the quants were forced to deleverage into the rally as their models were getting whipsawed by the unusual market activity. As they deleveraged and covered short positions in weak stocks and were forced to hedge their delta by taking bullish positions, this added fuel to the rally, which caused more deleveraging, and so on. This is evidenced by Renaissance's recent underperformance against the S&P by 17%, as well as a possible reason for the possible unwinding of Morgan Stanley (MS)'s PDT arm. A recent WSJ article even claims quants are "brewing trouble" over at Morgan Stanley. So where is the breaking point? A look into the why instead of how of this rally can offer some insight. This whole rally is essentially a scam to pass off asset depreciation in struggling financials to the taxpayer. The AIG counterparty profits were all taxpayer-financed. The PPIP's leverage is taxpayer-financed. But the real issue is the equity raises in this rally. Goldman announced an equity sale with its earnings a day after pre-announcing earnings. This is $5 billion of Goldman equity being traded for $5 billion of the public's cash on misconceived presuppositions of sustainable profitability. On top of that, Goldman sold $2 billion in bonds on April 29, just days ahead of stress test results. Though the stress test results, made public on May 4 but pre-released to the banks April 24th, are most likely going to be passes for all 19 banks, the details of the results as well as government-suggested capital raises will be the real issue looking forward. REITs have been offering shares all over the place, and conspiracies of their own have developed between the connection of JPMorganChase and Merrill Lynch/Bank of American analysts and the REIT secondaries these banks have been underwriting. Also, the recent surge in Goldman principal program trading starts to take some context here. If Goldman's program trading arm has been feeding into the rally and forcing quant deleveraging, then this explains why-- so it can raise cash by selling stock. Which I predicted and which indeed occurred. It'd be interesting to know how much of Goldman's $5B has been raised at these scam-inflated prices ($123/share I believe was the going price for the secondary). As soon as it's "finished," I fully expect GS's 5x principal/customer facilitation+agency ratio to fall off a cliff. In a terrific article entitled Goldman's Offering and Recent Rally: Coincidence?, Ben ElBaz states "although there is no hard evidence that Goldman intentionally hyped up the market rally and the financial sector to get a better price on its offering, it would be very naïve to assume that they passively let the market determine the price of this massive dilution." This principal trading participation is the circumstantial evidence I'm sure he would love to see to back up his thesis. Technically, the rally should end when quant deleveraging catches up with the rest of the market. That is, when the slow-money directional trend-setters deleverage their long buy-and-hold positions into the rally at a higher pace than the fast-money liquidity-providing quants do. This should occur at important inflection points where lots of supply is offered, otherwise known as resistance levels. I have been pointing out S&P 875 as a significant resistance level that might mark the rally's top and so far it hasn't been able to breach that level past a few points on no volume. The selling/deleveraging into the rally has already started and should start picking up on volume soon. According to Washington Service, NYSE listed company insiders

have been selling into this rally at the fastest rate since October 2007. Insiders sold over $8 for each dollar they purchased of stock in the first three weeks of April. To give that some context, the S&P topped out on October 11, 2007 and declined 57% before hitting March 2009 lows. If everything is so peachy-keen in the market and economy, why aren't insiders buying or at least holding stakes in their own companies? Possibly because they recognize that the "green shoots" are just weeds. When it does end slower money participants will be selling into a highly illiquid market, due to the deleveraging quants (liquidity providers) have had to face in the last several weeks. This will cause a spike in volatility and failed trade executions and whipsaws galore. Reality will quickly return to the market and the AIG CDS unwind story may gain more exposure, especially through the work of Barofsky and Spitzer. This would damage the investment thesis of all those who bought banks on their memos or earnings announcements, which would erase a big part of their recent huge gains. So who loses in this rally? The taxpayer of course. As bank equity is sold to the public into a rally financed by illegal and unethical uses of taxpayer funding. This is clearly all done with the full aiding and abetting of the Treasury and Federal Reserve, which has come under recent attack because of its alleged involvement in forcing BofA CEO Ken Lewis to buy Merrill Lynch and hide the distressed bank's true dismal state of affairs from BAC shareholders. If Goldman's principal trading increase is indicative of PPT activity, that also is taxpayer money being funnelled into an unsustainable rally, this time through the intermediary of Goldman's program trading arm. The memos, the earnings, the statements all say the same thing-- banks made money Q1 2009. They don't mention why-- because of AIG portfolio unwinds and accounting gimmicks. Clearly causing an unsustainable hype in the soundness of American banks will lead to an unsustainable rally in equities. And that's what is happening. The United States GDP contracted over 6% in Q1 2009, well worse than estimates. A flu outbreak characterized as an imminent pandemic by the WHO is spreading across the world, with early targets at worst case scenario losses estimated around $3 trillion. General Motors (GM) announced its debt restructuring plan this week, met with sharp criticism and a drastically different counteroffer from bondholders, suggesting Chapter 11 is in order for the struggling automaker. Chrysler is expected to announce its own bankruptcy any day. Even government stress tests, whose worst-case scenarios are tangentially worse than current economic conditions, suggest at least six of the 19 banks tested need to raise more capital. The selling catalysts are all over the place, while the buying catalysts were one-time unsustainable profits. After announcing $1.2 trillion of arranged agency and Treasury purchases in mid March, the Federal Reserve didn't announce anymore quantitative easing today, while keeping rates at all-time lows. Once markets sell-off and liquidity once again contracts, the Fed will have much more political capital left to be able to monetize much more of this ludicrous spending. Expect rates to rise from here (TBT is a good play for that) until the next wave of deflationary deleveraging and equity selling allows the Fed justification for another big round of QE, again capping rates and inflating the Treasury bubble. Mortgage rates are at Greenspan levels. Clearly the powers that be are reflating a reflated bubble. From dot-coms to houses and now to

Treasuries. What is all of this? Passing off asset depreciation to the taxpayer in the form of currency depreciation. Wait for the black swan in Treasuries to implode the bubble (which is currently inflating), rates to rise, and rampant inflation. But I yet again digress. Looking at the market right now, it is approaching the apex between important resistance at S&P 875 and the support trendline of its ascending channel. After breaking its shorter term rising wedge, it has formed a bear flag, and is approaching a break of its channel trendline, which should send the market falling. Other indices show similar bearish patterns, with the Nasdaq approaching massive supply at its 200DMA. Several oscillators have indicated divergences lately, suggesting the market is ready for its next wave down. A breakout of 875 on big volume would change things, possibly indicating the BS rally found a way to incite slow money to buy into the rally, perhaps bringing enough buying power in to confirm a sustained bull trend (assuming the Treasury continues to spend and the Fed continues to print to stave off the real losses that will occur once loans reset and we witness widespread defaults). Irrational exuberance has been evident in the markets before but the deciding factor that allows it to drive sustainable (at least for the 1-2 year time horizon) bull markets is the inclusion of slow-liquidity sidelined institutional directional trend-setting capital in the rally. Bull markets have volume to direct the equity prices' ascent. That simply doesn't exist right now and premarket gaps up are responsible for a big part of the rally. For the rally to continue, even in the face of complete irrationality, it needs sidelined cash to come pummeling into equities. It needs large volume accumulation to drive directional trends. A low volume rally floating higher is not indicative of any of that. Especially if this rally gets parabolic soon, which would lead to disastrous liquidity issues. I want to say here that I understand there is no arguing with the market. It is never "wrong" as only price pays. I share the opinion that the only "fair" price of a stock (or anything in the world) is its current price in the open market-- the intersection of supply and demand. However, that does not mean price trends that appear sustainable are sustainable. That does not mean market participants are always right in their trades or that their investment theses are "right." My point is that this current rally is unsustainable and the higher we go, the harder and more volatile the fall will be. The catalysts behind the rally were all BS and there is clear government-bank collusion to pass off losses to the taxpayer. -=-=-=

Generational Bottom? Saturday, April 18, 2009 – 6:04 am Doug Kass was on Kudlow and again mentioned a generational bottom. He seemed to be neutral if not subdued about the next five years essentially subscribing to John Mauldin’s “muddle through theory.” If that is the case then there can be no generational bottom. In my recent podcast, I talked about the two components to bear markets and corrections- time and price. The bottom in terms of price can occur well ahead of the bottom in terms of time. The Great Depression bear bottomed in terms of price in 1932, though the market didn’t

begin a new bull until 1942. The price bottom during the 1966-1982 bear occurred in 1974 but the next bull market didn’t begin until 1982. You get the point. The bear market doesn’t end until the next bull begins. If a market is in a trading range, it is still in a bear market. 1942 and 1982 were generational bottoms- not 1932 and 1974. Could the S&P mark at 666 be the “price” bottom? Very likely not. Major bottoms occur when the market trades at eight times earnings. S&P earnings in 2009 are going to be closer to $40 than $50, which means the market would need to go below 400. Perhaps David Tice’s call of 320, is derived from $40 in EPS with a PE of eight? In any event, expect the recent bottom to be retested, though probably not until 2010. And if you are calling for a generational bottom, then you should be expecting a bull market to begin immediately thereafter.