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09212009 May 25, 2010

Posted by easterntiger in Uncategorized.
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Weather Report 09212009

Current Positions  (No Changes)

I(Intl) – exit; S(Small Cap) – exit; C(S&P) – exit ; F(bonds) exit;  G(money market) – remainder

Weekly Momentum Indicator (WMI***) – last 4 weeks. +11.39, +7.18, +15.91. +18.3 thru 9/21

My suspicions of the current rally have been confirmed by two major revelations, in terms of abnormality.  One was noted by several sources, the other which I personally observed, and both in the past two weeks.  I have attached an article from one source which goes into detail on the first.  http://www.dshort.com/articles/2009/gaming-the-market-with-five-financial-stocks.html

On the first revelation, in summary, of the tens of thousands of stocks available in the U. S. markets, just FIVE stocks, yes,  5 – AIG, Citigroup, Fannie Mae, Freddie Mac and CIT, have comprised as much as 30% of the total volume traded of that which is traded in the New York Stock Exchange, or, the Big Board, as it’s called.

What is so strange about that?  Only that these same five stocks , having the value of about ½ of 1% of the S&P500, simply do not justify 60 times their weight in trading volume under any circumstances. Since large companies make the S&P 500, and the NYSE contains both large and small companies, the volume (NYSE)/value (S&P500) comparison is valid.  Further, on the second revelation, I personally witnessed a 5-day period in late August and early September where the holding company for the bankrupt  Lehman Brothers, a $0.20 stock, traded in volume equivalent to 30 to 50 times that of legitimate companies, such as  IBM, Apple, Ford and Cisco.

These are clear indications of ‘churning’, or, buying and selling the same stocks over and over again, in order to provide transaction fees, commissions, short-term gains, etc., which allow the broker/dealers to later claim that this is evidence of their good health, as they point to profits.  There are also other possible transactions, using derivatives, which require purchases of the stocks, in order to receive repeated, short term income on the sale of the derivatives contract.  Neither transaction provides any basis for moving the stocks based upon any actual, ongoing value of the company involved.

Just last week, I noticed about 8 Dow stocks, IBM, GE, Coke, Alcoa, Caterpillar, DuPont, Proctor & Gamble & Home Depot, which for no significant reasons based upon performance, advanced between 4 & 15% in just a few days.  What does this accomplish?  Moving a few stocks in the Dow Industrials effectively moves the index itself up by dozens of points a day, further influencing the appearance of healthy conditions.  (Typical next day, confidence inducing headline – Stocks continue their win streak as Fed Chief Bernanke announces end of the recession).

I last mentioned the S&P500 being at 118% of its’ 200 day moving average, the first time in over 10 years.   To further demonstrate the overextension of the market, the S&P500 closed on Wednesday at 120% above its’ 200-day moving average, the first time this has happened since 1982.  Even though the markets aren’t correcting back to their normal levels, they are being held/levitated much higher and for much longer than they would or should under normal circumstances.

What is the source of this appearance of ‘buying power’?  Within the past year, the top 5 central banks have provided over $4.2 trillion in liquidity (loans), some created essentially out of thin air, some supported by their sale of bonds and currency transactions between other banks.  These banks are the primary sources of post-crisis, equity market funding, and the rise in stock values in the past months.

It’s rather unusual to find that stock prices rise, while at the same time,  prices for oil, gold and other commodities are also rising, unless bond prices are falling/interest rates are rising, mirroring strengthening conditions.   Thus, the normal condition is currently not the case, and, is not sustainable.  The current rise in prices of stocks, gold, etc. is tied directly to the fueling of cash from the central banks to large banks (who should be lending the money, but aren’t),  and also to broker/dealers who are using their loans to drive trading and purchases of stocks, etc.  With these rising prices, other participants, especially hedge funds, are doing momentum trades to capture short term gains.  So, without the fundamental improvement in the actual health of the broader economy, through improved revenues and earning s that are not associated with cost cutting, layoffs, etc., in essence, what we’ve witnessed in the past 6 months is nothing more than a reflationary, mini-bubble in reaction to the near collapse of 2008.

As I have said before, prices might continue their slow rise until (1) the money provided by central banks retracts, or (2) when the effects of money received from bond sales takes hold – Federal Reserve buying of our own bonds has increased significantly to make up for the 40% drop in sales of bond debt to foreign purchases!!!    Even if condition (2) does not take place fairly soon, there are indications that condition (1) will take place within the next six weeks.   Stock price rises should be in their final phases, without a continuation of the previous trends of both of these conditions, in combination.

More to our point, with equities flattening, bonds prices do not yet reflect a rise to benefit our F fund, with no clear transfer of assets in a ‘flight to quality’.  We’ll have to wait on this to occur first.

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