Editor’s Note: In this series of articles, we include important or interesting videoclips with our comments. This is an article that expresses our personal opinions about comments made on Television and in Print. It is NOT intended to provide any investment advice of any type whatsoever. No one should base any investing decisions or conclusions based on anything written in or inferred from this article. Investing is a serious matter and all investment decisions should only be taken after a detailed discussion with your investment advisor and should be subject to your objectives, suitability requirements and risk tolerances.
1. A Crazy Week
This was the craziest week in recent memory. Every single day featured a dramatic scene or an event.
About 15 minutes to the close on Monday afternoon, Reuters “broke” the story that Lloyd Blankfein had retained attorney Reid Weingarten, the man famous for defending people like Bernard Ebbers of Worldcom. The stock of Goldman dropped 6 points in a free fall. It closed the week near its pre-news level.
Tuesday first featured the dramatic scene of Dominique Strauss-Kahn being freed after the Manhattan DA dropped the charges. Then, on Tuesday afternoon, the earth literally moved in New York City due to the earthquake in remote Virginia. The stock market didn’t care and the Dow closed up 322 points.
On Wednesday, after another up day, Steve Jobs dropped a bombshell by resigning as the Apple CEO due to health reasons. The stocks dropped 20 points in the aftermarket. But the next day, AAPL closed down a miniscule 66bps despite the NDX being down 1.7%.
On Thursday morning came the stunning announcement of the Buffet deal with Bank of America. Now that is what they officially call a sweetheart deal. Many smart analysts called this a surrender by Brian Moynihan, CEO of Bank of America. But the market clearly disagrees, at least so far. The euphoria of this deal rallied the financials vertically only to have the rally fade. But since that deal, BAC has traded with the market and other financials in contrast to being a leader on the downside until then.
If early morning in the B&B world was not enough, the German Stock market suffered its own version of the “flash crash” on Thursday morning. All the rumors swirling around the DAX were refuted later that morning, but the damage was done. The DAX never recovered and the Dow went down 170 points on Friday, perhaps due to fears of the Bernanke speech on Friday morning.
On Friday, the speech by Chairman Bernanke proved to be a dud. He essentially tossed the ball to the Congress and the President as he should have done. The markets however traded wildly after the speech. The Gold ETF, GLD, fell sharply to about 172 and then slowly rallied the rest of the day. The rally gathered steam in the last hour and GLD closed at its high at $177.5, up 3%.
The stock market went down hard like Gold and then began recovering. The Dow closed up 135 points and VIX closed down 10% after a 400 point swing in the Dow following the Bernanke speech. The 30-Year Treasury Bond also closed up almost 1%. Who says you can’t make everyone happy? Bernanke did on Friday.
What did the VIX, the Volatility Index, do in such a crazy week? It fell 17% from 43 to 35.5. That may be the strangest story of the week. The Readers of this Blog were, of course, prepared for this drop.
2. The Stock Market Rally
Treasuries and Gold fell during last week. Only Stocks rallied and what a rally it was? The Dow & S&P were up 4% and the NDX was up 6%. The VIX fell 17% from 43 to 35.5. That may the main story of the week.
Readers of this Blog should not be surprised. Last week, our featured clip predicted the stock rally of this week. Jon Najarian of tradeMonster said on Thursday, August 18, “I would not be surprised at all to see a 500 point move in the other direction very soon.” Then he jumped on the Fast Money Half Time show on Friday, August 19, to urge viewers to stay long for the next week. Those who did should be happy. The Dow ran up 467 points this week, not quite 500 but we will take it.
Dr. Najarian called this rally because of the capitulation he saw in the VIX on Thursday, August 18. We urge readers to look up his detailed comments in Clip 1 of our last week’s article Interesting Videoclips of August 15 – August 21 .
If you look at a chart of the S&P, you will notice that this week’s low stayed above the lower Bollinger Band. This meets the condition described by John Bollinger on Thursday, August 18, a condition that according to Mr. Bollinger has “good forecasting potential for higher prices.” It did so this week. For a detailed discussion of Mr. Bollinger’s comments, see Clip 2 of our last week’s article Interesting Videoclips of August 15 – August 21 .
Marc Faber, the Editor of the Gloom, Boom & Doom Report, called for a rally up to about 1250 in his interview with Bloomberg’s Carol Massar & Matt Miller on Tuesday, August 23. He said:
- “market formed a double low & we have some technical indicators that are going to turn positive and we could rally to around 1250”.
Maria Bartiromo tends to invite Walter Zimmerman, a technician, near the end of a decline in the stock market. So soon after a Bartiromo-Zimmerman interview, the stock market mounts a rally. True to form, Ms. Bartiromo interviewed Mr. Zimmerman on Thursday, August 18. The stock market dutifully rallied by 4% last week, the week following the interview.
In our simple way, we believe that the market moves have more to do with positioning of the big players than the actual news. It appears that big macro players as well as long-short hedge funds were mostly short the stock market as the week began. If the short positions are as large as some statistics suggest, then this week’s stock rally might have farther to go.
The record of August also suggests so. The stock market tends to close strong in the last week of August, especially when the first half of August has been weak, according to the historical commentaries.
3. Goldman & Cisco
This Monday’s vertical drop in Goldman stock reminded us of that afternoon in 1994 when Cisco stock was pushed off a cliff. The reason for that drop in Cisco was a “breaking” story about Newbridge Networks winning a contract from Walmart, a dedicated Cisco customer. The damage was instantaneous and steep. This was not a new, breaking story. The actual contract story was at least 3-4 months old. But it crossed the tape on the day of the stock drop as if it were a new story.
That is the similarity we see in this week’s Goldman story. According to a release by Goldman Sachs, Mr. Blankfein retained Mr. Weingarten at the “very outset” or months ago. But the story was “broken” by Reuters as if it were a new story. And the stock fell off the proverbial cliff.
The drop in Cisco on the Walmart contract news proved to be the bottom in CSCO stock in 1994. The drop in GS on the attorney news was the low for this week. It will be interesting to see if this low holds or how long this low holds.
4. Gold – Is It Broken?
Last week, our Clip 3 featured comments about Gold by Mihir Dange, a trader at Arbitrage LLC. Mr. Dange essentially said that he would need to see a high in Gold followed by a steep drop the same day with Gold closing down on that day. This is exactly what happened on Tuesday, August 23.
Dennis Gartman called the day a “significant reversal” on Wednesday, August 24. He said,
- “I pay great attention to something technicians call an outside reversal – that is, the market made an all-time new high – closed on the lows of the day – then closed below the previous day’s lows. If you don’t pay attention to that and don’t liquidate, you’re going to find yourself in a lot of trouble.”
Is the Gold rally broken? It felt so until the hard rally on Friday, August 25, after the initial drop after the Bernanke speech.
Despite the stock rally, long maturity Treasuries behaved well this week. The 30-year Treasury yield rose by just about 16 basis this week. All the three Treasury Auctions went well. We wonder whether the Treasury market is sending us a message.
David Rosenberg thinks so. CNBC Squawk Box interviewed him this week, on Tuesday, August 23, to be exact. Read the message he discerns and look at his target for the 10-Year Treasury yield:
- …the ten-year note yield is giving you an important signal. When you have the five-year note below 1%, the treasury market is giving you a recessionary signal…..you consider that the historical spread between the overnight funds rate and the ten-year note is around 125 basis points, then you could easily come to the conclusion that by the time we get to the other side of the mountain on everything the ten-year note could easily be 1.25 to 1.5% at the lows
- you know what the chart of gold looks like. it looks like a dot com stock right now. I think it’s due for a correction. Gold is something I would buy the dip....I would argue Treasuries are overbought at current levels and being tactical and would wait for better opportunity to scale in?
6. The U.S. Economy
We have featured comments from Lakshman Achuthan, David Rosenberg & John Taylor about the possibility of a recession in 2012 or 2013. David Rosenberg has argued that balance-sheet recessions occur every 2-3 years.
This week, Peter Fisher, BlackRock’s Global Head of Fixed Income & prior Under Secretary at the Treasury, added his perspectives to that theme:
- I think we’re in for shorter cycles because we’re not going to create as much credit. In the great moderation of the late ’80s and ’90s and the early years of the last decade, the cycle (was) seven, eight, nine years between the recessions. That’s because we’re comfortable taking out more credit….. Where we are now is more like the ’50s and ’60s where we had recession every two or three years…. a shorter cycle without the capacity to create credit is something we have to get used to- more volatile growth path.
- The Chinese economy is eventually going to run out of room to keep investment growing at the pace they have had. Investment is now almost half of their total economy, about 45%.. It is really hard to keep investing, building roads, bridges, schools, year after year more than you did the year before and then at some point you are going to be flat year over year…. When that happens, the growth rate is cut in half. I think in China the optimists think they have got another 3-4 years to run for investments and the pessimists think it might be in the next year or two they going to run out of room for all that investment.
7. Greece – Does Any One Care? The Slow Slide in Europe
This week, the two-year Greek note yield went past 46% and the 10-year Greek note yield went past 18%. It looks as if the markets are calmly pricing in the demise of the second European bailout of Greece.
What is going on in Europe or with European leaders? No one seems to know. Trichet of the ECB speaks on this Saturday, August 27 at the Jackson Hole confab. We hope he suggests an easing of interest rates in the near future. But we are not hopeful. We know that the ECB is different than the Fed. But despite the differences, we share Cramer’s opinion that Trichet is a moron. His rate increases earlier in 2011 alone qualify him for that adjective.
8. Second War for Independence in India
This is just a addendum to what we discussed last week. This week, it became clear that the battle being waged in India is a battle between Indian people and Indian ElectoCracy. This is our term for the Indian political machine that “governs” India in the name of democracy.
The entire election mechanism runs on money and on vote banks which need massive monies to maintain. When a politician spends so much money to get elected, his or her appetite for a large return on investment becomes massive. Then the politician has to keep the machine going for the politician’s son or daughter to take over. Massive corruption has become the means and the end for this ElectoCracy.
It worked for long because the Middle Class was not big enough or financially secure enough to care. Now they are. The campaign being waged in India is by the Indian people against the Indian Parliament, the seat of Indian democracy.
On one hand, you have all the political parties coming together with their captive intellectual pandits and community vote bank leaders to attack the Anna Hazare led movement as “undemocratic“.
Against them, are the Indian people in a spontaneous, nonviolent protest against the ElectoCracy, against 600 odd electocrats in the Parliament. Their key demand is an independent mechanism to check and monitor the corruption in and of the Parliamentary electocrats. Their main argument is that elections are a tool of democracy and not the objective of democracy. The true objective of a democracy is a government that rules for the people.
This is not a battle that can be resolved easily.
(crowd of “undemocratic” Indian people walking in protest – src BBC.com)
The Tea Party could win in a year or so in America because the elections here are still truly democratic. In India, the fight is against the electoral system itself. This is going to be a long and arduous battle of attrition. But it will have an enormous impact on India and much of emerging Asia and Middle East.
Frankly, the only videoclip worth watching would be the one of Hurricane Irene passing by the East Coast without doing any damage. The second might be a videoclip of the full fury of this giant hurricane, a storm that is larger than “main” Europe according to Chad Myers of CNN.
But as we finish this article, these videoclips are in our immediate future. Stay safe, everybody.
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