Monday, June 22, 2009

Monday Night and Who Will Stop the Rain?

It has been raining or misting for 5 days now. Enough is enough! No Sun until Thursday. Still waiting for the summer.

I left a comment on the computer post from last night. As of now the wireless is behaving ok, but I would still like to get some kind of upgrade. I will put it off until this weekend, or longer as I am lazy! A little short on time this evening, so a shorter post.

Insider Selling
To me insider selling of company stock can mean many things, but it most often means the people most in the know are abandoning ship. Other reasons like diversification, tax reasons, or many others can be very true at times. When looking at insider selling you want to see some real spikes up (or down) to make an inference for the market direction.

Tim Iacono over at The Mess That Greenspan Made has a write up and a great graph:
What to Make of the Insider Selling?
Bloomberg files this report on the recent rise of insider selling, company executives dumping the most shares since mid-2007, shortly before the broad stock market's peak.
Surely this can't be a good development for retail investors , many of whom have just recently convinced themselves that it's OK to put some money back into stocks again.
Perhaps a visual aid might help...(click for larger view)

Tim notes that the last insider selling top nicely coincided with the top in the market in 2007.

I have been wondering just who in the world has been snapping up all the bank secondary offerings as of late? I mean who would want to step in front of that train wreck? Deep down I have a bad feeling that big investment houses used things like pension money to purchase the shares. I also think the FED/Treasury has provided some kind of downside protection here.

Massive Treasury Auctions Hurting the Stock Market?
The Treasury is on tap to sell $165 Billion in bonds this week. That kind of debt issuance may be sucking up available funds from things like the orchestrated SPY futures gunners near the market close which have suddenly fallen silent.

Of course a nice stock market route is just what the government needs to spread some fear so investors will run for the solid "safety" of US Treasuries. This line of thought will one day be the butt of pointed financial jokes like "Remember when we all ran to US bonds when things got rough?" "Yeah, well we should have kept on running!" HAHAHA.

Anyways, Market Ticker has the goods on what this may mean:
Liquidity Disappearing
I hope you folks who got all giddy about the SPX in the 900s and the DOW up around 8,800 took the opportunity to either sell or hedge.
While there is no guarantee that this pattern will continue the fact remains that liquidity matters and there is little point in trying to argue that the primary fuel for the rally off the March lows has been unprecedented system liquidity provided by Sir Feds-a-lot.

The problem is that Treasury has been and continues to suck all the oxygen out of the room with their unprecedented issuance of debt to fund Obama's silliness in the form of his budget "priorities" and the raw handouts to banking interests, much of which is apparently going to show up in Goldman Sachs bonuses.
Again, to put this in perspective this 7-day window has $165 billion in issuance. The entire S&P 500 - all 500 stocks - has been trading in the $2-2.5 billion a day range for the last month or so. That's the capital flow that is represented by all trades in all 500 stocks.
There are of course lots of other stocks, but in aggregate the S&P 500 posts the largest dollar volume on a typical day by a significant margin.
You simply cannot issue $165 billion in Treasury Debt and expect it not to have a major impact on system liquidity. It is not possible. That which is spent on one thing (in this case Treasury bonds) cannot be spent on another (in this case stocks.)
The Fed cannot "monetize" this debt without creating an instant dislocation in the Treasury market - their games thus far have produced a SMALL rumbling of trouble there, but nothing like an outright monetization campaign would produce.
Bernanke and Obama are backed into a corner, exactly as I predicted would happen. In order to continue to issue like this in the Treasury market while not driving Treasury rates to the moon money will have to be "scared" into bonds - which means blowing up the stock market.
Sorry folks, but those "green shoots" are in fact marijuana plants and our President along with his economic advisers have been smoking 'em.

So either the early part of the week will be rough for the markets to get the needed bond buyers active, or this could be the signal for a lot more weakness going forward. I have argued that the government can either goose the stock market or have a stronger dollar, but they cannot have both. I will be looking forward to seeing how they balance this high wire act.
Disclosure: I had taken a small position in SPY a while back to show my "Split the Distance Bull Market" call. It never got there, and I was stopped out today for a loss. I always said never do what I do!

When Great Minds Think Un-Alike
I was pulled in two directions today after reading two outstanding posts regarding the inflation/deflation debate. Truly this debate is great economic thought exercises, and today I had a full work out!

First up, Mish with his deflation manifesto. I will not excerpt as the entire post must be read.

After reading Mish's article, I certainly appreciated his fine arguments. As I have said, there can be no debate about deflation is on right now. It is the longer term I think it cannot win out. Still, I will admit I was flip flopping after the great read.

Later in the day Jesse's Cafe entered into the fray with a very complete essay on why inflation is going to happen. Again, no excerpts as the article is well worth your time.

I wish I had written that piece. I think Jesse captures exactly what I have been feebly trying to say about how dollar devaluation will have to be the endgame, if not then I am all in the deflation camp.

Use the comments section to discuss the Mish and Jesse's takes. Both high level analysis, both perfectly credible. The articles as a pair really capture the heart of the debate.

Sorry for the short post, but the rain is making traffic terrible! Who'll Stop the Rain?

Have a good night.

1 comment:

GawainsGhost said...

Well, I like Mish and Jesse both. Each makes a good argument. But the simple fact is that two contradictory positions cannot both be true at the same time.

I think we are clearly in a deflationary period at this time. I also think it will be followed by an inflationary period, perhaps very soon. Here is another good article on the debate by Gary North.

North argues that the Fed can force banks to lend at any time, simply by raising the interest on reserves. Then mass inflation will occur. It's an interesting point.

But, you know, regardless of what happens, I'm going to keep doing what I do, maximizing savings and minimizing expenses. And I'm going to prove the soundness of my theory of money by buying a new Mazda RX-8 here in a few weeks, and maybe a new tailored suit to go along with it.

Anyway, there is a fascinating review of a new book, The Future Arrived Yesterday, by Michael S. Malone, in the latest issue of BusinessWeek. It's about the rise of what Malone calls "the protean corporation," which "will behave like perpetual entrepreneurial startups, continuously changing their form, direction, even their identity. They will be true corporate shape-shifters."

Ah, complex systems dynamics at work. This is the way of the world, where the only constant is change, creative destruction followed by self-organization and emergence into a new integrated whole. The only companies that can survive are those that can adapt.

The same is true for countries. Obviously, countries that are largely dependent on exports, like Germany and China, are going to face systemic stress during a time of global trade contraction. And countries that are largely dependent on imports, like the US, are going to face systemic stress when the credit used to fuel consumption dries up. This is where we are now.

It's going to be an interesting next few years. The dinosaurs are dying, the old complicated structures are failing, and long established theories and models are going the way of all things. But a new, more complex system will emerge. The only question is, who will survive. Answer: the most spontaneous and adaptable.