Monday, July 20, 2009

Talking Economic Trash

Long weekend of yard work. At least the weather was outstanding. No post tomorrow night as I have a dinner engagement.

Dollar Weakness - More Bang for the Intervention Buck
As the stock market indices have been on a tear for a week now, a peak at the dollar index chart gives us an idea where the impetus is coming from (dollar index 1 Month):

While this chart looks dramatic, keep in mind this is only a drop of about 3 on the index. Still, the clear breakdown tells the tale.

Dollar weakness is bullish for stocks for reasons I can never really figure out. While the FED/Treasury has been largely ineffective in helping the real economy, I think they may have begun to notice that constant headlines of "STOCKS RISE" are worth more in the psychology column than headlines like "TALF Lends Money".

Of course we all should have known the dollar was going lower when the Treasury secretary made a trip to Saudi Arabia to assure them their dollar holdings were "on solid footing". These trips almost always coincide with significant dollar weakness, a sort of heads up to our debt buyers as a courtesy.

The Axis Powers of finance (FED and Treasury) may be tempted here to let the dollar slide without any help in order to have a higher stock market. The value in terms of headlines due to a rising market are too alluring I think. How low can the buck go? I would say all the way down to 74-72 on the index should be worth another 15% or so of upside for the indices. What could go wrong? A few items come to mind:
-China has had 3 failed bond auctions and this may require them to be sellers of dollars to buy yuan. This would be downward pressure in a downward move.
-Said China dollar sales could cause acceleration of downside, perhaps causing a run
-Too many more headlines like "Bailouts Stretch to 24 Trillion" cannot help the dollar

Again, the problem with intervention all day all the time is that it requires even more intervention to maintain order. While the Axis Powers have been able to guide the dollar to their will, this environment is very dangerous.

Talking Economic Trash
While I am not a chart lover in general, I do like technical analysis as a corollary of a trading idea or just as another data point to consider. One of my favorite chartists is The Evil Speculator. Combining sharp trading analysis with hilarious writing makes for a fun site. Today the author had a different kind of post up.

The constant market manipulation and ever higher bias over the last few months make charts and trading a difficult proposition. While accepting the current atmosphere, Evil Speculator makes the following observation:
We are getting closer - I can smell it - just watch bubble vision these days. Resident CNBC court jester Dennis Kneale recently announced on his freak show that the ‘recession ended in June’. Meanwhile Goldman is shoveling out huge (tax payer sponsored) bonuses for the past quarter. It really didn’t take much - did it? After extreme pessimism in early March good ole’ greed and irrational bullish exuberance have returned in four months flat. Which is exactly what I predicted late February, remember?

The 2007 bubble mentality is back with a vengeance! We’re back to business and the status quo has been preserved. Yeeeeeehaaaaaa!!!!

Unfortunately it’s all an illusion - it doesn’t exist. What you see on your SPX chart is not a reflection of the state of the economy or even the stock market - it’s pure investor sentiment - or as Robert Prechter calls it: socionomics. This rally has been fueled by hope, wishful thinking, blatant and unlawful market manipulation, tax payer backed private bailouts, high frequency trading bots, and perhaps even the tooth fairy. I’m not going to waste time and energy rehashing the myriads of reasons of why this rally has been running on vapor.

I think I’ve made myself abundantly clear in the past few months and nothing, absolutely nothing, has changed since then. We are in a depression and the SPX will breach its 666 low within the next 12 months - maybe even before this year comes to a close.

Which is why I have told you guys over and over again to keep your powder dry. That’s also why I have played it very small and never had more than 20% of my assets in the market since late February. Of course it’s easy to get sucked into trades here and there - we can’t help it - that’s what we do. But even if you took a hit in the first half of this year - forget about it. Focus on what’s ahead.

The golden rainbow lays beyond all the hype and the noise you hear from those bullish pundits. Let them celebrate and let them pop the champagne as we breach their silly moving averages and watch them push the tape one last spike to the upside. None of that matters. What matters is that you are ready to short the sh&t out of this market at the end of this summer - and then grab a cigar and watch the freak show unfold - I’ve got front row seats reserved for all of you.

That is a pretty confident call.

On the opposite end of things a Goldman Sachs staffer handed out what can only be termed as a "Wildly Optimistic" forecast that was just mind blowing:
S&P 500 to Rally Most Since 1982, Goldman Sachs Says
July 20 (Bloomberg) -- Goldman Sachs Group Inc. boosted its forecast for the Standard & Poor 500 Index, saying improving earnings will spur the steepest second-half rally since 1982.

The benchmark index for U.S. stocks will advance 15 percent from its June 30 level to 1,060 on Dec. 31, an increase from David Kostin’s prior projection of 940. The chief U.S. investment strategist at New York-based Goldman Sachs also lifted his 2009 and 2010 earnings estimates for S&P 500 companies to $52 and $75 a share, which are 30 percent and 19 percent higher than prior estimates.

Wow! Now that is quite the call.

Tyler over at Zero Hedge had this take on the report:
Abby Joseph Cohen must have threatened with retirement and David Kostin is here to pick up the Olympic torch. Goldman Sachs just raised its 2009 year end S&P target to 1060, "13% above the current level" meaning Goldman prop positions are full and the great offloading to marginal buyers has begun. The justification: "After trading in a 10% band for the past three months, our “Pop, Stall, & Sustained recovery” framework, sequential improvement in ex-Financials EPS, stabilization in profit margins, and higher forward EPS guidance all point to a rising market through 2009." More specifically, 85 Broad is raising its 2009 EPS to $52 from $40, and 2010 EPS to a patently absurd $75 from $63, a 45% increase in bottom line earnings, and almost 100% from the old $40 estimate. And just so it seems more credible, "measured on a pre-provision and pre-write-down basis our estimates are $69 and $81. S&P 500 trades at 12.5x our 2010 operating and 11.6x our pre-provision EPS." In other words, pure rose-colored glasses halcyon.

...But back to Goldman - up until this point the firm has been at least slightly sensitive about catching marginal end buyers. Now the guns are blazing, and as all Wall Street professionals tongue-in-cheekly know all too well, a forceful upgrade is when any firm (Goldman most definitely included) starts to sell into a call (in this case its own). So buyers please beware: you are now implicitly buying the shares that Goldman and other brokers have been accumulating over the past 4 months.

You were warned!

This does present a chance to do an actual science experiment with Goldman Sachs providing all the reagents. Here is what we have:
-GS announces spectacular earnings
-GS has (with others) been the man behind the curtain with late day futures gunning, high frequency trading (HFT) push highers, and extremely large trading positions as evidenced by their huge Value at Risk (VAR) number
-A wildly optimistic, perhaps even insane, research report that almost begs anyone listening to buy stocks hand over fist

So what is the experiment?

We will test to see if first there IS a ramp up in stock prices. If so, we should be able to see that the HFT should take a downward move as they exit the churning and sell to other buyers. If after a 15% move or so to the upside coincides with next quarters earnings coming in WAY UNDER the Goldman estimates, we can watch GS earnings and see if they show no hiccup in earnings growth. If there is none, we can conclude that GS pumped the markets, sold all their volume accumulated over the past 3 months, and then shorted an overbought market right after telling everyone to buy.

I have argued that if the markets take another dive (like Evil Speculator thinks to the 600's on the S&P) that many people will simply leave the market never to return. In speaking with as many folks as I can over the last 3 months they all say the same thing: Glad markets have gone higher, but one more drop like we had and they are out for good.

If Goldman is gaming the system (if??) and my metrics come to pan out, they may find it very hard to sell another ramp up anytime in the next 10 years. In any case, it will be fun to see if the estimates for S&P earnings come in anywhere near what the analyst at GS thinks they will.

Have a good night.


Anonymous said...

S&P 500 to Rally Most Since 1982, Goldman Sachs Says

Entry Of The Gladiators

One born every minute:-)

Hell why not make the call 1120 that's a 50% retrace from top to bottom the computer doesn't care about fundementals. Just like a micro wave doesn't know that an hour on high is going to burn the crap out of your popcorn.

getyourselfconnected said...

The current action puts me in mind of my often cited work "Simulacra and Simulation" where the hold up paper model BECOMES reality through inferrence of meaning. Why is the market going up?? Because it is! Weird. Full reference article:

GawainsGhost said...

It's called pump and dump.

There is no trading now other than program trading. And wasn't Goldman Sachs's trading program stolen recently? Oh, yeah, they had the FBI arrest the guy, claiming if it got into the wrong hands it could be used for market manipulation. Right. Maybe they got it back.

It's easy to make a profit when your main competition--Lehman, Bear Stearns, et al, ad nauseam--has been wiped out, and you've been made whole by your butt buddies in the government through a taxpayer-funded bailout of AIG, which funneled money (to the tune of $13 billion) to cover your bad bets that would have otherwise bankrupted you had you taken the loss. Oh, and by converting to a bank holding company so you could use a new reporting period and effectively ignore December, you know that month when you lost $1 billion. How convenient.

Matt Taibbi was right.

Anyway, back to this program trading nonsense. I've always said that the computer would be the downfall of man. It's an argument along the thought lines of Plato when he has Socrates say that the invention of the alphabet, and writing, would make man less intelligent because it eliminated the necessity of memorization. Same thing. The invention of the computer will make man ignorant because it eliminates the necessity of thinking.

People believe that any solution made by a computer must be correct, since a computer can "think" (or more accurately perform mathematical calculations) so much faster than a human. The problem with that is not necessarily in the computer, it's in the program, which incidentally is written by a human. No formula can possibly take into consideration all variables. So the solution generated by the calculation of the formula is inherently incomplete and flawed.

This is what's wrong with everything from global warming to program trading. It's all based on computer models which are incomplete and for the most part inaccurate. Every computer model used in finance or economics, for example, derives from a program written by some genius (read idiot) at the Chicago School of Business in the 1950s that assumes a normal price distribution. But, of course, in reality there is no normal price distribution, so the whole thing is a joke, and not a very good one at that.

"Beware of geeks bearing formulas," Warren Buffett once said. But then he could actually think.

I hope program trading bankrupts Goldman Sachs. Or, really, I don't. Because what with their butt buddies in the government, I suspect that I and every other taxpaying American will somehow end up paying for it.

watchtower said...

GawainsGhost aka The, said:

"I've always said that the computer would be the downfall of man. It's an argument along the thought lines of Plato when he has Socrates say that the invention of the alphabet, and writing, would make man less intelligent because it eliminated the necessity of memorization. Same thing. The invention of the computer will make man ignorant because it eliminates the necessity of thinking."

This is brilliant IMO, works on many levels.
Made me stop and think if people are more intelligent today than say 100 years ago? 5000 years ago?

Are we more satisfied?

GawainsGhost said...

I'm not satisfied. The Dallas Cowboys are not winning football games, advancing in the playoffs and bringing home championships. I won't be happy until that happens, and from the look of things I have a long wait.

Sigh. Anyway, as to this "The" thing, I blame Google. If anyone out there wants to read my views on sports and all things Cowboys, you can check the comments on Or you can check my own Cowboys blog, although I haven't written anything there recently, mainly because there's nothing to write about in the off-season.

I refuse to do mock drafts or draft grades, and I could care less whether Tony Romo ever wins a golf tournament, much less which blonde he's boinking to his detriment.

Reality Football will be back in full force, probably this weekend. But I don't hold out much hope for this season. Jerry Jones is, well, Jerry Jones.

Anonymous said...

"I know the blogs are best at debunking myths that can slip through a lot of the traditional media outlets," he said. "And that is why you are going to play such an important role in our success in the weeks to come."
Barack Obama

Why is it I don't think he feels the same way about financial blogs?


getyourselfconnected said...

Hey all,
Home a bit late so no post.

I had to do a double take this morning when I saw this Denninger post:
"What's Powering this Rise?"
" want to present a chart this morning that should identify where some of this is coming from - maybe all of it.
That's the dollar, and its diving.

Now exactly why this turns into a rocket ride in the stock market isn't quite clear, but that it happens repeatedly is."

It seems Karl and I are on the same page (see what i lead last post with!)! Pretty cool.

I am so ready for football season! Canot wait until they introduce Tom Brady at Giltee on the Monday night opener. The crowd is going to go nuts.

Patriots added Fred Taylor, and if you know football you know how dangerous Taylor CAN be when healthy. Seeing that he will not have to carry the ball 30 times a game, I think he will be spectacular.

The addition of Joey Galloway is interesting. At the minimum his threat of speed will take some coverage away from Randy Moss, who i think is the most dangerous player in the NFL. With Brady back this season could be another high scorer.

The Pats left the defense alone except for some draft picks, so i do not expect the D to be killer, but it will not have to be a shut down defense either.

Cowboys may do better without Owens. The bad thing is Philadelphia looks stacked this year, and that is 2 tough games right there.

I will have an all NFL preview post up closer to opening day.

Take care all.

GawainsGhost said...

I don't think the Cowboys will be better without Owens. He was only the most productive receiver over three seasons in franchise history. Neither Pearson nor Irvin matched his yards and touchdowns, and I seriously doubt Williams will.

That said, this entire season in on Jason Garrett, whom I personally believe is an idiot. The man cannot make an adjustment to save his life, much less his career. And he doesn't know how to formulate a running game. So I don't hold out much hope for this season.

New England is a better run franchise than Dallas, as much as it pains me to admit that, and I respect their accomplishments. Mostly I admire them for who they beat in the Super Bowl, although New York did show them a thing or two.

The Giants are a tough team, and so are the Eagles. The Cowboys, sad to say, are not so tough these days. But the NFC East is always a hard fought division, and there's a reason why it's produced more Super Bowl champions than any other. Because the competition is so fierce, if you can win in the East you can win anywhere.

Anyway, to return to this program trading nonsense and these computer models, the reason why I know there is no such thing as a normal price distribution is because Mandelbrot proved it. He analyzed daily price changes for cotton going back over 100 years and showed they moved in fits and spurts. Yes, he used a computer to perform his analysis.

Wait a minute, Gawain, you might ask, isn't it absurd to use a computer to illustrate the absurdity of computers? Yes. But I defer to Beckett who, when asked about the absurdity of using words to illustrate the absurdity of words, said, "We have only words. We have nothing else."

We have only computers. We have nothing else. But we used to have minds.

watchtower said...

They are starting to talk football on the car forums, you probably have already seen this but I hadn't, I thought it was pretty funny:

"The Michigan State Police are cracking down on speeders heading into Detroit .

For the first offense, they give you two Detroit Lions tickets. If you get stopped a second time, they make you use them."