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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Stock Market Investors Suffering From the Chihuahua Syndrome

Stock-Markets / Stock Markets 2011 Jun 18, 2011 - 10:05 AM GMT

By: Barry_M_Ferguson

Stock-Markets

Best Financial Markets Analysis ArticleYou may not have heard of this particular syndrome before but it comes from my pet Chihuahua dog, Chico. Whenever he gets scared during a thunderstorm, he slinks off to sit under my bed. I suppose the mattresses and bed covering overhead  comfort him. He is actually a pretty good forecaster of nasty weather because he will anticipate the arrival of a storm by his habitual exhibition. When the first clap of thunder rattles the air, Chico can be found under the bed and shaking like a leaf.


A few years ago, I moved to a new residence. When the moving crew went to work putting the furniture on to the truck,  Chico became very anxious. The movers got busy. We got busy. Chico disappeared for a while. When we looked for Chico, we found him in the spot where he felt safest. Now, Chico has never been the smartest of dogs. So there he was - shaking like a leaf surrounded only by the bed frame. The mattresses were packed on the moving van. The room was bare except for the bed frame. Chico’s shelter was gone but his habitual reaction to anxiety was unchanged. Thus, with Chico pathetically adhering to habit obliviously ignoring structural changes, the Chihuahua Syndrome (CS) is born.

The reason I bring CS to light is investors suffer from the exact same affliction. As we move into the summer of 2011, the Chihuahua Syndrome is driving the trading habits of investors. Let’s lay out the diagnosis.

I won’t rehash the Federal Reserve’s coup de etat of 2007 nor any of the overtly manipulative efforts of the government to save the banks over the past few years. I think we all know that something has profoundly changed in our economic world and we are not in Kansas anymore. Where are we, we might ask? To save the big banks, the Fed has lowered interest rates to zero, injected tens of trillions of borrowed dollars into American and foreign banks, and usurped the debt auction business from the market. TARP has been played and QE2 ends with the month of June. The major stock indices currently look to be deeply troubled at the prospect of the profoundly changed structure of the economic landscape. Recent trading action seems to suggest that investors still have their finger on the ‘Buy’ button even as the indices are in fact rolling over. Unfortunately, investors are suffering from CS. Here are the signs.

1.  The Internet radio company, Pandora, brought forth their IPO on June 15 at a reported $18 per share. The minions of the propagandist media trumpeted the ‘gains’ (from the purported offering price of $16) as the price went to the upper $20’s only to finish up some 8% on the day. The next day the price closed at $13. Has no one learned from the other ‘heralded’ IPOs of the Spring? Glencore and LinkedIn come to mind as both have quickly lost half of their grossly inflated initial prices. The structure of the market has changed but investors are thinking like a chihuahua. Old habits are repeated. This is a clear sign of CS.

2. The last week in May was a clear case of market ‘calendarization’. The government bankers got together to goose the markets at the end of the month to ease the investor angst generated upon receipt of the monthly investment statement. May was a bad month. The banksters didn’t want to spread worry so they pounded the indices higher. They pounded everything higher in that final week. Yes, even the Greek indexes. Are the words ‘default’, ‘bankrupt’, ‘broke’, and ‘ain’t got no money’ no longer understood? How about ‘de-sovereigntized’. Yeah, I made that up but Greece cannot repay their bankster loans. A bail out was proposed to let the ECB give the banksters all their money back and let the private sector buy up the new Greek debt that is rolled over from the current Greek debt. I am well aware that I am the only person on the planet not under the influence of LSD but who in their right mind would think that the private sector has any aspiration at all to own Greek debt? Who would be stupid enough to loan the Greeks money? Yes, the banksters loan Greece money but they know they can steal it back from the public through the central banking theft system. Yet, the news of the bail out proposal sent the Dow Jones Greek Index up 5% in a day! Buyers of the Greek index no doubt suffer from CS.

3. The propagandist arm of government that we refer to as media have been bantering around the word ‘austerity’. It’s as if this is the cure for economically broken nations. Austerity is simply a euphemism for lower wages and higher taxes. Name an economy that has been fixed by lower wages and higher taxes. Many investors actually believe this works. The US is currently engaged in voluntary austerity. Many of the nation’s citizens are selling jewelry, land, and houses as they accept lower real wages and higher taxes in the form of inflation induced by a central bank that enriched the big banks with Treasury money. Investors allow this due to CS.

4. The Chinese are now offering their own ‘cash for clunkers’ program to stimulate car sales. USA Today reported car sales to be down some 14% in May in an economy that is supposedly growing at a robust clip. Yet, this same program was tried in the US and had negligible effectiveness. The Chinese are even more desperate. Would-be car buyers can not only bring in old cars but also farm machinery and city buses. Before it’s over, I suspect the government will expand the program to include rickshaws and bicycles. Even the Chinese are suffering from CS.

5. House prices in the US have always gone up. At least, that’s what Fed Chairman Bernanke said back in 2007. Besides, even though prices have fallen 33% from the highs (that beats the depression number of minus 31%), the bottom was last month.   Now must be the time to buy a home. That has been the thinking for every month for the last four years. That will be the thinking over the next four years as home prices fall more and more. I don’t doubt that there will be a bottom in prices at some point but as long as unemployment is double digits and wages are getting diluted by inflation and austerity, the bottom is not the present. We must learn to listen to the CEOs of the home builders. Optimism is not in their assessment of the current situation. Yet, investors still buy the real estate sectors. Another clear case of CS.

6. Guarantees aren’t really guarantees. The supposed ‘guaranteed return’ part of products like indexed annuities have asterisks next to them. This is for good reason. Those asterisks generally disclose the conditions upon which those guarantees will be met. Guarantees should not be conditional. When stocks fall into corrections or bear trends, investors get scared and invariably reach out for what they want to hear. Somebody always has a product that allows investors to enjoy stock market returns with none of the risk. Investors generally sign up for these products while sitting inside the perceived protection of a bed frame. This is CS at work.

7. Citizens think the government has a economic solution. Not since Andrew Jackson vetoed the charter of the second bank of the US in 1832 has government had an economic solution. As I write, the world is waiting for the second Greek debt bailout. A year ago, the ECB injected a trillion euros into the European banking system. Yet, Greece can no more pay their debts today than they could have a year ago. The US central banker Bernanke made statements over the past few years about home prices and economic prosperity that he would have rejected with a failing grade had they come from one of his students in his stent as a college professor. Yet, investors await his next statement as if he had a true answer. Government bail outs don’t work. Central bankers don’t have correct answers. Investors listen to both. Sadly, performing the same behavior over and over while expecting different results is a sign of not only insanity but CS.

8. Investors are not the only group that suffer from CS. Central bankers also suffer from CS. The Plunge Protection Team (PPT) was formed after a rather nasty attack of CS in 1987. Led by the Fed Chairman, the PPT is responsible for the arbitrary arrest of a stock market down trend. While administering the QE2 program, it seemed to me that the PPT was rather quiet. Of course, when stocks are climbing to the clouds so Jack can climb the bean stalk and steal the Giant’s gold there is no need for PPT intervention. They only seek to thwart price discovery on the way down, not on the way up. But, a rather nasty down trend has developed over the last couple of months. And like magic, a breech of the Dow 12,000 level brought them out on 6/16/2011.

The chart is included below of the S&P 500 ETF SPY. The chart shows the intraday activity of the SPY with 5-minute bars. Bear in mind that the Empire and Philly manufacturing indexes had both been released by the morning of 6/16/2011. Both were terrible. Unemployment claims were estimated to still be in excess of 400,000. Retail sales and industrial production were weaker. And so on, and so on. Chart-wise, lower lows and lower highs were signaling a down trend. As the Dow dipped below a technically insignificant level of 12,000, those of us that know the PPT knew that the fat round number had to be disturbing.

After all, the Fed had spent tens of trillions bailing out banks and goosing the stock indices. Could they suddenly lose key levels and risk a bear market even after all of their hard work and manipulation? The chart shows the PPT footprints rather well. I used blue circles to show the methodical, well-timed, and purposeful injections of buying meant to arrest any further selling waves. We can see that they broke for lunch at 1:15 PM and returned to their post at 2:45 PM. The indices declined during this period. Then we see the signature PPT end-of-the-day rally in the last hour of trading (the blue triangle of ascent). Straight up and forceful, the rally closed with increasingly heavy volume. Sure, all the economic news was bad but who cares? The PPT only concerns itself with stock rallies so the oafs of the world ignore the economics. This is now the only behavior that the PPT knows. When things get precarious, they strike. I also diagnose this behavior as CS. Please review the chart.

06/16/2011 intraday with 5-minute bars - SPY
Chart courtesy StockCharts.com

What does the bout with Chihuahua Syndrome tell us? The syndrome always manifests itself during periods of extreme anxiety. Generally, Chico just lays on the couch and naps. All is well. When there is stress, he heads for the bed frame. Therefore, we must recognize that the stock markets are now under great stress and the anxiety is palpable. We are either at a breaking point for the indices or a rescue point for the PPT and their government sponsors. With the supposed end of QE2, investors might need to get ready for a period of greater activity on the part of the PPT. Keep an eye out for the pattern as shown in the chart. And - don’t think like a chihuahua!

Barry M. Ferguson, RFC
President, BMF Investments, Inc.
Primary Tel: 704.563.2960
Other Tel: 866.264.4980
Industry: Investment Advisory
barry@bmfinvest.com
www.bmfinvest.com
www.bmfinvest.blogspot.com

Barry M. Ferguson, RFC is President and founder of BMF Investments, Inc. - a fee-based Investment Advisor in Charlotte, NC. He manages several different portfolios that are designed to be market driven and actively managed. Barry shares his unique perspective through his irreverent and very popular newsletter, Barry’s Bulls, authored the book, Navigating the Mind Fields of Investing Money, lectures on investing, and contributes investment articles to various professional publications. He is a member of the International Association of Registered Financial Consultants, the International Speakers Network, and was presented with the prestigious Cato Award for Distinguished Journalism in the Field of Financial Services in 2009.

© 2011 Copyright BMF Investments, Inc. - All Rights Reserved
Disclaimer: The views discussed in this article are solely the opinion of the writer and have been presented for educational purposes. They are not meant to serve as individual investment advice and should not be taken as such. This is not a solicitation to buy or sell anything. Readers should consult their registered financial representative to determine the suitability of any investment strategies undertaken or implemented.


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