As a trader, I stopped getting disgusted at government manipulation of markets several years ago, didn't pretend it wasn't happening, just tried to find when it was coming. I decided to develop an indicator that would tell me when the probability was extremely high that the Master Planners would intervene. That approach has served us well, and that indicator is known as the Plunge Protection Team (PPT) Indicator. It flashed a new “buy” signal Monday, September 15 th at the close, rising above positive + 20.00, warning that the decline from August 11th was terminal. The Industrials have risen 565 points since that buy signal. When this measure rises above positive + 20.00, it is usually early, but very right, an early warning indicator telling us to enjoy the decline for a few more trading days but get ready for a spike rally.
The current government market intervention (“manipulation” is probably a more appropriate word) that transpired the past two weeks, reaching crescendo Thursday on a rumor, and Friday on an announcement, is one of the most dramatic since the 1930's. It really puts into question the notion of U.S. markets being under capitalism, not socialism. The government nationalized Fannie Mae and Freddie Mac last week, announced its intent to nationalize AIG, a component of the Dow 30, this week, and then pulled out all the stops with the Paulson manifesto Friday. Not sure why he didn't nationalize Lehman Bros, unless it was personal, as he came from competitor Goldman Sachs, and enjoyed watching them declare bankruptcy. Okay, maybe I am a bit cynical — maybe.
Before getting into market performance and the forecast, let's cover what we know about this historic redefining of the rules of the game that Paulson has placed on the table for Congress to consider next week:
1) The Securities and Exchange Commission has put a ban on short selling (that is entering into a contract to sell a stock at today's price in the future without owning it now, in effect placing a bet the price of the stock will drop) on 799 financial institution stocks – not on any other stocks, through October 2nd, with the possibility of extending the ban for 30 days. This does not prohibit put options.
2) AIG was tossed from the Dow Industrials and replaced with food giant Kraft on Thursday (presumably to replace a loser with a winner to increase the odds that the closely watched Industrials will rise)
3) The Treasury said it would “insure” up to $50 billion in struggling moneymarket fund investments at financial companies (that are not FDIC insured).
4) The Fed announced they would make “unlimited funds” available to banks to finance purchases of asset-backed commercial paper from money market funds (This will be in the trillions).
5) Banks would be allowed to sell their illiquid bad loan assets to the Treasury in exchange for cash.
What is clear from the getgo, is that this is a bailout of Wall Street, not Main Street, that it is going to cost trillions, not billions, and the bill will be paid by both the American taxpayer, and the American consumer via a higher cost of living. Yes, this is going to be hyperinflationary. The Treasury will issue notes to the Fed, the Fed will come up with the cash (printed out of thin air), and the cash will be handed to Wall Street.
This process fails miserably to solve the problem, which is the dire financial condition of the average American household. The trillions of dollars being printed out of thin air should be going to each and every household in America , not just Wall Street. If so, Wall Street would benefit because their toxic assets would metamorphose into quality assets as the American household pays off its debts (cash to Wall Street). But what would you expect when the Treasury Secretary authoring this plan is the former Chairman of the largest Wall Street firm in America , Goldman Sachs, which also happens to be a surrogate for the Plunge Protection Team. Because the plan fails to bailout the American household, it will fail — period. But, fail with an even higher cost of living structure than we have today.
This plan assures that the Dollar will tank. It will lose its value as bad loans are replaced with fresh printed cash. Precious metals will skyrocket as this plan is executed.
As for the lunacy of banning short trading against 799 financial institutions (there are over 10,000 financial institutions in the U.S., so only some are protected from bets they will decline), the Wall Street Journal noted on Friday, “essentially this only allows investors to bet that stocks will rise, and bans investing strategies used by hundreds of mutual funds, pension funds, endowments and governments. These firms use short-selling to protect themselves from unexpected huge losses, some financial firms selling short to offset trades made by their clients so they aren't exposed to large market moves.”
Short selling is not only legal, or should we say it was until Friday, but is necessary, and can be quite good for the markets. In a short-sale of a stock, what it does is it requires a purchase of that stock by the time the short sale is contracted to close. In effect, short sales create future demand, as shorts must buy stocks, thereby helping stabilize and even push stock prices higher in the future. Further, if there are an abundant number of short positions, a short-covering rally is possible, driving market prices sharply higher. Banning short selling removes these invisible bids. Banning short selling is robbing Bears and hedge traders who rightfully are entitled to profits. Without short selling, it will be harder to properly gauge the true value of a stock. It could create an artificially high market price that will drop far more severely in a future event than otherwise would have occurred.
Banning short selling is essentially a magician's trick to take the focus off his hand. It is a witch hunt. Someone has to take the hit and the Master Planners have decided to blame the shorts, which is pure lunacy. Shorts had nothing to do with the economic mess this nation finds itself in. The Master Planners continue to equate the economy with Wall Street. They believe if stocks are fine, then the American household is just fine. Nonsense. Shorting is a way of identifying fundamental problems with a company. The health of the economy has nothing to do with whether or not a stock is shorted.
Here's the problem. This government intervention, one that will cost trillions, has failed to bail out the American household, thus is destined to fail, after trillions of new dollars hyperinflate our economy and debase our currency. The expectations for success are running high, creating a false sense that everything is going to be okay. This sets up a monster financial collapse that will dwarf the risks of today once it becomes clear that this program has failed. While old assets are swept into the vaults of the Fed in exchange for cash, via the arms of the U.S. Treasury, more bad assets will be created at an even faster pace as the American household, who is income starved, debt laden, and credit report deficient, will soon get hit by another tsunami of higher costs of living, making it impossible to pay their bills on time.
The Master Planners don't give a royal rip about the consumer. For example, Credit Card company schemes have managed to force 30 percent interest rates on what will be forever debt due to technicalities and small print. They mail statements within days of due dates, creating accidental late payments, granting them the right to raise interest rates to 30 percent. They lower credit limits without proper notice, consumers use their cards over the new limit by accident, and get hit with an increase in their interest rates to 30 percent. If they are late, their credit report gets creamed. Yet, now these credit card companies, Wall Street firms, are being bailed out at taxpayers expense to the tune of trillions without doing a darned thing to improve this economy.
The cost of this Paulson manifesto will be trillions on top of the already $600 billion spent in specific corporate bailouts this year. If they are spending trillions anyway, debasing the Dollar anyway, then the American household should also be bailed out. A rebate of the past ten years income taxes should be sent directly to each and every household, with the caveat that half of that money must be used to pay off existing debt. If no debts, great, the household gets to keep the entire rebate. Further, the unconstitutional confiscation of wealth known as the real estate tax should be eliminated and replaced with a sales tax. Also, a usury interest rate ceiling of 10 percent should be imposed immediately upon all financial institutions, the key beneficiaries of the Paulson manifesto. The Treasury should begin issuing a new currency that it backs with precious metals, and finally, the Federal Reserve should be abolished. The thinking here is trickle up economics is the medicine that is needed, not more trickle down.
The next two charts tell us all we need to know. The first shows the fate of the U.S. Dollar. Down. Big. A massive Head & Shoulders top with an eventual downside target of 40.00. The second chart shows the fate for stocks. More downside, to be followed by an inflationary nominal Bull Market once the downside has been achieved. More downside is coming before that inflationary nominal Bull Market starts.
Last Friday, September 12 th , 2008, we warned our subscribers, “ a sharp decline will be the market's fate dead ahead. Everything is pointing toward a crash at any time.” The next trading day, Monday, September 15 th , the Industrials lost 504.48 points, the largest one day decline since the 9/11 attacks in 2001. Two days later, the Industrials lost another 449.36 points. But we noted that our PPT Indicator just generated a new buy on Monday, suggesting a bottom was imminent. The Industrials then rallied 410 points Thursday the 18 th , and another 368 on Friday the 19 th .
Further, on Friday September 12 th , we wrote to subscribers, “ A great development for Gold bugs is that the HUI's Daily Full Stochastics generated a new buy signal Thursday, and at a level where significant rallies have started in the past. The PPT's involvement in bailouts, and in stock and bond markets, takes money, and is hyperinflationary. This should be the catalyst for a reversal in commodities, precious metals, and the HUI. We got a new buy signal in the HUI PPI Friday (Sept. 12 th ), and the chart on page 24 (of last weekend's market newsletter to subscribers) shows a good track record for this indicator.”
Of course Gold rose nearly 20 percent at one point this past week, with metals showing the largest one-day price gain ever on Wednesday, the 17 th . The HUI also rose sharply, up 50 points, about 20 percent, this past week.
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“Jesus said to them, “I am the bread of life; he who comes to Me
shall not hunger, and he who believes in Me shall never thirst.
For I have come down from heaven,
For this is the will of My Father, that everyone who beholds
the Son and believes in Him, may have eternal life;
and I Myself will raise him up on the last day.”
John 6: 35, 38, 40
by Robert McHugh, Ph.D.
Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com.
The statements, opinions, buy and sell signals, and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates, buy and sell signals, and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided. Copyright 2008, Main Line Investors, Inc. All Rights Reserved.
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