You know it’s almost time for curtains when the tricks get this obvious…
What if I told you that – of the thousands of different stocks listed on the New York Stock Exchange – that 40% of Tuesday’s volume was traded on just four of those stocks?
Impossible? Out of the ordinary?
Now what if I told you that all four of those stocks represented companies that are – for all practical purposes – completely insolvent and practically worthless? What if, to make matters worse, they were all agents of the U.S. government? The “American Dream” coalition as it were…
A PPT by any other Name
I still vividly remember the stories from winter of last year…
Brows were furrowed…cold sweat running like the mighty Mississippi. A few brave – perhaps slightly conspiratorial – pundits pointed to the “point of no return” at Dow 5,000.
“Past this point,” they said in their best toothless old sailor voice, “there’s a wave of bankruptcies, distressed selling, and a feedback loop like nothing we’ve seen in our lifetimes. Beyond here lies only soul-crushing Depression…”
The general tone led me to watch Planet of the Apes and Mad Max for “research” purposes in my spare time.
But then – for no really good reason – the market snapped back. Surprise! Old dogs take a while to learn new tricks. Who cares whether the company’s insolvent, after all? Their stock is cheap compared to a few years ago! They’ve got Uncle Sam’s seal of approval, too.
And with little more thought than that – and a little help from Timmy’s “stress test” marketing campaign – the banking bulls were back off to the races. A curious phenomenon, if you ask our Investment Director Eric Roseman…
“Historically,” Eric explained in a recent blog, “a new bull market in stocks is characterized by a change in sector leadership. We’ve seen that phenomenon time and again over the last 40 years as new innovations and productivity improvements spawn big changes in industry and profits.”
“If investors expect the same sectors that carried the bull market through October of 2007 to carry this ‘new bull market,’ …then we’ve got problems. Technology might legitimize this rally. But I’m not sure I’d call this a bull market simply because stocks have gained more than 20% off their March lows.”
The Usual Suspects
And by the way, the situation only gets more frightening when you look to the most recent bull market leadership; or more recently, the “bailout brigade.”
Completely Unprecedented Volume on Gov’t-Owned Financials
Above you have a chart showing volume for all the “usual suspects” since this rally kicked off.
Fannie, Freddie, Citigroup, CIT and AIG. They all share a few things in common. Complete and abject failure being the most obvious shared trait, followed swiftly by the fact that they’re all ostensibly government agents.
You read that right.
See, we taxpayers weren’t the only ones who caught a raw deal on bank bailouts. By accepting bailout money from TARP, financial companies tacitly agreed to become “financial agents of the Federal Government,” (government’s language, not mine).
To be sure, there’s no direct connection…no smoking gun…
Neither W. nor Obama handed a couple hundred billion to AIG and then asked them to bid up their share price (to be fair, that money was intended for Goldman!). Instead, this action is coming from a number of different angles. Day-traders looking for a greater fool…long-term investors interested in averaging down…and high-frequency flash programs ripping off the whole lot.
Going back to Eric’s ideas on new leadership signifying the real thrust of a bull market, we can see in the chart above that this rally started with promise. The financials were still in turmoil – as could be expected – so the bounce started elsewhere.
But as you can see above, over the course of the last month or so, this whole thing’s turned into a gussied-up version of three-card monte. Trading programs wing shares back and forth at the speed of light for a tenth-of-a-penny profit, the exchange doesn’t say anything because fee income keeps rolling in, and our questionable rally gets a major boost in volume and credibility.
Maybe it’s time to dive back in, thinks the retail investor as he considers the profits he could’ve made on CIT over the last few weeks.
Not that I have a problem with good old-fashioned sidewalk scams. It’s just that they’ll ultimately distract you from the frightening reality of the situation…
Diving into A Wood-chipper
…and that reality is that any retail investor looking to trade this market for quick profits could well be diving into a wood-chipper.
For one, these companies aren’t worth anything…at least not without the good graces and the full faith and credit of the U.S. government (not to mention her tetchy creditors abroad). Their fate is still far from decided at this point.
For two, the prices on these stocks hinge – at least in part – on continued flash and program trading. Should the computers divert their attention elsewhere, you’ll probably have trouble finding any genuine bids. Panic takes over, and we all know where it goes from there.
What’s more, these few stocks have made up around a third of each session’s volume over the last few weeks. Karl Denninger points out four bailout stocks alone that posted 37% of Tuesday’s volume. So if the bailout rally comes apart…the entire equities rally might not be far behind.
In conclusion, save the wood-chipper-diving for the professionals.
Unless you’re trading based on technicals and price action on a timeline of hours or days, these equities could be the third rail for your portfolio. There are still a number of great values in the market today…just not in bailed-out financials.
Yours in Personal Sovereignty,
Matthew Collins, A-Letter Editor
Article Source: Sovereign Society Offshore A-Letter