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Three Reasons This Stock Market Rally Is False

Sunday, July 26, 2009, 7:37 PM

There's a new Martenson Report ready for enrolled members. 

In this one I separate and comb through the various sources of economic data, look at stock market volume, and engage in some original research to explore the issue of corporate earnings quality to make my case for where the stock market might be headed.

Link:  Three Reasons This Stock Market Rally Is False

A snippet:

The recent stock market advance is lacking a solid fundamental story to base itself on, at least if we choose to rely on good data. Further, volume is down considerably, the most in decades, and this is another missing component that might make us view the stock market advance more favorably. Finally, earnings suggest that the stock market, even after its run, is not cheap, by any historical measure.

There is growing evidence that the price movements we see in the stock market are best explained by activities that are essentially hidden from public view. High Frequency Trading (HFT) is one example, and it's not a grand stretch to suspect other forms as well. 

Remember, one of the most famous traders of all time said, "The stock market can remain irrational longer than you can remain solvent," which I am tempted, for anyone considering shorting the market, to paraphrase as, "The stock market can remain manipulated longer than you can remain sane."

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15 Comments

malpert's picture
malpert
Status: Member (Offline)
Joined: Oct 9 2008
Posts: 18
Re: Three Reasons This Stock Market Rally Is False

Chris,

Below is a re-post of what I recently discovered regarding the murkiness of continuing claims.  The good news is the data becomes much less murky when we simply add three numbers together. 

The Bottom line:  Continuing Claims only includes claims under Regular State programs (approx. 6 months of coverage).  Continuing Claims (as reported by the media) excludes all claims filed under Federal Programs and extended state programs.

After Regular State claims expire, the jobless then roll into the federal program (EUC 2008 passed in July 2008 by GW Bush and expanded in February by the Obama stimulus package).  The federal coverage now lasts for approximately another 6 months.  After the federal benefits expire, individuals may be available for additional weeks of extended state benefits.  Neither of these categories are included in the 6.2 million continuing claims reported last week.

How many claims are excluded from the data?

Federal EUC:  2,632,361

Extended State Programs: 359,986

These categories are both reported weekly by the Department of Labor in the same report as the Regular State program, however, the DOL didn't take the next step of adding them all up!

Well, this week a member of the AP took that step.

The AP reported last week  that the total claims (NSA) is 9.1MM

http://www.philly.com/philly/wires/ap/business/economic_figures/20090723_ap_weakrecoverytoprovidelittlereliefforjobless.html

I've been tracking claims data each week, but had made an assumption that these programs were included in the report, not additive to it.  After all, an elephant this large couldn't be sitting right there in front of me?  Is it even possible???

Well, since there were ZERO claims under federal programs until July 2008 (it didn't exist prior) and ZERO extended state benefits until June 2008, it is possible.

I did a quick chart of total claims vs regular state-funded claims using the Department of Labor reports.  

Of course, while the "green shoot" reported claims have leveled off, total claims, as it turns out, are steadily rising.

DavidC's picture
DavidC
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Posts: 239
Re: Three Reasons This Stock Market Rally Is False

http://www.scribd.com/doc/17702821/The-End-of-the-End-of-the-Recession

Pretty persuasive!

DavidC

Davos's picture
Davos
Status: Diamond Member (Offline)
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Posts: 3620
Re: Three Reasons This Stock Market Rally Is False

Hello DavidC:

Yes it was. I agreed with about all of it save for the inflation/deflation part. I think we could end up with a dollar collapse which would lead to the proverbial inflation outcome. Take care

EndGamePlayer's picture
EndGamePlayer
Status: Platinum Member (Offline)
Joined: Sep 2 2008
Posts: 546
That makes it 4 reasons

Hi Davos- I'm 99.99% sure you are right on and we will see a dollar collapse within the next 3 years. My shot in the dark (opinion) is we won't see it until the trillions of bail-out funds and other hand outs have been spent or used up. As I see it - the ONLY reason the dollar is so strong is to keep us in debt and once that debt is MAX'ed - then - that would be an oppurtune time to devalue. Can the "powers that be" act intelligently for the good of the people? or will they pad their own pockets for greed? What an interesting play of power these times are! Peace- EGP

Davos's picture
Davos
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Posts: 3620
Re: Three Reasons This Stock Market Rally Is False

Hello EGP:

Do health care, cap and trade remind you of the person who had his/her first meeting with the bankruptcy attorney and then realized: Hey, time (before I file) for new furniture and a new car?

Take care

DavidC's picture
DavidC
Status: Silver Member (Offline)
Joined: Sep 29 2008
Posts: 239
Re: Three Reasons This Stock Market Rally Is False

Considering the range of the dollar against sterling, sterling fell to $1.052 in March 1985. However, I can remember sterling being $2.40 as a child, and sterling was over $2.1161 in November last year.

As it's around $1.65 at the moment it's really only slightly on the low side of its middle range over the last 40 years. Do I think it's going down? well, yes. But then, sterling is not in the best of health either!

DavidC

EndGamePlayer's picture
EndGamePlayer
Status: Platinum Member (Offline)
Joined: Sep 2 2008
Posts: 546
Re: Three Reasons This Stock Market Rally Is False

Davos - YES!!!  You hit that one the head!!   ROL

SagerXX's picture
SagerXX
Status: Diamond Member (Online)
Joined: Feb 11 2009
Posts: 2120
Re: Three Reasons This Stock Market Rally Is False

From zerohedge:  UBS is suspending the offering of inverse ETFs.  What do they know that I don't?

http://zerohedge.blogspot.com/2009/07/etf-gloves-are-off.html

cat233's picture
cat233
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Joined: Aug 20 2008
Posts: 575
SEC Rule on 'Naked' Short-Selling Now Permanent

CNBC www.cnbc.com/id/32174786

Federal regulators on Monday made permanent an emergency rule aimed at reducing abusive short-selling, put in at the height of last fall's market turmoil.

The Securities and Exchange Commission announced that it took the action on the rule targeting so-called "naked" short-selling, which was due to expire Friday.
Short-sellers bet against a stock. They generally borrow a company's shares, sell them, and then buy them when the stock falls and return them to the lender—pocketing the difference in price.

"Naked" short-selling occurs when sellers don't even borrow the shares before selling them, and then look to cover positions sometime after the sale.

The SEC rule includes a requirement that brokers must promptly buy or borrow securities to deliver on a short sale.

At the same time, the SEC has been considering several new approaches to reining in rushes of regular short-selling that also can cause dramatic plunges in stock prices.

Investors and lawmakers have been clamoring for the SEC to put new brakes on trading moves they say worsened the market's downturn starting last fall. SEC Chairman Mary Schapiro has said she is making the issue a priority.

The five SEC commissioners voted in April to put forward for public comment five alternative short-selling plans.

One option is restoring a Depression-era rule that prohibits short sellers from making their trades until a stock ticks at least one penny above its previous trading price.

The goal of the so-called uptick rule is to prevent selling sprees that feed upon themselves—actions that battered the stocks of banks and other companies over the last year.

Another approach would ban short-selling for the rest of the trading session in a stock that declines by 10 percent or more.

In addition to making the "naked" short-selling rule permanent, the SEC and its staff are working with major stock exchanges to make data on short-sale transactions and volumes publicly available through the exchanges' Web sites, the SEC announcement said.

It will result in "a substantial increase" over the amount of information currently required, the agency said.

"Today's actions demonstrate the (SEC's) determination to address short-selling abuses while at the same time increasing public disclosure of short-selling activities that affect our markets," Schapiro said in a statement.
 

DavidC's picture
DavidC
Status: Silver Member (Offline)
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Posts: 239
Re: Three Reasons This Stock Market Rally Is False

Hi cat233,

One has the impression that they're trying to stop short selling, full stop.

Naked short selling is, and always has been, illegal. If the SHO regulations had been applied properly, which they haven't been (some SHO stocks have been sitting in the DTTC for years apparently!) there would be no problem with shorting stocks - ask Patrick Byrne.

One other thought - it's not OK to make stocks artificially fall in price but it's OK to make stocks artificially rise in price (ooh, you cynic DavidC...).

DavidC

cat233's picture
cat233
Status: Platinum Member (Offline)
Joined: Aug 20 2008
Posts: 575
Re: Three Reasons This Stock Market Rally Is False

DavidC wrote:

Hi cat233,

One has the impression that they're trying to stop short selling, full stop.

Naked short selling is, and always has been, illegal. If the SHO regulations had been applied properly, which they haven't been (some SHO stocks have been sitting in the DTTC for years apparently!) there would be no problem with shorting stocks - ask Patrick Byrne.

One other thought - it's not OK to make stocks artificially fall in price but it's OK to make stocks artificially rise in price (ooh, you cynic DavidC...).

DavidC

DavidC,

As long as buying and selling of... Put, call, naked put, and naked call options exist ...I am happy.

Cat

investorzzo's picture
investorzzo
Status: Diamond Member (Offline)
Joined: Nov 7 2008
Posts: 1182
Re: Three Reasons This Stock Market Rally Is False

Heres one you have to read to believe. I still can't even after reading it. My house is foreclosing soon and I read this- unbelievable!

The truth about the housing numbers.

http://seekingalpha.com/article/151591-the-truth-about-u-s-housing-numbers

DavidC's picture
DavidC
Status: Silver Member (Offline)
Joined: Sep 29 2008
Posts: 239
Re: Three Reasons This Stock Market Rally Is False

cat233,

You made me smile there! Right on!

DavidC

Woodman's picture
Woodman
Status: Diamond Member (Offline)
Joined: Sep 26 2008
Posts: 1027
Re: Three Reasons This Stock Market Rally Is False

I agree investorzzo, that seekingalpha article on housing is unbelievable; the claim is made billions of dollars are coming from the government for "private prisons" and this is keeping homebuilds out of bankruptcy.  No data is presented to support this.

cat233's picture
cat233
Status: Platinum Member (Offline)
Joined: Aug 20 2008
Posts: 575
CFTC review of position limits began today

CFTC review of position limits began today; tone of commission suggest tighter regulation ahead

It has been over a year since oil peaked above $147 per barrel last July, which generated frenzy of speculation about the role speculators played in the run-up of oil prices. Since that time the price of oil has fallen by more than 50% to its current price of ~$66.50 per barrel (oil fell as much as 80% peak to trough), but the push for greater regulatory oversight has continued at a strong pace and will likely result in new rules for the futures markets in the near future.

Today the CFTC held the first of a series of hearings on Energy Position Limits and Hedge Exemptions. The CFTC currently sets and ensures adherence to federal position limits for certain agriculture products, but it does not do the same for energy markets, so it is now exploring the impact that such regulation will have in order to apply it in an effective manner. While the focus of today's hearing was on position limits in energy markets, the commission has indicated it also intends to further review other commodities of finite supply in future hearings. After last year's commodities bubble (which affected both regulated ag commodities and unregulated energy commodities alike), the role of speculators in the market has been hotly debated, with some recognizing the need for such transactional players in an efficient market and others simply equating speculation to manipulation.

Today's hearing and the information released leading up to the hearing makes it clear that there will be greater regulation on the commodities futures markets in one form or another. There are many stakeholders involved in the ongoing debate about the ideal solution, ranging from commercial end users (such as airlines, freight companies and farmers); suppliers (such as energy companies and utilities); financial institutions that hedge and take risk; traders/speculators that seek profits and facilitate the market through the price discovery process; and retail consumers that purchase gas and heating oil. While all are important, the financial exchanges, CME and ICE, which offer the trading and clearing platforms for the futures in question, are the most directly affected publicly traded companies. Since their businesses are at the center of the debate, the CEOs of both CME and ICE each testified at today's hearing.

Given the topics discussed in the hearing, it is fair to expect there will be federal position limits set on energy contracts in order to ensure that no single entity can influence the market. The exchanges already impose their own limits, but it is likely that the CFTC's limits will be more restrictive than what is currently in place, or there would be no need for these hearings. Additionally, the CFTC may require further measures to be taken place by the exchanges to ensure they align with the commission's agenda.

The regulation is seen as a negative for the exchanges because it could limit trading and clearing volumes, and may send business to outside unregulated markets. The CEOs of the exchanges warned that the CFTC needs to be aware of the potential unintended consequences that a hasty or misguided regulatory decision could have, such as driving volume away from the transparent exchange-traded markets and into unregulated and opaque markets. This would not only hurt the exchanges businesses, but would also counteract the idea of greater oversight on the markets.

Although a regulatory decision isn't imminent, the exchanges are likely to be volatile in the near term as the hearings continue (next hearing is tomorrow at 9:00 ET) and political opinions get aired in the press. The ICE has lost 17% and CME has lost 10% since the hearings were first announced in early July, while the broader market has gained 9%. In addition to the exchanges, financial institutions with big commodities trading operations like MS and GS could also be impacted.

Source:  Briefing.com

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