Financial Sense Archive | About | Newshour | Metals | Storm Watch | Authors | Resources



GREED OR FEAR
by Stephen Tetreault
October 9, 2006

Once again we will see a resurgence of the battle this week between the bulls and the bears and we shall see which market emotion �Greed� or �Fear� or a combination of both will win out. The markets are actually doing better than I thought possible at this juncture as they have methodically churn like a slow moving train that is moving up a steep grade, (hopefully for the bulls it will not slip or stutter here as traction may not be regained very easily) This week after the end-of-the-quarter/month window dressing that we saw last week I expected some profit taking, however the bad-news-bears couldn't get anything going and the dip-buyers just kept buying and squeezing the new-bear-cub shorts. We could see an additional 1-2 days of continued strength if the bulls can find some new fuel/liquidity. Our economic calendar gets stronger this week and the weeks ahead, and traders/investors my start to become more skittish about holding on to their pent-up profits ahead of some key reports that may be taking center stage this week (see table below), as we move into second week of the new quarter; and into the start of the earnings season that starts in earnest next week and the weeks thereafter. September is historically known as the one of the worst months of the year for the markets but it did not come true this year as the last time the Dow posted a gain in September was 1998. Despite the technical outcome the negative contagions abound and as we head into October the volatility will surely increase. The markets/indexes could find themselves on the defensive this coming week if additional reports on growth and inflation suggest that our economy is headed for an acute slowdown despite what the FOMC may suggest. The recent pullback in crude oil prices and the FOMC's decision to keep rates steady (2nd meeting in a row) have helped to keep a floor under or what we call and underpinning so far which has helped to protect the market's gains of the 3rd quarter. The markets right now are digesting the potential fallout from a deflating housing market that will likely impact economic growth and it will surely hurt the outlook for corporate profits, which are already in a downtrend�and on a slippery path to fall quarter/quarter and possible year/year.

If you listen to those on bubble-vision and within the hyping media you will once again discover that the bulls are once again being asked to put on their walkmans and iPods, and to tune them into two recurring songs "Let's party like its 1999" �And Don't worry be Happy� and they have also replaced their eye-glassed of concern/doubt with " rose colored glasses" as they are once again being led to believe that the good-times are rolling ahead and that stocks can only push higher from here, this type of brain-dead-zombie mentality really scares me folks. My overall market sentiment/bias is bearish due to the potential for some serious window undressing, potential earnings warnings (as we are now entering in earnest the confessional period) and simply put the indexes are quite over-bought. In my opinion the economy's prospects for a proverbial soft-landing is quickly diminishing (hell I never believed in a soft-landing). And I believe that various contagions heading forward will certainly weigh-heavily on the indexes this year a few of which are�topping corporate profits, a stretched, over-extended business cycle, lackluster earnings guidance, weak economic data points, a continuing weakening jobs market, a turn around in energy costs after the election and or ballooning �Twin-Deficits� and I can go on and on.

I was looking back at some seasonal and historical trends this weekend to determine what I may have missed that stimulated this recent bullish parabolic trend�. What I found was some confusing data-premises as this year what typically happens during certain periods of time has not happened this year. Many market participants including my self were setting up for a big correction in the August/September time frame and when it didn't happen we saw a relatively strong rally instead, and some of the fuel was on the back of shorts covering, but the majority of the rally came as several major brokerage firms GS, MER and LEH rotated out of their energy positions especially in the futures and the jumped started large-cap stocks through upgrades (gap-runs) and infusions in ETFs. The as we entered the fourth quarter after such a powerful and clearly manipulated end of month/quarter rally in September, I expected to see a down profit taking and rebalancing week. Well I was dead wrong on that account. Instead we had a continuation rally. October has been known at time as being a "BEAR-KILLEr", meaning significant lows are typically found later in the month and we see strong rallies into the end of the year, so the proverbial $64,000 question will historic trends be forth coming or is the positioning of the participants for the expected rally going to cause the exact opposite affect this year�and this type of counter trend activity wouldn't surprise me in the least; as this is what my indicators are foretelling.

The current Euphoric-Bullish giddiness within the talking-butt-head community is as thick as pea-soup-fog, you can’tsee anything else. It seems everyone on bubblevision this year is expecting a rate cut around the corner and that the economy will rebound so thereafter. Instead of focusing on real-data points of the economy, earnings, corporate governance etc., bubblevision is on a constant DOW high watch and those on bubblevision are as giddy-overly-euphoric at levels not seen since 2001; and they are trying to juice those on the side lines to get so excited that they can't stand it anymore and they will once again be induced into the shark-infested pool again to invest their hard-earned (many will be stupid enough to take on borrowed) monies. In my opinion, as I wrote last week, these poor souls will once again be induced into buying the top as so often happens at market extreme levels of sentiment. The current near record lows on the VXO/VIX/VXN also confirms the extreme bullishness and that complacency reigns supreme. The market's incessantly bullish push higher for the past 3+ months has stretched the rubber band further than I have seen for quite some time.

We have seen that the stock and bond markets have been rallying strongly under the assurance/assumption that with a slowing economy the FOMC have not only stop raising interest rates but they are close to reversing their recent hikes with cuts. The Fed-heads have been making the rounds this week, in a very lackluster attempt to reverse the market of this paradigm. Philly's Fed president, Charles Plosser, said that we'll probably see another rate increase before a decrease, as he sated �Recent developments in the real economy (which one is this) may be suggesting that lower interest rates are called for, but I do not believe that is the case." He said he is much more concerned that inflation could spiral out of control than he is about a sharp slowdown; and of course the giddy stock market disregarded, and turned a blind eye to these statements�.however the bond-market players took notice and sold off briskly into the end-of-the-week; and nearly gave up all their gains. I have watched the bond-market for many years folks and in my opinion that's where the smart money trades reside and we should be heading their warnings; historically the equity stock market tends to be a little slower to catch on to the real-economic conditions.

There's a lot of money coming into the markets from some where (please review money flow chart below) and its not from investing activities....so where is the liquidity being generated from?....we know the money supply is up (and thanks to the FOMC we don't know exactly how much they have been inflating the M-3, which specifically measures the Fed's activities with money supply as they have stopped reporting on their market manipulating activities). This easy money that they inject into the main stream makes it into the banking system through their primary dealers which are the major brokerage houses that are making most of their profits lately by trading the markets with the Fed's easy-inflated money infusions. I would love to be a primary fed-manipulator as those with large brokerage houses with trading teams (that so often take opposite positions than the positions they are placing their clients in) are basically embroiled in an almost "risk-free" trading environment. If they see a lot of Fed money coming in the stream, they simply take on some easy leverage on their considerable trading capital and make huge bets that pay off nicely; and if for some reason the Fed withdraws liquidity these large very liquid teams sell short, buy puts, and make money on the ride down (enough said on this manipulation, and what I believe is insider illegal trading).

The question that we need to ask/ponder is why the so called inflation fighting Fed would be pumping up the money supply. The Fed uses their manipulation of our money supply to massage the economy far more often and with significantly more leverage than their interest rate changes. If they're concerned about a slowing economy (and a deflating housing bubble) they can and will pump huge amounts of liquidity into the economy to keep the proverbial pump primed. The longer term problem with this is that they will without a doubt increase the very inflationary pressures that they are suppose to combat. Hence every time they start to jawbone the need to stay vigilant against the inflation monster (that there are creating by their freewheeling liquidity inflation activities).

I continue to find it so ironic that the herd of talking butt-heads are now once again shouting with loud voices that we are embroiled in a new-huge bull-market and that its time to step up and buy�buy�buy or you could be missing the BULL-rally train that is headed toward the land-of-milk and honey. They are once again starting to pass out rose-colored glasses to all who appear on their so-called financial shows (They are more of a hyping-media program) so that everyone can review the economic landscape with the rose colored glasses and despite the facts as presented (weakening jobs market, increased lay-offs especially from the new wave of mergers, increased consumer debt, a crumbling housing market (see my take below)��.So many folks forget what happened after the FOMC went on a pause in may of 2000 (see-link) after their rate increasing path�.I do not forget the bursting of the bubble. All I can say to my bullish friends is PLEASE BE VERY CAUTIOUS.........I am staring to have the little hairs on the back of my neck stand on end again�.as a seasoned and savvy trader as I have found so many times that when the overall landscape appears the most positive (as we are led to believe that we are entering the land of milk & honey by so many of the hypsters) it is when disaster normally strikes and strikes hard like a spitting cobra�and almost every time in which we have experienced such periods of extreme volatility as we have seen of late, it precludes a significant major drop. I believe that there is an increasing likelihood that any additional euphoric rally attempts will be sold into very-hard by the smart-money-players; we will no doubt see attempts by the bullish dipsters to attempt to buy the dips�especially by those (whom I refer to as the next horde of proverbial bag-holders) that have been led to believe that they have missed the so-called bull-run-train; and are now being induced into jumping aboard. I am still of the belief that that the ground work being laid for a significant Bull-Trap, as any potential new monthly inflows from pensions and 401k�s will quickly evaporate and that this market in my opinion lacks the real liquidity to rage full steam ahead from these levels (outside of that being provided by the FED), I believe that funds will also, after such a robust 3rd quarter, be quite reluctant to put new money to work at these levels unless there is a distinct volume lead bull-run; and-or a significant October sell-off upon which to re-enter the markets. Please remember folks that when hedge funds and mutual funds want out of the markets they usually sell the high-beta and highly liquid stocks (ETFs) first, they are almost always extremely over leveraged, and if any bouts of significant selling ensue then they start to sell the markets generals; so we need to keep an eye on these stocks as well.

Some Insight into momentum-investing

A bullish case can be made that we are entering a period just like late 1999-2000 again! But I doubt it, and I pray that we are not!!

Folks while I do not believe that we can stage a new bull market from these levels, I want to share with you some food for thought as I reflected back to another time in history that I lived through that reminds me of what I'm seeing again. This weekend, after reflecting back in time to the last time that I saw such out right manipulated and euphoric bullishness...I looked back at 1999; and I was just as mystified then as I am now at the outright power of greed and how the bubblevision media and the brokerage/analysts community can fan the flames of the bullish wild fires once ignited. And the herd mentality that they can foster can be extremely powerful, and the media especially CNBC was in my opinion responsible for the irrational exuberance in 1999 more than any one else as they knew by their actions that they day after day were throwing gasoline on markets and if any sparks remained the bullish fire roared brightly again. I remember what they were able to promote and orchestrate on the Nasdog as the bubble was forcefully inflated in late 1999 ahead of the Y-2-K mystical deadline. Let's take a look back at the Nasdog chart back then �1999�. The market was churning slightly upward between 2,500 � 3,000 for most of the summer, and when it finally broke through 3,000 to a relative new high and the media, analysts and greed-filled fund-managers jumped on the train and started to spin that we were headed for the land of milk and honey and that technology stocks were the place to be and that valuations, sound business plans, real-cash flow, meant nothing as its all about the momentum-train and its departing the station, and if you do not jump on you will never see these levels again in your life time�.and as we saw they piled on in droves�.the darn index after breeching 3000 barely corrected before hitting 4,000; I was like a deer-caught in the head-light as I had jumped aboard as a new-trader, and no matter what stock I bought it went up�.the index rose almost 35% in 9-weeks. The momentum buyers were induced into a frenzy of buying (it’s like a game of hot-potato, or musical chairs as long as you have someone to pass the potato to or a chair to rest upon when the music stops your ok; everyone wins as long as those in the game continue to participate. It portrays the greater-fool-theory at its best; for those not familiar with the theory/premise. (The theory states that that it is possible to make money in the stock market by buying stocks whether overvalued or not, and by later selling them at a profit because there will always be someone (a bigger fool) who is willing to pay the higher price and be left holding the bag!.)

And they theory sure held true in 1999, in January of 2000 I was shouting at the top of my lungs to all those who would listen that the Nasdog/SPX and Dow were all at an extreme exhaustion top and that valuations were ridiculous and that corporate profits were peaking and most ignored me and at the time they were right the crap-filled Nasdog tacked on another 800+/- more points before the death-roll started in march of 2001. For those who do not remember the Nasdog topped on March 10,2000 @ 5132 and by April 17,2000 it had dropped a staggering 1900+/- points to 3227+/- . Nevertheless the point I was trying to make is that when the herd, is induced into a frenzy by greed, it can take on a life of its own, as the hyping of and the creating of new highs, the buying the new highs and being so greed-filled as to preempt the dips before they even appeared the herd is induced into a darn buying frenzy with reckless abandon. And that rocket ride steadily upward was at the time breathtaking and I was left behind at the proverbial bull train station in January, and I do remember thinking many times that I was wrong to have disembarked the train and that I was being left behind�.worse yet because of my conviction that we had topped in late December early January I was shorting the markets and as a newbie bear a was getting bloodied by the raging bulls as my time frame was to short and I was being forced into covering every darn week. The giddy bulls showed the bad-news-bears no mercy, as the stampeded over them. And we saw that timid valuation and sensible investing bulls were also given no quarter, as they were not provide any real pullbacks to establish new positions; as it was day after day of incessant steady momentum driven advances. And I learnt a valuable lesson those months folks as during that process I observed that the locoweed induced giddy-bulls are a force to be reckoned (irrational exuberance last longer than most believe it should) as the frenzy created by those greed-filled fund and hedge fund managers chasing performance and retail investors induced into running with the bulls run until they collapse or run off the proverbial cliff. That is what the powerful emotion called greed can do, especially when the hyping bubblevision media fans the flames into a full fledged wild-fire.

The lesson that I wanted to pass along folks is that the efficient market theory does not always work in time of a frenzy of lust-greed filled participants as when markets get very over-heated they tend to stay hotter than they should, and most participants chasing performance and green, become blinded to fundamentals, real-earnings and business-models and economic conditions. Even when many participants have recognized that the prices have run way too high, that they have gone up too fast, and that, therefore, there is an increasing possibility of a sharp correction, but nevertheless they continue to hold their noses and buy CRAP. Again they are hanging their hats on the premise they would still be able to exit with sizable profits because of another bigger and "greater fool" will come along to buy the shares at an even higher price than they had to pay! This works perfectly at times folks so long as the rocket-ride trend continues, but the risk is that the greater fool what I call a �bag-holder� may in fact be you!

The markets for some darn reason have significantly discounted and have been more than willing to disregard what I perceive to be heightened inflationary pressures (and the data so bears out my concerns as well). Also from my vantage point it is not unreasonable to assume that helicopter Bernanke has a strengthening bias against further tightening or giving any hints of such ahead of the elections, nor is it unreasonable to presume that he fully intends to move early and aggressively to thwart the financial and economic risks associated with bursting of the mega-bubbles that the FOMC has created. Yet there are very serious contagions associated with this entire notion of the so called Greenspan/Bernanke New Era central banking; wherein they are looked upon an infallible financial gods; what we can say is that both regimes, are conducive environments where asset and economic bubbles are almost completely ignored as they are also the key players in the inflation of these bubbles themselves (sort of a blind eye denial syndrome), the FOMC seems to have secretively adopted an low �risk management� inflationary tactic, and an ignorance of the bubbles. Basically, the approach that they take is a �speaking with fork-tongue� sort of an approach is that they believe a bursting Bubble can and should be mitigated by inflating other bubbles elsewhere in particular inciting sufficient credit (debt) creation by maintaining and infusing and over abundance of liquidity (one reason that that have stopped reporting on M3 money supplies); to keep asset markets sufficiently levitated (large amounts of easy and excessive monies will always create bubbles) and to ensure the continued manipulation of a so called expanding economic output (that is not real out-put, just excess monies making a foot-print).

The real contagion and dilemma that emerges from the creation of one Bubble with another Bubble usually a significantly bigger one is multifaceted, and the overall ramifications are cancerous in nature as it fosters an extremely overwhelming greed based profit motive which of course leads to speculative biases that evolves over time to saturate and creep into all asset classes. Worse yet in my opinion it firmly ingrains this bubble-mentality of easy monies into our Financial Structures throughout the various classes (i.e. hedge funds, derivatives, securitization markets, �structured finance,� bank real estate lending, etc.) that spreads through the different classes like a fast-acting antacid and as such it creates asset inflation and mega-bubbles (like the bond bubble of 1993, emerging market bubbles of 1994-1997, the most notable of late the technology-stock bubble of 1999-2000, and now the very most dangerous of bubble is being crated credit/debt, as it dwarfs the summation of all the others) The Fed through their irresponsible actions (my opinion) has caused an huge escalation in financial leveraging (wherein hedge funds, banks and major brokerage huge are extremely overleveraged due to the feeling that the fed�s printing machines will always bail them out of any difficulties), these extremely speculative positions over time play an increasingly instrumental (and often largely unrecognized) role in system liquidity conditions. The FOMC has backed themselves into a very small and cramped corner as when a central bank actively induces over leveraged speculation as an expedient policy mechanism for system stimulation (this is clear inflationary folks, the very beast they are dedicated to fight, they are feeding) as the Fed clearly did in 2001-2005, they created the largest housing bubble ever; and now since they are the creator of this mega bubble they will not easily be able to divorce themselves from the housing bubble as they have now trapped themselves so to speak in an position where if they do not remain overly accommodative, they will be the one that clearly pops the housing bubble.

I continue to find it very interesting that so many of the so-called economic guru�s are so adamant about the likelihood for a soft landing. I have been studying historical economic for many years folks, and let me tell you Soft landings are about as rare as truth-telling politicians, as I have heard that so many have seen one or more or they know someone who has, but actually finding one throughout history is slightly more difficult, as from my recent research we have experienced 16 periods where we have seen an ending of a FOMC tightening cycle; and out of those 16-peiods I can only call to mind one rate-halting path that resulted in a so-called soft landing; and for those a bit younger than me, that period was �1994� and those were different times as we were just embarking on a new-growth cycle (remember the beginning of the so-called internet, personal-computer, and wireless growth cycles) which was propelling the onset of the new bull market. This time we have no such growth-spurring mechanisms, just the opposite is happening as we currently have a housing market bubble that is deflating and it’s this bubble that has been the primary engine of the Bush economic-recovery. The housing market has been responsible for most of the growth in real GDP and many of the new jobs in the past few years; hence I ask�what industry is now poised to step in to the vacated shoes of the housing-market, I may be blinded by the bullish-light, as from my vantage point (out-side of a new-war) I can see very little stimulus on the horizon, maybe some of you kind folks could shed some light on any areas that I may have missed.

© 2006 Stephen Tetreault
Editorial Archive

Contact Information
Stephen Tetreault
T-Waves
Southern Maine, USA
Email | Website

Contact Us | Copyright | Terms of Use | Privacy Policy | Site Map | Financial Sense Site

© 1997-2011 Financial Sense® All Rights Reserved.

The opinions of the contributors to Financial Sense® do not necessarily reflect those of Financial Sense, its staff, or its parent company.