HOME OF "PICTURES OF A STOCK MARKET MANIA" April 28, 2010
Alan M. Newman's Stock Market CROSSCURRENTS
Alan M. Newman, Editor
Excerpts from our April 26th issue
Rationales & Targets
Talk about conflicting indications for the economy, bulls are crowing about the statistically faulty (done by survey with “seasonal adjustments”) new home sales rise of 27% but we are far more impressed by foreclosures spiking 7% in the first quarter (see tinyurl.com/2cek7tc). Meanwhile, weekly initial unemployment claims are still far from numbers that would indicate a sustainable recovery. Thus, at close to 24 times earnings and a 1.8% dividend yield, the S&P 500 are quite overvalued, as much so as they were in October 2007 before it all came apart.
We believe the Goldman fraud has the potential to greatly undermine the hopes for investors in the next few months. The very words of Goldman’s Lloyd Blankfein, “We lost money, then made more than we lost because of shorts. Also, it’s not over, so who knows how it will turn out ultimately,” clarify the Goldman raison d’etre. If Goldman can make money, they intend to do so, regardless of the cost to the rest of the nation or even the rest of the planet. The potential for a groundswell is enormous. We’ve been wrong for too long but this time, the top should be in.
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The news on Friday, April 16th about Goldman Sachs hardly came as a surprise to us. Over the past many months, you may have noticed our contempt for the financial industry in general and Goldman Sachs in particular. That Goldman can even be alleged to have committed the vampiric misconduct cited by the SEC (see tinyurl.com/y6wxrqj or better yet, see http://www.sec.gov/n...010/2010-59.htm) is testament to the incredible abuses that greed has empowered and enabled, especially via the construction of derivative products, like the Abacus synthetic CDOs (collaterized debt obligations) that seemed to exist for only one purpose; to enrich John Paulson and his hedge fund. Paragraph 16 of the SEC complaint is about as flagrant an indictment of the kind of unethical behavior (at the very least) that drove the country to the edge of the abyss; “16. Paulson discussed with GS&Co possible transactions in which counterparties to its short positions might be found. Among the transactions considered were synthetic CDOs whose performance was tied to Triple B-rated RMBS. Paulson discussed with GS&Co the creation of a CDO that would allow Paulson to participate in selecting a portfolio of reference obligations and then effectively short the RMBS portfolio it helped select by entering into CDS with GS&Co to buy protection on specific layers of the synthetic CDO's capital structure.” Just one page later, in paragraph 18, it is disclosed that Goldman’s Fabrice Tourre, who put together the deal, knew full well what the outcome would be, claiming in an email that The whole building is about to collapse anytime now.”
Logically, the SEC’s claim of fraud is not likely to have been based on an isolated incident; we can fairly assume despicable episodes such as this may have occurred on many occasions, and been committed by other firms as well. In the past, the SEC has always bowed to pressure from the financial industry it is supposed to monitor in the interests of investors, and has never adequately meted out punishment sufficient to prevent recurrences, only the merest slaps of disdain, modest monetary penalties and warnings. Ironically, it probably no longer matters whether the SEC hangs Goldman Sachs by their collective corporate balls. Bit by bit, piece by piece, the public has paid too dear a price and it will take many years before any semblance of trust can ever again be placed in the financial industry. However, the SEC now has a chance to recover the trust of the people it serves. The mission statement of the SEC is quite clear; “….to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” We’ll believe it when we see it in action. To date, with regard to their primary mission, the SEC has come up completely and utterly empty.
In the meantime, there are now indications that the financial industry is not only NOT getting its act together but that the repercussions from the SEC claims may be just the beginning. First, we have the claims (see tinyurl.com/y7fpf9f) that the banks are masking risk levels by “temporarily lowering their debt just before reporting it to the public.” As we showed in our April 5th issue, the credit exposures of the top five banks averages close to three times their risk based capital and in the case of Goldman, credit exposure is a resounding 766% of risk based capital.
Secondly, the fraud contention has catalyzed others to action; AIG is considering suing Goldman. What’s left of Lehman is considering the same. And foreign governments are now considering their options as CDOs have gone horribly wrong, imploding despite assurances offered that they were proper transactions.
In recent days, there has been ample speculation John Paulson aide Paolo Pellegrini told the government that he informed ACA Management that Paulson intended to short the portfolio of mortgages ACA was assembling. Given the history of Goldman alumni to always fall in line with the company line, we should not be surprised. We can only wonder if ACA management stands ready to confirm this claim.
In the meantime, Goldman is already attempting to distance the company from Mr. Tourre, claiming the company would never willingly mislead investors. Less than five months ago (see the November 30, 2009 issue), we ridiculed Goldman Chairman Lloyd Blankfein’s comment that the firm was doing “*******’s work.” Clearly, they are not. We also claimed this sorry chapter in our history had not concluded, not by a long shot. We believe there is a lot more to come.
Speculative Intensity
At this juncture, it is impossible to ignore sentiment, which has run to extremes at least as significant as the mid-January highs. Below, we illustrate a measurement of the intensity of speculation that is simply beyond the pale. A portion of the growing divergence between NYSE and Nasdaq volume is likely due to the NYSE losing business to other market makers, especially electronic, but there is no way to explain away the staggering divergence visible in the chart. Since January 1st, 21-day average NYSE volume is up 3.2%. By comparison, 21-day average Nasdaq volume is up 40.8%. Clearly, the action is taking place in the more speculative, higher P/E and lower dividends paying issues on Nasdaq, and that’s a bad sign for investors.
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ABOUT ALAN M. NEWMAN
Alan M. Newman has been the Editor of CROSSCURRENTS since the first issue was published in May of 1990. Mr. Newman is also a member of the Market Technician's Association and has been widely quoted for years by the financial press, media, and other newsletters and has written articles for BARRON'S.
The newsletter is published roughly every three weeks and focuses on economic and stock market commentary, often covering controversial subjects. Several proprietary technical indicators are usually featured in every issue accompanied by current interpretation. Broad samples of our work can be viewed at http://www.cross-currents.net/.
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