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Behind the Shell Game Lurks a Black Swan

By Rick Ackerman Posted on October 29, 2009, 12:07 am EDT Last Updated October 29, 2009, 12:19 am EDT

When we half-jokingly talk about DaBoyz and how they are continually manipulating the markets, we sometimes lose sight of the fact that they really are out there, rigging the game so that they cannot lose.  However, even as these Masters of the Universe maintain quasi-criminal control over the short- and intermediate-term swings, they understand as we do that there are larger, uncontrollable forces lurking in the form of black swans such as the collapse of Lehman Brothers.  A post in the Rick’s Picks forum from Mario Cavolo brilliantly describes the interplay between the manipulators and those larger, dangerous forces. Here’s Mario with some thoughts on the subject that hit us like a bolt of lightning:  

Swan2

“Rick, I have been in a state of particularly deep pondering of these issues for the past few days, stimulated by the way, by my carrying around and reading Nassim Taleb’s classic, Fooled By Randomness, when I had a sudden insight. In the same way that I have learned here from you and others as well, we realize that ‘DaBoyz,’ the ‘PPT’ and various other interested groups (the Goldman Sachs trading desk, with 40x higher volume) with such ability, even possibly illegal ability, interfered and manipulated the market with enormous cash infusions after the March low, forcing it up beyond reason and fundamentals, such heavy handed manipulations demonstrated by all kinds of evidence in daily trading activity, volume spikes, etc. 

‘They’ Have Decided

“Well guess what? THEY are at it again, my friends, and why shouldn’t it be the case? In the short and intermediate term time frames, they absolutely can and do manipulate index levels, gold and the dollar if they want — right or wrong?  Those same BOYZ have made their latest set of new strategy decisions, of what WILL go up or down in the range they’ve decided, within the context of the current overall state of affairs and the intermediate-term time frame.

The action, including strange inexplicables, is sending the message right now: Part I. Yes, gold and stocks have had their nice ride to the topside of the trading range, and there is not much upside left in this intermediate time frame, so it is time to reasonably take profits, let the market breathe/correct/trade sideways. Well they know that’s what most everyone is thinking now: there is very little upside to this run, few are that foolish a risk taker, eh? DaBoyz know it too, and know it’s time to let it breathe/correct for a while. Taleb just taught me about this “asymmetry” in the upside and downside. Part II: Yes, at the same time as stocks/gold are popping up, the dollar has had its scary ride down to the lower side of its trading range and now it’s time to take those stock and gold profits and park it safely in dollars. 

Adjust, but Pray

“A dangerous game? Yes, of course.  Do they have a choice? No. They have to do this, Rick, to address it, to manage it, to make choices, (while also preserving their own status, of course). They are responding and adjusting, responding and adjusting, while praying that some random black swan doesn’t suddenly appear again to disrupt the delicate balance of the sand pile currently in place. The state of affairs here in October is quite different than May. In fact, what would you really do to unwind it, to solve it, to balance it, to save it?

“I am surely incapable of properly answering such an enormous question.”

 As are we, Mario.  Thanks for weighing in.

(If you’d like to have Rick’s Picks commentary delivered free each day to your e-mail box, click here.)

  • mthomas November 4, 2009, 7:31 pm

    Ok Rick, thanks for your advice on the long dated options. I agree with you, although I do feel that we are at an important swing high in the market. I think the market will at least test and possibly break through the march lows in 2010. Every true bear market ended with a retest of the lows, and I don’t see it being any different this time.

  • mthomas October 30, 2009, 5:15 pm

    Dave, there are a few alternatives. One, I think now is a decent time to buy long dated puts on the market. If you’re not comfortable doing that, you can invest some money in gold related assets. I think cash is also a very good place, unfortunate but true. I also think the gold price will continue to perform well because of the growing lack of confidence in central banks’ policies and in fiat currencies. I recently read some really good articles on these topics at http://www.goldalert.com/, which discuss the relationship between the dollar, the gold price, and gold mining companies given the Feds easy money policies. I thought the article called “What Gold Bubble? Setting the Record Straight?” was good, and there is also some good information there about specific gold mining companies that are leveraged to how the gold price moves.

    &&&&&

    I would strongly advise against buying long-dated options at any time, on any vehicle, unless you are doing so at an important swing high or low and your goal is to spread off the premium risk on the reaction move. Over the last 35 years, there have only been a couple of times when holders of puts would have had as much as three consecutive days to feel good about it. Time is ALWAYS working against put and call buyers, and the further out in time you go when you buy options, the more heavily you are stacking the deck against yourself. RA

  • Dave October 30, 2009, 10:12 am

    So what’s better? $ or stock market? The dollar is toast because of the helicopters and printing presses, but why are stocks any better? All crooks and scheisters cooking the books, and brokers playing promoter games to pump their stocks.

    I’m confused…. All the gazillions of dollars sloshing around looking for a place to go where they can make more bucks. So one day it’s blah blah the stock market is overheated and eveybody jumps into dollars and out of the market. The next day it’s the other side of the mouth speaking and economy and stocks are sprouting up and up, so it’s OK to gamble back in the stock market.

    But if the US economic situation is so screwed up, then which, ultimately is a better place to park one’s investment money: dollars or stock market? And until there is a clearer consensus, surely it is futile arguing the dollar’s demise or stock market return (drop) to ‘reality’. The two opposing forces will have a tug of war back and forth.

    So what is the path to the end game? When those gazillions of dollars turn out to be Monopoly money and the stock certificates wall paper what’s a guy supposed to do?

  • Rich October 29, 2009, 7:02 pm

    Profound title Rick.

    The Commerce Department reported its estimate for 3rd quarter 2009 GDP Wednesday, up 3.5 percent. The Central Planners moved fast to declare the Recession from 2008 over. This was the first reported rise in GDP since the second quarter 2008.

    However, about half the growth came from the expired Cash for Clunkers government subsidized vehicle purchase plan where they provided significant cash rebates in exchange for consumers buying the cars the Central Planners wanted folks to buy. Most of the rest of the GDP growth came from increased government expenditures, which were up 7.9 percent. This is a great number for socialists, however for households, which account for 70 percent of GDP in a capitalist economy, not so great. Households remain stuck in a sinking economic quagmire. Current Economic policy appears to be more about the government than the household, and 3rd quarter GDP brings the point home in spades. For the American Household, the deep recession/ possible depression remains firmly intact. Present and future cash needs remain a fearful proposition. A massive tax rebate is what is needed for the American Household.

    Initial Jobless Claims, new folks collecting unemployment because of a job loss, came in at 530,000 in the latest reporting week, and continuing claims were 5.8 million.

    80 years ago today, to the day, the stock market crashed, the kickoff to the Great Depression of the 1930s.

    Agree with Robert McHugh who wrote this plus note Cash for Clunkers and $8000 Tax Credit for new homebuyers increased the indebtedness of underemployed Americans and the likelihood of increased defaults…

    Regards*Rich

  • mario cavolo October 29, 2009, 6:06 pm

    I am delighted to find you regarded my post worthy of further attention and consideration. Meanwhile, considering the opposite of Taleb’s randomness, can we be guilty of oversimplifying matters by suggesting traders are simply and wisely reallocating/rotating their funds? We now have ourselves just some plain old common sense by a few hundred thousand traders who have enjoyed their run up in stocks/gold/oil, see further upside in those relatively limited from here, and so are now wisely taking their profits off the table to reallocate/rotate it into what’s been neglected, beat up, shunned, heading down for the past few months, such as the USD and UNG and a few other choices out there. We don”t suggest the fundamentals be ignored but they are subject to a wide spread of interpretation and traders simply play the price/volume/momentum action. The traders/speculators are having a field day just deciding what to play next; like whether to play craps or roulette or blackjack or baccarat…reminds us of what Taleb calls the “peso problem”?…its a bit scary out there… Cheers, Mario

  • Rich October 29, 2009, 3:36 pm

    Maybe a rebound day today with this perspective:

    Breakfast with Dave

    Read full article (PDF 483KB)

    October 29, 2009

    BULL RUN MAY BE REVERSING

    The S&P 500 is riding a four-day losing streak. And while we have seen these corrections turn around before during this massive bear market rally that started last March, the difference this time is that the uptrend line from the lows has been violated across a fairly broad front, including the S&P 500, Nasdaq and the Russell 2000. When trend lines get violated, and when this happens on high volume, it usually, though not always, signals something big.

    So many people are deluding themselves that we have some sort of durable recovery on our hands and yet consumer confidence, at 47.7 in October, is unbelievable — the lowest this every got in the 2001 recession, which included the 9-11 terrorist attacks, was 84.9. Think about that for a second. If the equity market is catching on to the view that we could be in for some slowing in the data, then a significant correction after a 60% surge is very likely. This is a time to be raising cash if you haven’t done so already — valuation, technicals, fund flows and fundamentals at this juncture are all near-term obstacles.

    In terms of valuation, we said yesterday that the P/E ratio on the S&P 500 on a normalized 10-year basis is 20x and the long-turn norm is 16x. Just to go back to the norm, let alone compress to a level commensurate with an unusually high level of economic and financial uncertainty, would suggest that we would see the S&P correct down towards 875.

    ONLY ECONOMISTS SEE THE RECESSION AS BEING OVER

    The man on the street sees it a little differently, perhaps less enthused by the fact that a lower rate of inventory destocking is arithmetically underpinning GDP growth at this time. Put simply, a Wall Street Journal/NBC News poll just found that 58% of the public believe the economic recession still has a ways to go — and that is up from 52% in September and means that the private investor, unlike the hedge fund manager, is not interested in adding risk to the portfolio even after a 60% surge in the equity market.

    Only 29% of those polled believe the economy has hit bottom — imagine having that psychology with nearly zero interest rates, a bloated Fed balance sheet and unprecedented fiscal deficits (poll was taken from October 23-25). Nearly two in three (64%) said the rally in the stock market (still a bear market rally — not the onset of a new bull market) has not swayed their view (or ours for that matter). There is going to be some very tough slogging ahead as far as the economy is concerned.

  • gary leibowitz October 29, 2009, 3:10 pm

    Don’t buy into the notion that the PPT has any long term affect what so ever. In fact all they can do is create a more orderly slide. I say this because all these conspiracy theories go against historical data. Case in point: 1929 thru 1930 moves. There certainly wasn’t any major government intrvention then yet the charts are strikingly similar.

    If you want some reason for this all you have to do is look at human behavior over the last 5oo years. While technology makes for faster transmission of information to many more people then ever before it doesn’t stop our genetic emotional code from being triggered the same way.

    In fact if the current scenrio was to closely follow the 1930 move you can expect a breakdown in the market over the next few months.

  • Rich October 29, 2009, 4:10 am

    If there were any doubts about who THEY are, read this:

    http://www.augustreview.com/news_commentary/free_trade/missile_shield_sacrificed_for_trilaterals%27_profit_20090918150/print/

    Meanwhile, trailing buy and sell stops with healthy skepticism can make and preserve profits.

    We wrote it up and bought some LVLT with a trailing Buy Stop…

    http://www.jubileeprosperity.com/

  • Tahoe Billy October 29, 2009, 1:28 am

    It is interesting no doubt, sort of like “okay, propped up, now what?”. This is probably where the powers that be would like the market for now around 10K. Any higher would be laughable and dangerous, so this probably where they want it. People have something again in the IRA’s etc. looks better on paper. World saved, but recovery to where? More flat screens and Hummers again?


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