What Are They Smoking at Barron's?

This week's Barron's is truly daring and I'm not being sarcastic. In one article, Kopin Tan (a pretty smart reporter usually) confidently declares the long dollar slide over. The underlying rationale makes, in a matter-of-fact way, quite a few questionable assumptions as in "This week likely marks the end of the Fed's easing". That's news to me. Fed member Richard Fisher's speaking against more cuts (see this previous post) is cited as proof that the Fed is actually just about done with its rate-cutting campaign. The only problem with that argument is that Fisher was one of two dissenters at the last FOMC meeting, which means Bernanke and a majority of Fed members actually DISAGREED with him.
Another assumption the article makes is that commodity prices have seen their top levels and it's look out below from here on out, which was the crux of a previous Barron's article of a few weeks ago. This is what I thought of that opinion then and I haven't really changed my mind. The next courageous (and probably wrong) assumption is that the European Central Bank is also on the verge of a major policy change and, contrary to the Fed, is getting ready to start cutting rates as more and more evidence of a slowing European economy come in. I don't know about you but I really don't see the ECB slashing rates with oil close to $120 and food products up around 40% on average this year all across Europe.

In a second article, the daring Jack Willowghby just as confidently, because he has more than 55% of money managers to back him up, calls for a new bull market in stocks. Needless to say, some of the portfolio managers he quotes, high off the fumes of the recent 10% upward correction, are positively delirious. The chief investment officer of Vanguard, mistaking his job for that of a chief marketing officer, thinks the financial industry's troubles are just about over, the uncertainty cleared and the market cheap. He sees Dow 14,500 by year end and, throwing all caution to the wind, he predicts Dow 15,800 in June 2009.

Funny detail, one argument this wise chief investment/marketing officer uses to come up with his psychedelic prognostications: a cheap dollar.

Time To Get Short Again

For those astute market players who are of the opinion that the current financial and economic troubles are far from over and that we are in a bone fide bear market, this daily chart of the Dow Jones Industrial Average (click to enlarge) would:
1. confirm that opinion
2. seem to indicate that now would not be such a bad spot to add to an existing short position if not initiate a brand new one.

We are getting tantalizingly close to:
1. the psychologically important 13,000 level
2. a rapidly falling 200-day simple moving average (now very close to ....the 13,000 level)
3. a previous significant support line, broken in early 2008 and now a significant resistance line.

I am forgetting the 14-day RSI, very close to 60 which is usually as high as the RSI gets in a bear market.

On the sentiment side, it appears the gloominess has lifted considerably after the Google earnings blowout (I'm just echoing the fundamentalists here), a rather bearish development in a bear market.

Should the Dow convincingly break above both 13,000 and its 200-day SMA I might regret this post...

Fed Haters

Richard W. Fisher, president of the Federal Reserve Bank of Dallas and voting member on the Fed's policy-setting committee, almost sounds like a typical Fed hater when he says:

"The answer, to be curt, is not to compound the bad by repeating the oft-prescribed remedy of inflating our way out of our predicament with a wing-and-a-prayer promise that it can always be reined in later" (as reported today by Dow Jones).

He was one of two dissenting members at the most recent FOMC meeting, preferring a 50 basis point cut to the actual 75 basis point reduction.

Now a real Fed hater (or at least a real Fed doubter) who also happened to be a conspiracy theorist (they usually are) would tell you that this is all for show. Nothing like a make-believe dissenter to show the world that the Fed hasn't totally given up on its inflation-fighting mandate.

Something I haven't heard before concerning the Bear Stearns "bailout", courtesy of the adventure capitalist himself, Jim Rogers:

"If the system is so fragile that the fifth-largest investment bank can bring it all down, then you better go ahead and have the problems now. What if three or five years from now it is the largest investment bank that fails or the largest five or six banks that fail? Then there will be a disaster."

Very valid point. If we are to believe the official explanation from the Fed, that a Bear Stearns bankruptcy would have caused major damage to the economy, then one has the right to ask: why is the fifth-largest IB so crucial to the economy? The alternative would be to not believe the Fed and conclude that the reason Bear was bailed out was not to save the economy. What could be the real reason then? Jim Rogers' interpretation of things: "The government has been intervening to save all its friends for a decade or so rather than letting the market work properly."

The Uptick Rule

Adam Warner of the Daily Option Report blog has posted extensively and exhaustively on the whole uptick rule controversy (more recently here, here and here). What Adam keeps saying time and again (because nobody else is saying it and that is truly galling) is that those people who are intent on and capable of destroying a stock or "launching a bear raid" to echo the hysterical rhetoric never needed an uptick to get short in the first place. At the proprietary shops I traded in the late 1990's, "bullets" were all the rage. I want to be really careful here but one can make the case (and some have) that many traders were using bullets (long stock and long deep in the money puts) specifically to circumvent the uptick rule. Other strategies were also used to the same effect and by the time the uptick rule was repelled, something that was actually done progressively with intermediate steps and pilot stocks, it really didn't have any impact anymore.

I think what's going on is just another form of a phenomenon that takes place inevitably every single time there's a severe and prolonged sell-off: blame the short-sellers. It has always been that way and one can even argue that the uptick rule, which was instituted in 1934 in the wake of the mother of all sell-offs, was itself the result of a blame the short-sellers mentality. People want, need a bad guy every time there's blood on the street. And scapegoating the minority of people who make money when the markets go down, forgetting that they usually stand to go bust if they're wrong, is just too convenient politically to pass up.

Case in point, this from Thomson Financial (emphasis mine):
"The Chairman of the Securities and Exchange Commission said today that the SEC is closely examining whether market participants illegally colluded in an effort to short shares of Bear Stearns just before it had to be rescued by JP Morgan Chase and the Federal Reserve.In a Senate Banking Committee hearing today, Chairman Christopher Dodd of Connecticut said he is worried that the volume of trading in Bear Stearns shares indicates that illegal trading might have taken place. Dodd told SEC Chairman Christopher Cox that he hopes the SEC is examining this."Your hopes will be, I think, met and exceeded, with respect to the agencies' response to these concerns," Cox said in response, adding that that SEC's enforcement division is "very active on this."However, Cox indicated that he was restricted from speaking further because this process is ongoing."
The highlighted portion speaks for itself. It just means the scapegoats have been found and they shall be punished and made an example of.

Fed Oversight

I'm listening (distractedly) to the Q & A session part of the Bernanke Congress testimony and something funny happened. One smiling, seemingly innocuous, congresswoman asks him a question to the effect that every time he has lowered interest rates lately, the stock market (she specifically mentioned a "New York Stock Exchange index" she follows) seems to take it well at first, goes up strongly but then a few days later retreats and falters to the point where it finds itself lower than at the time of the rate cut. And this is the funny part: in his answer, some boilerplate to the effect that rate cuts take time to take effect, he didn't even bother pointing out that the Fed's rate cut policy is not aimed at propping up the stock market. So was it just an oversight on his part or is it that he so internalized the fact that the Fed does in fact monitor, react to and target the stock market (even though it's not in its mandate and that previous Fed officials have always denied it) that he just didn't pick up on the congresswoman's implication that the Fed's only reason for cutting rates is to support the stock market?