Tuesday, October 26, 2010

Morning Update/ Market Thread 10/26

Good Morning,

Equity futures are lower this morning, the dollar is stronger, but bonds are significantly weaker. Oil and gold are both lower.

Yesterday’s run higher was extremely weak and faded late day to produce topping tail type candlesticks. Volume was the second lowest of the year! That’s not something you want to see with a new high attempt if you’re a bull. The Transports did make a new intraday high above the April high, but the Industrials did not – closing highs are what matter most for DOW Theory.

The up/down action caused yet another small movement in the McClellan Oscillator and so we can expect a large price move soon – the McClellan did finish in barely positive territory. Yesterday was another Bradley Model turn date – these have been run over lately but we are certainly past due for a trend change.

But we can’t have any of that in front of an election, now can we? Oh no… so therefore today is another POMO, as is Thursday. Thus you can expect rising prices to come out of nowhere as the POMO operation begins - only to have all that money vaporize later. So, don’t be surprised to see what was clearly a topping candlestick get overrun by brute stupidity. Following the POMO on Thursday, of course, we will naturally want to Pavlov higher Friday afternoon to get in front of the Monday morning ramp job which should be a doozy as there’s another POMO scheduled for Monday, the day prior to the election! Oh yeah, that’ll be nice… or because everyone knows the game thoroughly now the reversal happens now. Whatever steals the most money... personally I don’t have a supercomputer to figure it out, but we know the large banks do. And that really makes a mere mortal playing their game a fool.

Meanwhile the historic divergences continue to grow, saying to me that the reversal when it comes is going to shock a lot of people.

There’s quite a bit of data coming out this morning, unfortunately most of it comes later after the open. The Case-Shiller Home Price Index comes out at 9 Eastern. Consumer Confidence, the FHFA House Price Index, Richmond Fed, and State Street Investor Confidence are all released at 10 Eastern. We will report on these results in the daily thread.

You can see in the 30 minute chart of the SPX below that we are creating a megaphone top formation. Megaphones typically reverse the trend going into them:

Yesterday the VIX was positive at the same time the markets were positive. This is another sign that people (are there any humans left?) are positioning themselves for a trend change:

Yesterday the Consumer Metrics Institute released a report saying that the real economic contraction of 2010 now exceeds the contraction of 2008! And it’s forecast to FAR exceed the contraction of 2008. Is that what the mainstream media and government statistics are telling you?

Comstock Funds posted a good chart recently showing where we are in the deflation cycle. I think this chart is excellent. What it is saying is basically that wave C of the deflationary wave is still coming:

Of course the market is going to gap lower at the open. Every day begins with a gap in HFT land. That way they can get in front of any real humans left and reverse the trade once they have suckered said human into a trade. They see the human’s bid even before it is executed, and then they see whatever stop is inserted as well. There are so few humans left willing to play this game, however, that WHEN the owners of the HFTs turn their machines off, the market is going to instantly (as in a flash) go no bid. It’s generally a really terrific way to build a market and to inspire confidence.

Speaking of inspiring confidence, the asshat award of the month goes to Warren Buffett’s Berkshire Hathaway:
Berkshire Hathaway Tells SEC: Accounting Rules Don't Apply To Us, And We Don't Have To Take Writedowns

Is Berkshire Hathaway asking the SEC for special treatment?

The regulator questioned Buffett's firm in May over a glaring absence in write-downs concerning losses worth $1.86 billion on Kraft and US Bancorp, Reuters reported today.

Berkshire denies any accounting malpractice despite the fact that the losses endured for at least 12 months and were clearly not temporary under SEC guidelines.

Here's what Berkshire CFO Marc Hamburg wrote in a response letter (which can be viewed in full at Zero Hedge) to the SEC's queries in May:
We believe it is reasonably possible that the market prices of Kraft Foods and U.S. Bancorp will recover to our cost within the next one to two years assuming that there are no material adverse events affecting these companies or the industries in which they operate.

We believe that our conclusions to not record other-than-temporary impairment charges on investments in an unrealized loss position for more than twelve consecutive months was appropriate and in accordance with ASC 320 and Topic 5M.
Hamburg then attempts to further justify Berkshire's actions by arguing that the firm is pretty sure the losses are "recoverable through anticipated future investment income" (ok...) and that the firm has a talent for holding securities for long periods of time, so it can wait for the shares to bounce back (hmmm).

And there you have someone who once again clearly believes they are above the rule of law while they march along their merry way producing nothing but ACCOUNTING FRAUD. And this is the game that our entire economy is built upon. Earnings beats? LOL, nothing but fraud. And that’s the story of the failure of this current Administration, isn’t it? They have failed to uphold the rule of law. No convictions, no prison time, no enforcement of the rule of law. How important is it? It is nation ending important.

When you see the rule of law being enforced, THEN will be the time to start getting serious again about “investing.” Until then, it’s all fraud all the time. I’ll go long the market in earnest the day that Warren Buffett is behind bars sharing a cell with the likes of Dimon and Paulson – I don’t think I’ll hold my breath waiting.

Pink Floyd- Pigs On The Wing: