9/19/08 (The Death of the Free Markets!)

Traders,


Yesterday was unprecedented for many reasons. The dichotomy between the market rally and the government intervention is a very sad state of affairs indeed. I had a talk with a friend of mine - he made an interesting observation, "While I had a very profitable trading day, I did at the expense of Capitalism!" When my Democrat friends (note: I am independent) - shouted from the top of their lungs that the Patriot Act extinguished their liberties, I stood by them and shouted with them "Anyone who trades liberty for security deserves neither liberty nor security" - Ben Franklin. I agree!

Liberty is also essential to the Capital Markets. The chief tenant of Capitalism is the FREEDOM to CHOOSE to take RISK to assume a REWARD. Taking that risk means being accountable and responsible for those actions, and when you lose you are LIABLE for those losses. However, when the government intervenes and removes the risk by assuming the liabilities and changes the rules (by BANNING short selling) - they strip away the accountability and responsibility for those that took the risk. The Government has bailed out home owners, who made a conscious decision they should be accountable and responsible for and are legally liable for the losses, but the government is bailing them out. The government has bailed out the banks and companies who made decisions to borrow and lend money and should be accountable and responsible for are also legally liable for those risks, but the government assumes those liabilities and protects them. When people and companies are no longer accountable or responsible for their actions, when they are no longer liable for their losses, when the government intervenes by changing the rules to protect companies, when the government assumes the liabilities of those that failed, that is NOT regulation, that is INTERVENTION - yesterday was the first deep stab at the heart of Capitalism and mended with Socialism.

This is NOT about deregulation or more regulation - the market needs regulation, but it is the misunderstanding as to what government's role is as to regulation. Just like the Patriot Act blurred the need of security by distinguishing our liberties - there is a fine line between regulation and intervention. I hear people consistently say that the government needs MORE regulation to keep the market from falling. But that is NOT regulation - that is intervention. Regulation doesn't KNOW up from down - it is there to create a FAIR and TRANSPARENT market to allow transactions to take place without manipulation. The market going up or down is not good or bad, regulation is to allow the market to function in all types of markets. But when the government intervenes by changing rules, bailing out companies, opening the discount window to non members, injecting more capital, protecting companies from short sellers, that is NOT regulation it's INTERVENTION, they are now IN the market - they own shares of public companies and using its power to protect the VALUE of those public companies.

Just like the Patriot Act, people will argue that it is necessary to protect our Freedoms, by giving up a little. The same could be argued with government intervention in the markets, we need to protect the market from going down, by giving up some accountability, responsibility, and liability.

What people do NOT realize is that we cannot just wipe out those losses. Losses are losses, transferring those losses to the government does NOT mean they are gone, they are still there. Many people think that when the government takes on the debt and bails out a company - that those losses are gone. If you believe that - think about the consequences of that thought process, which assumes that our currency really has NO value, if the government can just wipe it out! The government bailing out company after company, injecting huge amounts of capital into the system, and lending 100s of billions at the discount window is putting more and more debt on the government's books and that has very serious consequences. Mainly - the stress of the currency. Just look at treasuries - I saw the 30 day notes trading at negative amortization (negative interest) - you are PAYING to LEND the government money. Not only do you lose money via inflation you are losing actual face value.

The market rally yesterday, was NOT about fundamental change or health in the economy - it came because Comrade Schumer announced the new government agency and then BANNED short selling - which caused a massive short covering rally.

We have checked our Freedoms, Accountability, Responsibility, and for the first time Liabilities for losses at the door. Regardless how great it may be that we are getting a huge rally and profiting from such a rally - think about at what expense are we making money from this short-term and false rally.

These are very sad times indeed as we face serious moral hazards and look to the government to bail us out. Remember, WE are the government and WE will have to pay these losses, our children will, our grandchildren will. The government is no longer concerned about inflation or the economy – it is on one course – bailing out the financial markets and giving them a get out of jail free card. We have clouded valuation – now the future is on the government’s shoulders.

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Blame Someone! - It's Short Sellers

Short Sellers have a bad name as it is; they are like the "Don't Pass" rollers on a crap table that bet against the roller. Short sellers profit when companies decline in value. The Germans have a great word for that - "schadenfreude" (taking pleasure in other's misfortune). However it IS a legitimate part of the market. In order to function short selling allows people to make a one of two decisions - bullish or bearish. However, not all short sellers are betting for the market to go down. Many shorts come in the form of “Hedging”, just like a home owner buys insurance against something were to happen to the home, many firms short stocks against the convertible bonds issued by the company. Market Makers NEED to short stocks to provide option pricing (when they buy a call they need to short the stock, when they sell a put they need to short the stock – both of them are to hedge against directional risk), investment neutral funds are short an equal amount of stock they are long to off-set them against large moves in the market place. So a large many of short sellers are using the shorting function as a hedge mechanism.

First, a few months ago - we started blaming the "Naked" short selling (those that have not received shares prior to shorting) - please note that ALL short-sellers are initially "Naked" when they sell stock. Traditionally when you short stock, you have a "locate" for long stock, since it takes 3-days for stock to CLEAR - you are "NAKED" short that stock for 3-days before it can transfer to your account. That was how the system works. Of course there were those that were shorting stocks without a locate and never intended to receive the shares to cover the short. However, that is not a big slice of the short community. In fact it was rather small. However - it was a great patsy to use to protect those 19 financial firms a couple of months ago. Blame the Naked Short sellers - they are the ones that are driving down the market. OK, that is silly - but many jumped on board - it sounded good. It was misdirection that would make any magician proud - the reality it wasn't short selling that created the financial crisis - it was the default on lending trillions of dollars. Stocks were sold by those that OWNED the stock, Short Sellers, and Naked Short Sellers - the market didn't go DOWN because of Naked Short Sellers. Do those that claim it did have any idea of how many shares are traded in the market on a daily basis? Remember when that band was lifted on those 19 financial firms? Investors were allowed to again short those stocks and they went back down. Many shorted those companies based on their balance sheets and business models. Should we protect companies like IndyMac, Enron, Lehman, and many other failed companies? They made bad decisions, they didn’t go out of business because the stock was shorted – they went out of business all on their own.

Now - it's not just those BAD "Naked" short sellers - it's ANY short seller (legal or otherwise). The government is now BANNING short selling of ANY KIND in 800 companies. We are seeing the biggest short covering rally of all time! We have gone from blaming a small group of sellers to blaming ALL sellers. This is called Protectionism, not regulation. These COMPANIES failed - they have loaned too much money, did not manage their risk, and are now borrowing BILLIONS from the government and the government is ALSO now protecting them from anyone who wishes to short the stocks.

I don't care what any talking head says - the market rallied into the close as well as this morning from the biggest massive short covering of all time. What do you THINK would happen if the government BANNED Short Selling in 800 stocks? All those shorts would be FORCED to cover - thus driving the stock market higher. Expect we should see a continued rally today.

Think about this for a second - now you can only BUY stocks - thus the market can only go up! So we are now in a BULL MARKET - not from fundamental economic soundness, or that these companies have cleaned up their balance sheets, or that our economy has gotten better. We are in a BULL MARKET because of government intervention. God Bless America when the government can create a Bull Market by wielding their powers.

What happens Oct 2nd when the ban is lifted? Or does the government extend it again?


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Printing Presses are SMOKING!

Bailing out Bear Stearns, Freddie, Fannie, AIG, lending 100s of billions at the Discount Window, injecting 10s of billions into the market is not enough. Now Comrade Schumer and Comrade Paulson are creating a NEW AGENCY (probably called Homeland Investment) to take on 500 billion (1/2 a trillion) in liabilities from companies that made a bad decision. The United Socialist States of America. We have given these companies a free pass, freed them of their accountability and responsibility - the government is assuming their liabilities. The question is it enough?

Not only that – the US Treasury is going to post $50 billion to back Money-Markets. The government is quickly taking over the entire financial and banking system of this country.

If this doesn't work then we are just propping up the market for a bigger failure. Look I think it would be very healthy for the market to fall and find a bottom and the losses be realized. Once we do that we can find a bottom and then start back into a bull market. But the government is rewarding bad decisions by assuming their liabilities. These companies made bad decisions - let the shareholders (who assume the risk) share in that responsibility. We are bailing out companies that have made huge profits over the years. My friend said "Welfare is Socialism for the Poor; the Discount Window is Socialism for the Rich."

I think this is just a temporary prop up of the market - at some point the dollar breaks. We already saw it happen with Money Markets, we already saw people buying short-term treasuries at negative interest rates. These are very bad times indeed - regardless of this rally. It WILL come back to bite us - maybe not tomorrow - but it will.

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Futures Pre Market

Of course they are way up – no one can sell anything anymore. Arb traders can only Arb on the long side. Just think of all those MASSIVE short baskets being forced to cover yesterday and today. Wow – it’s crazy. Expect to see HUGE spreads as traders are handcuffed.

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Supports / Resistances

Please repeat after me, there are NO RESISTANCES! The government has intervened, and by damn – this market will rally if we have to print money on every piece of paper we can find.

INDU 11,000 / ????? (What’s the point of finding value in a market when you can’t sell anything. I guess 11,500 – just get long the government will bail you out.)

SPX 1200 / ????? (1300 – who knows – over 800 stocks have been banned from shorting!)

NDX 1700 / ????? (1800, 1900 - ?????)

RUT 700 / ????? (who knows????)

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Conclusion

Forget price discovery or value investing. Forget looking into fundamentals or making a decision on revenue. We have left reality behind and it is now about massive capital injections now reaching a trillion dollars and protectionism from keeping ANY stocks from going down – by banning shorts. The government is about to create a new program to buy at least $500 billion of bad debt from companies. So who is going to pay for that? YOU the TAX PAYER. YOU are bailing out all those companies that have been failing. If Paulson’s Bazooka was big, buying out Freddie and Fannie – then this is the FULL SCALE NUKE OPTION – we the people of this country are giving the entire financial market a free pass! We are buying over a trillion in debt.

Think about this, who did Paulson work for before becoming Treasury Sec. He is bailing out his old company and other firms he has done business with for decades. This is a complete abuse of power by our government. We have propped up the entire system on government pouring billions into the market and now protecting firms from going down.

We had a very profitable day yesterday, but that is not the point. I would of rather not make money, in fact lose money – rather than having our entire system manipulated and socialized by the government.

At the end of the day – this is the LAST option the government had and now if this fails we are doomed. We are also creating a hyper short-covering rally of an EPIC scale and putting huge stress on the currency.

Many are saying again “The worst is behind us!” – are they – we better hope so – because at this point now the entire market rests on the shoulders of the government. The government is buying down all the debt and liabilities, protecting stocks from falling, and actually owns shares in stock.

We are seriously testing the faith of our FIAT CURRENCY. If this doesn’t work – I don’t know what will. This is the biggest short covering rally of all time, the market is rallying because positions are being FORCED to cover. I would think we could see the market come back down VERY HARD on OCT 2nd when the Short Banned is lifted.

Frederick Hayek warned of General Planning and State sponsored mass socialism. Hayek and Friedman are rolling over in their graves.

If this is not PROOF of the failure of Bretton Woods and Keynesian Economics using government intervention of fiscal and monetary policies to control the market I seriously don’t know what is. Great – I wonder what tax bracket John Maynard Keynes was in?