Light at the End of the Credit Default Swindle ~ The Risk Averse Alert

Friday, March 06, 2009

Light at the End of the Credit Default Swindle

Did you happen to see Fast Money's Word on the Street? If not, watch it. Just click the icon at the bottom of this post. You'll learn we have a new world record bearish consensus, this from the American Association of Individual Investors. 70% of members polled this week are bearish the stock market. Seventy percent!

Let me tell you what I know about the AAII. Generally, these are investors of a mentality believing "there's always a bull market somewhere." These are people who resist taking a dark view toward the stock market like a child resists inoculation. They're a "stocks for the long run" crowd ... Motley Fool types.

So, given such a decided consensus believing stocks are better sold than bought here, what do you suppose is the stock market's path of least resistance? Here's a hint: it is not down. How can it be? There are far fewer new bears to join an already crowded trade than there are prospective converts to the bull side. Today's bears are those to whom "early adopters" — the visionaries — will sell their shares following a substantial lift off bottom.

Thus, even if you are someone (like me) believing our financial woes are nowhere near over, consider how easily a massive short squeeze might be orchestrated here, subsequently offering opportunity to unload shares into the deep sea of presently bearish players who are likely to become bullish converts at much higher levels.

If you wonder who might presently represent a viable short squeeze target, consider Doug Noland's closing remarks in this week's Credit Bubble Bulletin:
I’ll surmise that the CDS market is now in complete dislocation. I’ll also assume the sellers of CDS (and various Credit insurance) have resorted to shorting equities (individual stocks, ETFs and futures) in a desperate attempt to hedge escalating losses.

Apparently, credit markets are no longer providing adequate opportunity for CDS writers to hedge their exposure, so they have moved into the stock market. That's Noland's position anyway. As such, in my estimation strong hands should find easy marks in those whose position is desperate.

Yet consider a different view toward CDS writers. Has this group been driving the stock market lower over the past year and a half? Has the stock market become their play thing? Has manipulation of CDS spreads been a part of the game? If so, the game is just about over...

Days Numbered for CDS Cowboys

Watch that report and listen!! Duly note, too, the fact this most bullish piece of news was delivered on a Friday after the close, following a brutal week of trading. It reeks of, "we knew all along, but were prevented from reporting it."

Listen to the part about "outsized influence." It's the kind of thing bringing the CDS of Berkshire Hathaway to trade at levels suggesting its debt is at greater risk of default than that of the nation of Vietnam. Ditto General Electric versus Russia.

Has not "outsized influence" been the manner in which Wall Street operates, even to destructive ends? Remember $4.00 a gallon gasoline? What do you think caused this? Demand from China? (It was Index Funds.)


Time will tell if what has unfolded since late-January, early-February is a fifth wave of five waves down from May 19, 2008 ... or a C wave of an a-b-c down from early January '09. Right now I am siding with the latter.

Fast Money
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Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

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Anonymous said...


How do you contrast the AAII data with the continuous bullishness of the CBOE P/C and the ISEE figures?

(Maybe the put buyers are buying double and triple inverse ETFs or is that wishful thinking?)

I still don't get the feeling that all longs have capitulated or people (especially CNBC) have stopped trying to pick bottom.

One scenario, I think may unfold, a rapid rally (10-15%) going into Thursday/early Friday based on mark to market hoopla and (false) calls of bottom, then a washout trade early next week to retest lows.

All the best.

TC said...

Here's my read on the CBOE Put/Call Ratio. The elevated Call buying registering over the past month or so largely represents hedging of short positions in underlying equities. The fact this hedging is considerably more pronounced than any time over the past year indicates a relative excess of short positions — indeed, an imbalance — that, although currently the strong trade, is more widely regarded as subject to being attacked and reversed, simply because the probability selling over the past ten months will persist lessens as prices continue lower. Surely, there are a growing number of players who recognize a host of budding opportunities at presently depressed levels. Surely, too, positions are being built as a consequence. So, the extent to which prices can be pushed lower, those players whose actions serve to do so are more actively hedging their positions, recognizing (quite rationally) the growing likelihood the long side eventually will not only step in and defend their positions, but might also aggressively add to them.

Thus, the unusual measure of Call buying registering over the past month or so is seen as elevated short equity position hedging rather than unwarranted speculation anticipating a general turn higher in the market. That this presumed hedging is more elevated than at any time over the past ten months indicates smart money earns its keep not being stupid.

Per the persistence of CNBC's bottom calling, I have some thoughts on this. For now, just consider how useful this will prove were a massive short squeeze manufactured, lifting indexes 50% or more over a period of days, after which another 20-25% over some months is affected, resulting in a transfer of shares from strong hands to weak.

Given current conditions, I do not think this possibility is at all unlikely.