Summary Statement of Fundamental Reality ~ The Risk Averse Alert

Tuesday, October 13, 2009

Summary Statement of Fundamental Reality

With the recent collapse of Wall Street's securitization business came the end of a largely unregulated, private sector credit creating machine equipped with an infinite multiplier. This machine — principally powered via City of London connected offshore financial centers (OTC derivatives) — helped both build and mask all manner of financial and economic imbalances. Its seizure has blown a huge, capital sucking hole into the present financial arrangement. Most alarming is the fact this is occurring atop a gutted physical economy 3-4 decades short of such necessary capital investment as every nation requires to maintain some semblance of economic competitiveness. With capacity to mask imbalances born of wildcat finance obliterated, exposed is a global economic arrangement incapable of generating such surplus physical output as is required to both maintain and expand the economy's productive capacity, as well as ensure the viability of finance existing to facilitate economic functioning (let alone the viability of the mountain of side bets that have been created over the past decade or so in particular by the so-called "talent" on Wall Street).

Of course, nothing is set in stone. Yet the cold, hard reality is a well-entrenched financial interest will not let go of the illusion supposing a mountain of derivative claims against physical output are viable. So, further convulsions more or less are assured. Absent a global program coordinating low-cost capital investment in physical economy in measures that absolutely dwarf the present meager commitment championed by President Earth, Wind and Fire Obama the United States of America, as well as every industrialized nation of the world, is at profound risk of suffering both financial and economic dislocations of unprecedented proportion, because the planet's present physical capacity to generate such wealth as is necessary to service existing financial claims is woefully inadequate. This much is made painfully obvious by the past year's parabolic increase in new financial claims created against a physical economy whose shrinkage likewise accelerated (as well as by the fact these claims were placed by the lender of last resort).

Now, it really should come as no surprise that, even now, human nature would display the full measure of timeless consistency such as causes mass behavior to demonstrate a disconnect with the gravity of the systemic risk we presently face. Thus, even should the mightily hoped-for improvement in top line revenues materialize over the course of Q3 earnings season, one would be well-advised not to suppose the worst has passed. Indeed, if you should have an opportunity to view a company's earnings performance over recent quarters, duly note how any reported improvement appears but a tiny upward correction in a still-unfolding downward trend. Surely, though, no shortage of pump-meisters will lay claim to the economic reversal of fortunes thesis, playing "Happy Days Are Here Again," painstakingly tilling that fertile ground upon which strong hands presently are unloading dead equity at premium prices (albeit in piecemeal fashion because this is all the market apparently can bear).

Likewise, per any proclamation coming from corporate insiders suggesting better days lie ahead, before taking their word at face value consider their outlook eighteen months ago. Was it fearful of the growing risk of systemic collapse? If not, then it is rather likely any optimistic outlook will prove nothing more than an exercise in the art of story telling.

So summarizes fundamental thinking guiding my still negative intermediate-term outlook toward the stock market — a view whose technical substantiation is being confirmed every step of the way higher in the still unfolding, counter-trend rally off March '09 bottom.

Fast Money
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© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

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.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

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