Time: The Deadly, Invincible Enemy of Equity Bulls ~ The Risk Averse Alert

Thursday, August 05, 2010

Time: The Deadly, Invincible Enemy of Equity Bulls

The mountain of credit securities built up over past decades representing a notional value whose increase so far during the 21st century has gone parabolic and entangled the lender of last resort to a degree never before seen in American history — this in a bid to support a profoundly deformed financial structure — is an albatross of epic proportion and a goliathon enemy to the low man on the capital structure totem pole: equity. Save extraordinary Congressional action shutting down financial markets while a bankruptcy reorganization proceeds — canceling the greater bulk of unproductive, illegitimate debt claims — equity is a doomed asset class.

How anyone can remain an equity bull (Anthony Scaramucci) and cite the supremacy of contract law as this pertains to millions upon millions of delinquent mortgages is mystifying. Absent extraordinary action everything comes down.

Equity will be the first to go. Indeed, over the past 10+ years we already are seeing this.

Every now and then you read about massive amounts of debt of a certain class coming due over some approaching period. It is then you get a sense of the mess that has been made, and gather what prospective disaster, indeed, looms now that assets backing this debt are under relentless pressure.

Adding infinite weight to this problem is the willful destruction of the U.S. Treasury in a vain attempt to sustain the unsustainable. The fundamental reality being ignored by a Congress acceding to support and further legitimize current financial structures is twofold:
  1. The global, physical economy is incapable of generating wealth enough to keep current to any degree within the bounds of historical norms the massive mountain of presently outstanding claims (to which now are being added an unprecedented volume of claims on the U.S. Treasury itself).

  2. Absolutely nothing is being done to address the physical economy's woeful incapacity to create new, tangible wealth.

It is this second point insuring equity's rapidly approaching doom.

And here is the technical truth of the matter that, apparently, everyone but Cramer's peeps gets. The volume of shares exchanged since March '09 bottom has been persistently contracting during advancing periods because weak hands with huge exposure are no longer able to make lemonade out of one giant lemon.


The best these weak-handed, heavily exposed players can do is keep the thing levitated one day at a time, hoping some major load of feces does not hit the fan ... this that they might stay in the game of pretending they are viable profit centers ... which illusion's maintenance these days has a real, human cost. Such is what makes prohibitive the cost of powering an economy (as a consequence of their energy market machinations), puts the cost of decent health care out of reach for an increasing number of people (as a consequence of instituting "reforms" giving private insurance companies they own complete control), and even threatens mass starvation (with their current agricultural commodity operations).

There is no way an arrangement where gouging is the principle means of creating new cash flows anything lasting and good for lowly equity will be secured. Truth is quite the contrary.

NYSE 5-min

Tonight's message has been inspired by the market's levitation following Monday's CME-driven open. The question is whether sideways trading is "consolidating" this week's initial gains, or has levitation simply been an exercise in buying time — weak hands raising capital in hopes of buffeting the blow when the inevitable attack on their position's weakest links — derivatives — seizes the moment?

Surely, it is the latter. Muted volume exchanged this week stands as living proof. There has been no sign of accumulation ... while at the same time distribution, by and large, is done.

Of course, this is not to say additional time escapes possibility of being bought. Yet when you send your boy out to talk up a "mission accomplished" at a time when it is anything but ... you reveal the very weakness of your position. Indeed, were truth otherwise — were strong hands taking the market higher — this President probably would be painting a very dour picture, rather than a rosy one, allowing his deep-pocketed backers opportunity to further strengthen their position. That he talks positively amidst his failure to change for the better a blessed thing stands as most glaring disparity, particularly as each new day's trading on major stock exchanges reveals fewer and fewer believers.

When, absent a tangible program venturing to fill the void left by a decades-long disinvestment in physical economy, hope rests on weak hands buying time until a "rough patch" is transcended ... you can just forget about all the fairy tales being spun to sustain this hope. These too surely will pass ... and violently, no less!

Mark these words: empty rhetoric will not save equity from destruction. Nor will fascism. Both are being attempted. Both will fail.

Fast Money
* * * * *

© 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.

There's an easy way to boost your investment discipline...

Get Real-Time Trade Notification!