Climbing the Wall of Worry

The collapse of equities in 2008 was not because we are going into a depression but was caused by a coordinated attack launched by corrupt short sellers running major hedge funds. Every time short selling was forbidden for financial stocks the financial sector rebounded. The hedge funds are now big enough to manipulate the market just as in the late 1800’s when wealthy individuals manipulated the markets. We are going into a recession for sure in part due to this hedge fund racketeering but the FBI is now beginning to take action.

Given the dire economic developments over the last three weeks many wonder why the Dow Jones Industrial Average has surged more than 1200 points over that span and is poised to close one of its worst years in history on an up note. The reason is because traders and portfolio managers are now looking ahead, pricing in the likelihood of an economic recovery at some point in 2009. The year-long slide has halted because most of the bleak economic news has already been “baked" into current stock prices. We indicated that the window of opportunity for getting in at the current bottom of the market was open the month of November but there are still opportunities when great stocks with low long term debt, with a Current Ration under 1.0, dividend income >7% and current quarter’s income at least five times higher than the annual dividend payout. We are near the end of the decline because we see market racketeers being investigated and stopped.

Aside from the obvious recent jump in the Dow, S&P, and NYSE, we pointed out other signs of improved market sentiment, including heavier trading volume in general with more on up days than on down days. Still, the markets remain skittish due to continued sporadic hedge fund manipulation of the market including shorting attacks on what seems like random stocks. Investing in individual stocks has been treacherous for two years now. But we are seeing more evidence that the FBI is now starting to crack down on Wall Street corruption.

The courts seldom allow taps to go on the telephone just because someone is suspected of cheating on their wife. When someone like Spitzer is taken down, it is not really just for seeing a prostitute. The FBI does not get involved for that type of domestic issue but uses smaller seamy infractions along with the private real threats of major prosecutions and prison sentences to stop major corruption cases in their tracks.

In the 1970s it was Ab-scam and local corruption crackdowns. Often they go easy because a corruption case is time consuming and costly so they bring the villains down on smaller charges such as infidelity.

Other times they make an example and throw some bums in jail. In the early 1990s it was the use of Rico racketeering law to crackdown on Junk Bond scams. They made a few examples after the Dot Com collapse in 2003-2003. Now they are cracking down on Wall Street corruption again and it is making short selling corruption crawl back into the shadows and thus bringing an end to the recent short selling attacks on the market.

Bernard L. Madoff, former chairman of the Nasdaq, was arrested Thursday charged with committing securities fraud. The 70-year-old founder of Bernard L. Madoff Investment Securities LLC is accused of running an investment scheme that has lost at least $50 billion. The Securities and Exchange Commission brought charges late Thursday and announced it would be stepping in to attempt to freeze assets and secure emergency relief for the firm’s investors.

Madoff reportedly confessed his business was, “a giant Ponzi scheme,” and was released after posting bail of $10 million. Madoff could be fined a maximum of $10 million and be imprisoned for up to twenty years if convicted. If it is proven that Madoff’s business truly did fleece $50 billion, it would rival the amount of losses incurred by Enron.

Possibly Rico racketeering law will be applied now to coordinated insider hedge fund short-side manipulation in the last hour of the day and the beating down of stock prices with naked shorting. It certainly looked like the short sellers backed off on this past Friday. It certainly is very positive that the market advanced after the substantial declines in Asia and Europe last Friday.

The 200 day DJI moving average is 26% above the current level of 8630. The 200 day moving average happens to be the upper resistance level of an advance during a bear market. That is the potential top for the advance we believe has now started.

Asian, European, and USA futures markets are somewhat positive this morning. When the short sellers fold and go from the dark side back 70/30 to the long side the stock market advance should be breath taking. But all along that advance it will be a climb up the wall of worry as the economy continues to bottom out. Remember the economy usually bottoms 6 months after the stock market bottoms and unemployment continues to get worse for another 6 months after the economy has bottomed.

The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery. -Winston Churchill

A government which robs Peter to pay Paul can always depend on the support of Paul.
- George Bernard Shaw

Harry Reed said Wall Street would show how critical the Chrysler hedge fund bailout was and hearing that, Wall Street advanced. But then President Bush indicated he would facilitate loans to the auto makers and the market stopped advancing.

Suppose you were an idiot. And suppose you were a member of Congress....
But then I repeat myself. -Mark Twain