This past week saw quite a jump in the markets. The only problem is the market rose on very little participation (typical for summer trading the week before the 4th of July holiday). Which begs the question: What drove the market? In a phrase – short squeeze. When someone is short the market, they are betting on a decline. If the market goes against a short (up), the short will have to cover and buy. In the last few weeks, we have seen 2011 record levels of shorting in the market. It stands to reason that record shorting be met with a strong rise that was prompted by the austerity vote in Greece. At the same time, we are starting to see some bond investors defecting to stocks since the Fed (for now) is done buying up new treasuries. If many people’s predictions are correct and bond yields rise, their prices will fall. Falling bonds could be good for stocks, but stocks have very strong head winds too overcome. This week could give some early direction of where bond investors will be going if treasuries start falling in price. I do not envy the Fed’s position at this point.
A Week That Says It All
I know there are some folks that read my commentaries and wonder if it is possible for the markets to be as broken and manipulated as I propose. This past week is a shining example of how far past “normal” or rational we have gone. Let’s look at this past week through the news and market results. This alone will show how surreal the current environment has become:
- The US mint has just released its 2011 Silver Eagle coins as of June 30. The price per one ounce coin is $59.99. That is right – $59.99 with a limit of 100 per household. Keep in mind that the spot price of silver as of Friday 7/1 is at $33.84. This proves that price discovery in silver is shattered. For those that don’t believe price discovery is broken – Ask yourself why the silver that everyone owns is priced at $33.84, but the US government can sell their coins at $59.99 with a 100 per household limit? Seems to me the true value of silver is $60 or higher. For those worried about silver, please read the most recent Market at a Glance from Eric Sprott. Although a little technical, the Sprott letter is a great read on where the silver market is at the moment. Keep in mind that Canada, Australia, and the US minting authorities cannot keep up with silver demand.
- The Greek government pounded through the worst austerity measures (that will likely never work) in opposition to the populace. Yet, the markets rallied on the knowledge that the Greek default “can” just got kicked further down the road, and increased the European Central Bank’s (ECB) and many other European and US bank’s exposure to a Greek default. The banker’s should have taken losses versus the Greek people. There is no way any of these banks should have lent a dime to the insolvent Greek government. But, they did, thanks to Goldman Sachs creating ways for the Greek government to hide their debt problem. I would bet on the fact that Goldman Sachs is now profiting from the toxic stew they created in Greece. They did it with mortgages; I am sure they are doing it with Greece.
- After seeing what went on in Greece, we can now turn our attention to the insolvent states of the U.S. This past week, New Jersey had to run to the open arms of JP Morgan for a bridge loan to keep the state running. In addition, we have Minnesota’s government shutting down as a result of a democratic governor and republican state representatives being unable to find common ground on a $5 billion budget deficit. Does that sound familiar to you? Perhaps like the country’s current problem?
- Stock buy backs versus insider buying is telling a very troubling story. I have been questioning where this market is getting its support from, and we now have one piece of the puzzle. According to Trim Tabs investment research, a company who does exhaustive market study, year-to-date companies have bought back their own company shares to the tune of $168 billion dollars, while the executives of US companies have bought only a net $10 million. That is a 16,800 to 1 ratio. The difference between the two is this: a “buy back” is when a company uses its money (or borrowed money) to repurchase shares while “executive buying” is when employees of the company buy shares. The revelation of leverage within companies lines up considering we are also at pre-Lehman collapse highs on margin buying (borrowing money to buy stocks) in the stock markets. To make matters worse, much of the stock buy backs have been with borrowed money. Again the market rise is not true price discovery – it’s false.
To recap, markets are heavily engineered and laden with risk. The approach here is still one of caution with stocks. I would love to have the economy recover and the market run as it should. However, the political state of economics, and the outright refusal of governments to stay out of the market, is creating moral hazards beyond comprehension. As always, protecting your assets is the name of the game.
Do you have an investment strategy that seeks to protect your portfolio against volatile economic times? Call me to schedule a free review of your current investment portfolio – 913.693.7918.
John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals. For more information, visit http://www.chladekwealth.com.