The 1929 & 2007 Bear Market Race to The Bottom
Week 67 of 149
Will The CFTC Prove a Better Regulator Than the SEC?
Primer on Futures Contracts
Analyzing the CFTC Data
What's With the Gold and Silver Commercial Traders?
23 January 2009
Color Key to text below
Boiler Plate in Blue Grey
New Weekly Commentary in Black
Here is the BEV chart for the Bear Race.
The weekly closing price BEV (Bear's Eye View) results for week 67 in the Dow Jones' 1929 & 2007 bear market's race to the Bottom are as follows:
1929/32: -55.56% from its weekly closing high price of 380.33
2007/09: -42.68% from its weekly closing high price of 14,093.08
If January's stock market performance is a leading indicator for the rest of the year, the bulls will be on a morphine drip by April.
It has been 3 months since the DJIA broke under its BEV -40% line. Since 1885, with the exception of 1929 (on full display in BEV terms above) there is absolutely nothing more bullish for stocks than having the DJIA break below its BEV -40% line. You may want to review my article on -40% DJIA markets to see what I am talking about. Where is the bounce for the bulls?
This is a sick market. The "policy makers' injections of liquidity" just don't do it anymore. As with all addictions, late stage pathology is not pleasant to watch. I think we will eventually get our bounce in the DJIA, but only after the DJIA falls below the BEV -50% line. That would place this DJIA Bear at #2 or #3 in the table below.
Below is my volatility chart comparing 2007's 40 & 200-day moving average closing price volatility with 1929 bear market volatility.
Note: 2007 values are actually positive. They were inverted so 1929 would fit on top and 2007 on the bottom. So for 2007, please forget the negative valuations and focus on the percentages.
(Remember, with the 2007 data up is down and down is up!)
1929/32, Wk 67 200 Day Moving Average Volatility: 1.24%
2007/09, Wk 67 200 Day Moving Average Volatility: 1.81%
The 40 Day M/A is still falling. Next week, it should fall below the 200 Day M/A for the first time since 23 July 2008. However, the 200 Day M/A is still rising. Note the volatility table below where I've compared the 1929/32 bear to the 2007/09 bear's volatility. The 2007/09 bear reached a new high for its 200 Day M/A. Note above that the 1929/32 bear's 200 Day M/A was only 1.24% at this same point as the 1929/32 bear progressed to it final bottom value.
This bear is the most volatile market in the 124 year history of the DJIA. So why isn't the DJIA below the 1929/32 bear's valuation at this same point in time. Well, remember Federal Reserve Chairman Bernanke a few months ago kept mentioning all the new tools he had, tools that were not available to "policy makers" in 1929? Funny how quiet he is about his new monkey wrenches as the DJIA keeps dipping below its 8000 line, again and again.
If you and I are puzzled about the lack of a good dead-cat bounce in the DJIA, think how bewildered Bernanke is! He was the acknowledged big-shot expert on the Great Depression bear market. For years he bragged that he hoped to get a chance at a nasty stock market bear, a real rip-snorter of a bear market. All he needed, he would tell the guys in the FOMC room after few drinks, were some new tools to leverage his genius, and market forces would "cry uncle" PDQ. But that was then, and this is now.
So day after day, Ben goes down in the basement of the Federal Reserved. People walking the hallways of the Fed can hear him pounding all day and long into the night on the pipes of monetary policy. But he is finding out that the damn bear is just too stupid to know when to quit! Poor Benny.
Historically, daily 1% swings from the pervious day's closing price in the DJIA, while not uncommon, should not occur on an almost daily basis. The stock market is running a fever with its "Persistent, Extreme Volatility."
In this holiday shorten week, we could've had all 4 trading days, 2% days. Thursday and Friday DJIA's lows for of the day were both 2% lower than their previous day's closing price. Negotiations between the Bear and the "policy makers" must still be going on.
The Step Sum is showing three declining peaks and two declining bottoms since early December 2008. The DJIA is showing signs of exhaustion, not of a bottom. If it breaks below the November 2008 low, watch out below!
Well I for one am not surprised this market is having problems. The table below is from my Wk 65 Bear Market Report, it shows the dividend yields at the crossing of the -40% line for all the big bear markets since the Roaring 20s. We should always respect the opinion of 80 years of market history.
Note how every one of these bear markets had a DJIA dividend yield of greater than 6% when they crossed the -40% line. Every one of them except for our current bear market. Note also that for the 2007/09 DJIA bear to produce a 6% dividend yield, it would have had to fall to 61.64% from its October 2007 BEV Terminal Zero, meaning its last all time high of the 1982-2007 bull market.
Ben, pound all you want with your new monkey wrench. Beat the hell out of any monetary aggregate within your reach. Slap the shorts silly. But DJIA history says that a bear market bottom happens with the DJIA having a 6% dividend yield. For the 2007/09 DJIA bear to have a 6% dividend yield, it must fall far the current line in the sand at 8000.
You've staked your professional reputation that you can beat this bear market into submission. I hope you can do some good. But between you, me and anyone reading this, I believe you're the disease and not the cure. I can't stop you, but believe this bear will.
Should we come back into the market now? That all depends upon what you believe in. A genius with some new tools or a bear with history on is side.
I noticed gold, silver and the gold mining stocks did really well this week.
The Step Sum is an indicator of market sentiment. When the underlying sentiment is bullish the Step Sum will rise. When bearish it falls.
Think of the "Step Sum" as the sum total of all the up and down "steps" in a data series as prices change over time. An Advance - Decline Line for a data series derived from the data series itself. Logically, to have more up days than down days during a bull market makes sense as does having more down days than up days during a bear market. Understanding the Step Sum is no harder than that.
Will The CFTC Prove a Better Regulator Than the SEC?
As an investor of exploration companies, the success of my investments depends upon the free market price of gold and silver. When comparing the activities of the gold and silver commercial trading activities with other commodity commercial trading, I find irregularities with the gold and silver markets at the COMEX Exchange in New York. To make my point, I have one table and 17 charts of commercial trading patterns derived from the CFTC's own data. There may exist a perfectly legitimate reason for the gold and silver commercials to trade as they do, and then again my charts may be a huge red flag that the CFTC is ignoring.
In January 2009, we know how the SEC failed in its duty to protect investors from the Madoff Ponzi scheme. Madoff's irregular profits had been noted for years by credible sources who then made considerable efforts to expose the fraud to the SEC. The SEC failed in its duty to stop the fraud.
The sum lost by investors in Madoff's scheme is stated at $50 billion. This is a fraction of the sum lost by investors in Wall Street's high-tech pump and dump scheme of the late 1990s. Note also that Madoff's fraud is a few orders of magnitude lower than the losses taken in the US sub-prime financial debacle. For ten years under US government supervision, Wall Street acting as a fiduciary, has had it way with its clients' wealth. Has there been any criminal investigation for Wall Street's serial con-men who have lost hundreds of billions of their client's capital in one embarrassing scheme after another? No.
So why is Madoff's case referred to the Justice Department for criminal prosecution while Wall Street's investment bankers are let off with paying what amounts to a Federal tax on fraud? Well, your guess is as good as mine, but I suspect if we look at who lost money from 1990 to 2009 we may find the answer. Madoff ripped-off the elite of high society. I hear talk of bailing-out some of Madoff's victims. Washington never considered making Wall Street pay restitution to the victims of the Dot.Com frauds. After the bubble popped in 2000, Wall Street's penalty was to make a check out to the order of the US Treasury. That done, Washington and its willing accomplices on Wall Street got busy with the real estate market.
Let's never forget Congress, who writes the laws for the markets and has supervisory obligations in the markets:
I've never heard a congressman or senator demand the Justice Department investigate a RICO violation for even a single scandal from the Dot.Com disaster to the sub-prime fiasco. One hundred billion dollars was lost by Americans who trusted both Washington and Wall Street. Enron's Ken Lay is sitting in jail. Is it possible that JP Morgan or Merrill Lynch risk managers were ignorant of the fraud their derivative brokers were writing for their client, Enron? I don't see how. Why didn't the Justice Department pursue this connection? Well, the big banks have many friends in high places: the little guys have none.
That President Obama would want to have the head of the NY Fed, Timothy Geithner, to be his Secretary of the Treasury when it is known that he willfully failed to pay his federal taxes is an indication of how tone deaf politicians become to the public after years of serving the "people's interest." I expect the next four years to be more of the same only more obvious.
Primer on Futures Contracts
To understand what the CFTC does, one really needs to understand the basics of futures trading. For the benefit of investors who are not familiar with futures contacts, a short primer on commodities contracts and their importance to the economy is appropriate. As always, please look at the charts before you read my text, but this primer is a stand-alone item.
There are two sides to the sale of anything, including a futures contract: a seller and a buyer. Note that below I said "promise to deliver" as often with futures the only exchange between the seller and buyer is a cash settlement. What speculator wants 5000 bushels of corn dumped on their front yard? Also with futures contracts, the seller may end up sending money to the buyer!
The SHORT SIDE: those who * promise * to deliver the stated commodity in specified quality and quantity, by a specified date, to a specified exchange approved location and at an agreed upon price.
The LONG SIDE: those who * promise * to take the delivery of the stated commodity in specified quality and quantity, by a specified date, from a specified exchange approved location and at an agreed upon price.
Who is doing all of this promising? Two groups of people with two different motives for trading futures contracts:
COMMERCIAL HEDGERS: Commercial hedgers, or the "trade" are people or companies who intend to make their profits via their business operations. Commercials are the actual producers or processors of the physical commodity. For corn the producers are farmers, the processors would be General Mills who makes corn flakes. The commercial hedger's interest in the futures markets are for insurance purposes, or as commonly stated "laying off RISK." For the commercial hedgers, the purpose of going "Long" or "Short" in Chicago or New York is not to generate their main operating profits on future price changes using leverage. Commercials use the futures markets to protect their enterprise from unexpected and uncontrollable price swings in the market place.
An excellent example of hedging was South West Air last year. South West anticipated a large increase in jet fuel, so they hedged their fuel expenses by taking a large long position in the oil futures markets. This fixed their prices of jet fuel while prices were still low. When the spot price of jet fuel soared, South West's hedge also soared in value. This hedge off-set its increase fuel costs. While other airlines had to raise ticket prices to maintain their profits, South West did not. This long position in the futures markets was a commercial hedge. South West Air's intention in going long oil was to continue to make its profits from cut rate air transportation, not trading oil futures.
SPECULATORS: The speculators or the "funds" are people or companies who don't produce or process a damn thing for the market place. Speculators seek the RISK of wide price swings that the commercial hedgers want to "lay off." A humorous comment explaining what speculators do goes like this: "people who sell things they'll never have and buy things they never want." Speculators are people or companies who intend to make their profits via making their best guess estimates of where the price of a commodity will be sometime in the future.
Speculators, it needs to be noted, usually lose money as they typically use extensive leverage and have the least amount of information of the market. It is a given that the speculators are the "dumb money" in the market place. This is not saying speculators are lacking in intelligence but that they have the least information on the commodity they trade.
No one ever cries fowl when speculators lose money, only when they make it do the Bill O'Reilly's of the world take note of them, which is completely unfair. It's the speculators who by losing money provide the "insurance" payment to the commercial hedgers when prices go the wrong way for the commercials business interests. In the case of South West Air's successful hedge of jet fuel, their gain was a loss to a speculator. If the speculators never win, they will not keep playing the game and then everyone loses. Mr. O'Reilly, if you want to know who is responsible for past, current and future price increases in crude oil and gasoline, look at "government's policy" on energy and the US dollar.
Let's take a quick look at the grain market, we have:
The Farmers (natural shorts) who walk their fields everyday; no one knows the condition of the crops better than the farmer himself.
Pillsbury (a natural long) knows the grain demand situation on an international scale.
The Speculators (no fixed market bias) typically has only the weather channel and real time market prices as their sources of information.
From January 1986 to September 1992 the CFTC has published a Commitment of Traders (COT) report every two weeks. Starting in October of 1992 the reports became weekly. This difference in reporting periodicity has a slight effect in plots of some of my data series charts.
The COT reports contains more information than I know what to do with. So I only track the grains, meat, metals, energy, interest rate, the S&P stock index and other basic future markets. Within these markets I track only data on open interest (the number of contracts in play) and the long and short positions held by the commercials, large and small speculators.
The charts in this article contain plots for the price of the commodity and a Step Sum of the long-short positions of the commercials traders of various markets. The data-points for the Step Sum are easy to understand. Those weeks when the commercial traders are net long in their market, a +1 is generated. Those weeks the commercial traders are net short, a -1 is generated. The Step Sum plot is the sum of all the positive and negative 1s up to that week. This allows us to track the commercial trader's long or short trends in their markets.
But first let's examine the table for the commercial traders showing how many weeks the CFTC has compiled data on their markets and how many of those weeks they were net long or net short.
The table is sorted by the percentage of net long reporting periods. It is interesting to note that since 1986, commercial traders have been net short in their markets. That is except for the US Treasury Bond Market. For those who think corporations are making their profits by price gouging, they will not find evidence to support their claims in the COT data. If you think that Wall Street is supporting the US Treasury Bond market, maybe you have something there.
What's With the Gold and Silver Commercial Traders?
The silver commercial trading is really strange. Since January 1986, (when this data was first published) the silver commercials have never reported a net long position for 1012 COT reports.
Below is the silver commercial traders Step Sum Chart.
Note the change in pitch in the Step Sum plot during 1992. That's when the CFTC data went from bi-weekly to weekly reports.
The above Step Sum plot is remarkable. In February of 1986, President Reagan was in his second year of his second term as president. That was 23 years ago. Since then there have been wars, financial panics and market bubbles. The money supply has exploded, the remains of the US Government's 6 billion ounce of silver stock pile has been exhausted, the Euro came into circulation to compete with the US dollar and 9/11 took down the silver pits in the World Trading Center. What will it take to make the silver commercials turn bullish on silver? Are they waiting for the last silver mine to shut down? Maybe the last ounce of silver sold?
And just who are these companies that the CFTC & COMEX classify as commercials traders? It seems that they are for the most part the same banks and insurance companies that have been blowing up on Wall Street in the past year. However, no one can find out exactly which banks or insurance companies are shorting the silver on the COMEX.
Are these financial houses hedging risks associated with loans made for the benefit of silver industry clients, or are these short positions held on these banks and insurance companies own accounts? Why would they do that? By law, no one is allowed to know, so the CFTC can't comment on this type of inquiry. The CFTC would say that the law is written by congress. But what do politicians know about regulating the futures markets? Exactly what the CFTC told the congress (behind closed doors) when the laws for the futures markets were written.
The truth is that the CFTC, like the SEC, runs its own shop. What is, and what is not acceptable behavior in the futures market is what the CFTC says it is. Are we to believe that if the CFTC wanted to prohibit a practice allowed by law, and the CFTC approached congress to change the law, the congress would refuse their own regulator?
Like any other large organization, congress hires technical experts to manage technical operations under its control. The CFTC provides this technical expertise in the futures market for the congress.
In the next few years we will see that the futures silver market is but another part of the unholy trinity of Washington, Wall Street and Academia. Like Robert Rubin or Lawrence Summers, most regulators come to Washington from Wall Street or Academia, only to go back from where they came from a few years later. This system is only as honest as the people coming in and going out of it.
To fully appreciate how strange the silver commercials manage their trading, lets look at the wheat chart.
Remember, (unless we are talking about silver or gold) commercials consist of producers and processors. Going back to my grain example, commercial traders consist of the farmers and the grain merchants in the wheat market. Farmers always want higher prices while grain merchants always want lower prices. The Step Sum from 1986 to 2004 suggests that General Mills, Cargill, Archer Daniels Midland and Pillsbury were ganging up on farmers. But then maybe not. Successful farmers are adept in trading their markets on the Chicago Board of Trade (CBOT) too.
In 2004, it's very apparent that the commercial wheat processors got out of the way of higher wheat prices and have actually been net long for the past five years. Why? Maybe it was something as simple as knowing the cost of growing wheat was rising and the processors did not want to drive their wheat farmers out of business. That's possible, but more likely, it became apparent that global demand for wheat was going up and the market could support higher prices to the profit of all commercials. I'm only making guesses and suspect nothing but ethical behavior by these wheat traders.
These charts on the COT commercials traders are interesting charts. But note that the Step Sum plot for wheat is seldom a straight line like the silver commercial traders are. There are changes in net position from being short to long even during prolonged runs of a long or short market bias. The table above listing the COT data is helpful when viewing these charts.
Let take a look at the gold commercials. Is it just me or is there something odd about the gold commercials trading after 2001?
This chart is data from the COMEX which is regulated by the CFTC. It appears that the gold commercial traders (the same ones who trade silver) were net long from 1996 to 2001. Superficially, this indicates that the gold commercial traders were expecting higher gold prices. But I find that hard to believe.
Whenever we consider gold in a market, we must understand that gold, and silver were once money. That paper and credit instruments now function as gold and silver once did is because American "policy makers", against the wishes of the world, usurped gold and silver as money and replaced it with the debt backed US dollar in 1971.
Usurpers never rest easy.
Overt campaigns to suppress the price of gold occurred in the 1960s with the London Gold Pool. After the UK withdrew from the pool in 1968, this manipulation collapsed and a two tier gold pricing mechanism was created. A market price for gold which would rise and fall, and an official price for gold set by governments. Today's official price of gold is $42.10, but Washington has never sold an ounce of its gold for $42.10. What kind of price is that?
During the 1970s, US dollar CinC inflation caused wealth to flee the US dollar and into the safety of gold. The Carter Administration had a few publicized gold sales of considerable size from official sector gold stockpiles to punish gold "speculators." It didn't work. Gold continued to rise as people fled from the US dollar until Paul Volker raised US short term interest rates to over 20% in 1980-81. Gold fell on its own afterwards, and remained controlled as wealth now flowed back into the US dollar during a financial asset bull market.
Early in the Clinton Administration, increased upward pressure gold started to build. This would have negative implications for the bull market in US financial assets. Fed Chairman Alan Greenspan and US Secretary of the Treasury Robert Rubin created the "strong US dollar" program. This program was inspired by an academic paper written by a Harvard economics professor, Lawrence Summers (who would later become the Secretary of the Treasury). Professor Summers noted the historical relationship of gold prices and interest rates. Lower gold prices creates lower interest rates, and the lower interest rates facilitates bull markets in US dollar financial assets. To lower the price of gold, central banks started moving gold out of their vaults and into the global market place.
The bull market of the 1990s wasn't so much a daily battle between bulls and bears, it was a team effort where everyone at the "policy" level, on a global scale, pushed down gold and silver and pulled up financial assets.
There is significant evidence that a covert campaign of selling global monetary gold reserves originated under the guidance of Greenspan, Rubin and Summers during the early 1990s. In the wake of this program it's believed that over 15,000 tons, about half of the world's monetary gold was sold into the open market. This gold is now jewelry, and can't possibly be return to the central banks.
As this programmed was designed by bankers, the central bank gold "injections" into the world market was accomplished in the form of gold loans to favored clients of Wall Street investment houses. These gold loans were loans of actual gold bullion. These loans of central bank gold are now in default. If the central banks are not calling these loans of their gold in, it's because the hedge funds, insurance companies and investment bankers who borrowed their gold can't pay back their gold.
With this background, let's now return to my chart of the gold commercials with its Step Sum of their net long and short positions. Starting in June of 2001 and continuing on to this day, the gold commercials have maintained a net short position. Why, what happened in June 2001? As we can see on my plot of the gold price, gold started to rise in price.
With gold prices rising by double digits since 2001, gold loans at 1% became one more toxic product Wall Street sold to its clients. The world's central banks in the main shut down their gold loan programs, new clients for gold loans could not be found and old clients with gold loans on their books knew their days of solvency were numbered if the price of gold could not be brought back down.
With the world's central banks refusing to lend their remaining monetary gold reserves into this really bad "policy initiative" of Greenspan, Rubin and Summers, Wall Street (under the supervision of Washington's regulators) had no other option but to flood the gold futures market with "promises" to deliver gold sometime in the future via shorting the gold market in a massive manner. Observing the price of gold from 2001 to 2009, we can see how this "policy" has worked for them.
We see Step Sum patterns similar to gold's commercial activities in the charts in the energy futures markets, but energy is different. Take for example Exxon, an energy commercial. Exxon: produces, refines, transports and markets energy products. Exxon and the other oil majors do it all. So who are they hurting by being net short gasoline or oil for year after year? Not the people who like affordable energy products. And God bless Exxon for the dividend they pay year after year to its shareholders.
But mark my words; the day is coming when the world will demand an independent audit of Fort Knox and other central bank's gold vaults. The US will not be in a situation to say no. BTW, the last audit was performed during the Eisenhower Administration in the 1950s. I expect the CFTC and the US Federal Government in general to be weighed and found wanting.
CFTC's specific failure was to allow financial companies that neither explored, mine, fabricated or marketed gold and silver products to assume massive gold and silver positions on their own accounts. Since August 1971, with the exemption of hedging risks associated with their clients in the precious metals industry, Wall Street itself has no legitimate business interests to justify commercial status in the gold and silver markets.
23 January 2009
Dow Jones -40% Declines From 1885 to 2008 is the article that inspired this race of 1929 & 2007 Bear Markets. You may want to read that article to understand my "BEV Chart."
Dow Jones Industrials Average Market Volatility is the source for my volatility studies.
The Lundeen Bear Box and Step Sum is the source for my Lundeen Bear Box and Step Sum Chart
Note For the Record: Mark Lundeen does not want a devastating bear market in the next two years. However, in full view of Congressional Market Oversight Committees and under the supervision of Government Regulatory Agencies, things were done that I believe will make a historic bear market inevitable. If you have a problem with this bear market, contact Washington, not Mark Lundeen.
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