SP 500 and NDX Futures Daily Charts - Coiling Ever Tighter Into the Apex

VIX remains above the 50 DMA but fairly low so the 'yellow flag' is out.

Hedges in place.

As a reminder tomorrow is stock option expiration.

A Message on the Need to Reform the Financial System -- From Herbert Hoover

This speech was given by Herbert Hoover as the country was caught in the depths of the Great Depression 6 December 1932, as he was leaving office, largely perceived as a failure.

I have sympathy for Hoover and rightfully so. For many years I saw his portrait every time I would visit the headquarters of the IEEE in New York City. I read about his magnificent acts of logistical organization and the relief of suffering in the European famines. He was an accomplished and talented person.

And yet he failed, or at least has been judged a failure as President, because of a timidity and unwillingness to act, boldly and in a timely manner.  He was constrained by bad advice, and an ideological bent that prevented common sense action from moving the country forward. Afterwards in his Memoirs he blamed the advice he received from his Treasury Secretary, Andrew Mellon, the great liquidationist, who had been appointed by Warren Harding in 1921, and who throughout the 1920's preached the gospel of tax cuts for the wealthy to stimulate growth.

"Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people."

This speech could be given with little alteration by Barack Obama today, although I am sure he would add quite a bit more flair.

The Too Big To Fail Banks are still with us, but even larger and more dangerous and powerful. Obama himself, despite pledges to the contrary, is taking large amounts of funds from the corrupt campaign process.

Instead of acting quickly to correct the causes of the financial collapse, he expended most of his early political capital on a healthcare plan that, despite some genuinely beneficial changes, serving to increase the control and reach of a few private healthcare monopolies by requiring all people to purchase insurance from them.

Fed policy still serves the few and is largely opaque in its dealings, becoming even more powerful as regulator.

And the markets are dominated by even fewer players, and tainted by a major scandal in which over a billion dollars was stolen from the customers.   

Corporate profits are excellent and the very wealthy few are making enormous strides in increasing their wealth. And yet the bulk of the nation suffers from fear and uncertainty.

The people's vehement objections to the bailout, marked by faxes, calls and emails in their millions, were ignored.

Yes, Obama faces a rigid and uncompromising opposition in the Congress, which achieved its House majority during his term I might add, but he still has broad Presidential powers, including the ability to direct the enforcement activities of the regulators and the Justice Department.

And not one major participant in the fraud has been indicted and prosecuted.  Instead, the perpetrators and beneficiaries of the fraud have crafted the words for the very reforms which they have opposed and weakened every step of the way.   And the regulatory agencies continue to hand out wristslap fines for egregious market frauds that continue to add to the deterioration of the confidence of average market participants.

If the US had a Parliamentarian system, Prime Minister Obama would have most likely already been ushered out the door.

Am I being too harsh? He promised much, and achieved little, and broke almost every major pledge he had made to his constituency in his zeal to curry favor with those who would have nothing to do with his mandate. In this he is more Chamberlain than Hoover, who at least acted on his principles that were unfortunately mistaken as he later admitted.

When he writes his memoirs I will be shocked if the current President does not paint a picture of magnificent accomplishments, and for the shortcomings, blame everyone but himself and his inability to execute on principle.

President Obama will undoubtedly provide a good case study for the failure in leadership in a crisis for future historians.

"There are three definite directions in which action by the government at once can contribute to strengthen further the forces of recovery by strengthening of confidence. They are the necessary foundations to any other action, and their accomplishment would at once promote employment and increase prices.

The first of these directions of action is the continuing reduction of all government expenditures, whether national, state, or local. The difficulties of the country demand undiminished efforts toward economy in government in every direction. Embraced in this problem is the unquestioned balancing of the Federal Budget. That is the first necessity of national stability and is the foundation of further recovery. It must be balanced in an absolutely safe and sure manner if full confidence is to be inspired...

The second direction for action is the complete reorganization at once of our banking system. The shocks to our economic life have undoubtedly been multiplied by the weakness of this system, and until they are remedied recovery will be greatly hampered.

The third direction for immediate action is vigorous and whole-souled cooperation with other governments in the economic field. That our major difficulties find their origins in the economic weakness of foreign nations requires no demonstration...

Banking Reform

The basis of every other and every further effort toward recovery is to reorganize at once our banking system. The shocks to our economic system have undoubtedly multiplied by the weakness of our financial system.

I first called attention of the Congress in 1929 to this condition, and I have unceasingly recommended remedy since that time. The subject has been exhaustively investigated both by the committees of the Congress and the officers of the Federal Reserve System.

The banking and financial system is presumed to serve in furnishing the essential lubricant to the wheels of industry, agriculture, and commerce, that is, credit.

Its diversion from proper use, its improper use, or its insufficiency instantly brings hardship and dislocation in economic life. As a system our banking has failed to meet this great emergency.

It can be said without question of doubt that our losses and distress have been greatly augmented by its wholly inadequate organization. Its inability as a system to respond to our needs is today a constant drain upon progress toward recovery. In this statement I am not referring to individual banks or bankers. Thousands of them have shown distinguished courage and ability.

On the contrary, I am referring to the system itself, which is so organized, or so lacking in organization, that in an emergency its very mechanism jeopardizes or paralyzes the action of sound banks and its instability is responsible for periodic dangers to our whole economic system."

Herbert Hoover, Annual Message to Congress, 6 December 1932

Frontline: Money, Power, and Wall Street

Coming April 24 and May 1, four hours in two parts.

There has been no genuine and effective reform, and no real recovery. And there is clear and present danger of another financial market collapse.

The truth of what really happened was led down a blind alley, and strangled. And no one saw or heard anything.

When it becomes available I will put up a link for those who would access it via the internet.

Watch Money, Power and Wall Street on PBS. See more from FRONTLINE.

A Study On Speculation in the OIl Market For Those Economists Who Have Apparently Not Seen It

Here is a study from the St. Louis Fed on Speculation in the Oil Market that indicates that speculation contributed about fifteen percent to the increase in prices in the oil market during a recent price increase.

Anyone who trades these markets and follows the real economy does not require such a study to tell them what is plainly visible to their own eyes, especially when the studies always seem to come out five years after the fact, in the manner of regulatory actions against market manipulation.

The markets have become deregulated to the point where hot money from big hands can push prices around at will, especially using large positional advantage and High Frequency Trading.    And even if traders are caught blatantly rigging the markets and painting the tape bringing in hundreds of millions in profits, they will only be chastised, make a hollow promise to do better, and endure a wristslap fine that is a very modest cost of doing business.

Granted, the larger markets cannot be moved for long against the primary trend, and the trend in oil has been higher for any number of long term fundamental reasons.    But traders feed on volatility, both up and down. And they introduce faux inefficiencies to take profits for themselves, adding no value, as a tax on the real economy.

And of course no financial engineer wants to discuss the effects of money printing on the price of real goods and services.

In the smaller commodity markets the scams can go on for longer periods of time creating more substantial damage to fundamentals of the related industry. I would love to show you the CFTC report on the effect of absurdly large positions in the silver market, but it has been sitting on that report for four years.

We have to ask ourselves, what are markets for? Are they fulfilling that function honestly and efficiently? What is the benefit of speculation and what are its limits?

Even Bernanke has seen the effects of speculation in the markets, and this from a man who ordinarily could not find a bubble with both hands as he expels it.

It is harder to get an answer to this now, because like some periods in history prior to this, the markets and the public are awash in hot money looking for an easy path to enormous returns as quickly as is possible. And that money flows through the avenues of Washington and Wall Street, and the media, and the universities and think tanks, distorting perception and public policy discussions.

And that is the danger of speculative excess, against which we have been warned time and time again.

Now the Fed will likely point to ETFs and blame investors who flocked to commodities to protect themselves from money printing. But that is only part of the story.

If you want to know who is benefiting from this, follow the profits. Look at the big trading desks who are gaming the system, and not at the small fry trying to find some investment haven in the storm of paper games.   And the reason they are so desperate is because of the reckless and irresponsible actions of the government in allowing the overturn of Glass-Steagall and the unbelievable growth in the unregulated derivatives market which even now poses a clear and present danger to the financial system.

And if you want to know who is to blame for that, skip the study, and go ask Brooksley Born.

"The increase in [oil] prices has not been driven by supply and demand." — Lord Browne, Group Chief Executive of British Petroleum (2006)

"The sharp increases and extreme volatility of oil prices have led observers to suggest that some part of the rise in prices re‡ects a speculative component arising from the activities of traders in the oil markets. " — Ben S. Bernanke (2004)


The run-up in oil prices since 2004 coincided with growing investment in commodity markets and increased price comovement among different commodities. We assess whether speculation in the oil market played a key role in driving this salient empirical pattern.

We identify oil shocks from a large dataset using a factor-augmented autoregressive (FAVAR) model. This method is motivated by the fact that the small scale VARs are not infomationally sufficient to identify the
shocks.

The main results are as follows:

i) While global demand shocks account for the largest share of oil price ‡uctuations, speculative shocks are the second most important driver.

(ii) The comovement between oil prices and the prices of other commodities is explained by global demand and speculative shocks.

(iii) The increase in oil prices over the last decade is mainly driven by the strength of global demand. However, speculation played a significant role in the oil price increase between 2004 and 2008 and its subsequent collapse.

Our results support the view that the financialization process of commodity markets explains part of the recent increase in oil prices.

Speculation in the Oil Market - St. Louis Federal Reserve, January 2012

And I have to offer a bit of an apology to Paul Krugman. As you may recall, I have taken issue with his absurdly incorrect description of the relationship between spot prices, inventories and the futures markets in the past when he stated emphatically that he saw no speculation in the oil markets.

Apparently he did see speculation and admitted it later on. He just didn't think it was a problem.

NYT
Oil speculation
By Paul Krugman
July 8, 2009

Oil speculation is back in the news. Last year I was skeptical about claims that speculation was central to the price rise, because what I considered the essential signature of a speculative price rise — physical withholding of oil from the market, in the form of high inventories — just wasn’t showing.

This time, however, oil inventories are bulging, with huge amounts held in offshore tankers as well as in conventional storage. So this time there’s no question: speculation has been driving prices up.

Now, “speculation” isn’t a synonym for “bad”. If the underlying assumptions that seem to have been driving oil markets were right — namely, that a vigorous recovery is just around the corner, and demand will shoot up soon — then it would be perfectly reasonable to accumulate oil inventories right now. But those assumptions are looking less reasonable by the day.

Anyway, the moral of this post is that the oil story this time looks very different: this time, the signature of large-scale speculation is clearly visible.

Paul Krugman saw no issue with it because he wanted to see a recovery in the economy at that time, to prove in the benefits of the financial engineering being done by the Treasury and the Fed. Alas, it was a phantom.

Hey Paul given this admission, that 'withholding' is a signature of speculation to the upside, would you consider creating 'phantom inventory' and 100:1 leverage of existing inventory to be evidence of speculation and manipulation to the downside?  And brazenly bombing quiet markets with enormous sell orders that crush price lower without even the appearance of legitimate price seeking?

If so, you may wish to talk with Bart Chilton about the silver market. That is, if you were interested in reform and not just proving some economic theory about stimulus.

Few care about genuine reform of the financial system and the markets, caught as we are in a credibility trap. But that is the only path to sustainable recovery. And therein lies a tragedy.