Posts Tagged ‘Wall Street’

Money & politics to cause more sell-off ahead?

Sunday, January 24th, 2010

Today, we are supposed to discuss the “next sequence in the time-line” from our previous article. But before we go into that, we will discuss some new developments that is more urgent.

As we all know, last week was a very bad week for the global stock markets. On Wednesday, various markets (including the commodity markets) had hit the trend lines in price charts. What this means is that prices had reached the minimum in which the up-trend was still regarded as being intact by technical analysts. On Thursday, many trend lines were breached simultaneously. The last time such a similar event happened was in August 2008, which heralded the Panic of 2008.

Is this the beginning of the correction that many (including us) since September last year (see Aborted correction)? Back then, stocks were already in highly overbought territory and some contrarian traders were even shorting stocks. In the reverse sense, that was very similar to November 2008 when stocks were in highly oversold territory and many were anticipating a rally. The rally did not arrive until March 2009. In the same way, has the long anticipated correction finally arrived?

Those who enjoy having adrenaline rushes may want to take the courageous step of shorting the S&P 500 index. Historically, years ending with zeros tend to perform badly (for whatever reason that we have no idea). Also, election years tend to be bad for stock markets. 2010 is the mid-term election for the United States.

The Chinese government’s decision to halt lending (after an orgy of lending in the first couple of weeks of 2010) was the initial pin-prick against the up-trend. Commodity prices in general fell, with the exception of palladium and platinum. But Thursday’s news that Barrack Obama is going for the jugular of Wall Street (you can read the details from the mainstream press) was the trigger for the reversal in trend that even brought down strong and steady palladium and platinum. Since 2010 is the year for mid-term elections in the US, it is hardly surprising that Obama is embracing populism with stronger gusto. Also, there are rumours that Ben Bernanke, who is perceived to be too soft on Wall Street, may be ousted as chairman of the Federal Reserve (in a vote by senators). It is no secret that Wall Street is perceived to have looted Main Street. So, in an election year, politicians will pander for the support of Main Street.

In principle, we support Obama’s stand against Wall Street. But we disagree with his counter-productive way of dealing with Wall Street by imposing more regulations. The reason why we believe this is counter-productive is because in general, more regulations:

  1. Implies more red-tape
  2. Increase costs of doing business
  3. Restrictive on the good guys as well

Instead, we take the same approach as Jimmy Rogers, whom we quoted at Jimmy Rogers: ?Abolish the Fed?,

More regulations? You want Alan Greenspan and Ben Bernanke? These are the guys who got us into this situation. They are supposed to be regulating the banking system for the past 50 years. These are the guys who let it all happen. I don?t want more regulations. Let the market regulate it. If xyz needs to go bankrupt, let them go bankrupt. I promise you, that will send a very straight signal and you will have a lot of self-regulation when these guys [Wall Street] start to go bankrupt.

Obama’s plan requires the approval of Congress. We can be sure that Wall Street, with their money, will lobby Congress and fight tooth and nail to frustrate Obama’s plan. That goes without saying.

Not only that, we believe that Wall Street will step up the pressure against Obama by dumping everything in sight on the stock market, perhaps even going to the extent of doing naked short-selling (see Short selling, who loans their share?). Since selling begets more selling, a plunging stock market will bring back memories of the Panic of 2008 to Main Street, which in turn can do damage to consumer sentiments (see Do sentiments make the economy or the economy makes the sentiments?). Of course, this is just our conjecture. If our theory is correct, then it implies that there will be more sell-offs in the days to come.

This is indeed money and politics.