Replies to post #265108 on Zeev's Turnips Patch-No Politics (ZEEV)

[marketmaven]

WHY INTEREST RATES WILL RISE- thanks Dan
by John Mackenzie
July 2, 2004
http://www.financialsense.com/fsu/editorials/mackenzie/2004/0702.html
Increasingly, Fund Flows have been used to offset any rise in yields. More command performance from Chairman Alan Greenspan. The latest decline in yields can be attributed to inflows bidding price up and yield down. Following the greatest liquefaction scheme in history, this most recent 25 basis point rise in Fed Funds has resulted in an about face in market psychology. The Markets clearly now believe we have now seen the end of low rates for this business cycle.

Any panic in equities will certainly seek safe havens; the Central Bankers are counting on this as they need to maintain the United States Uber Bubble in Housing and the adjacent Derivatives Bets in Rates. These two colossus are the very pinnacle of this economic cycle. The Financial economy, a hostage of its own machinations, is bucking wildly.

Control is clearly being exercised as the Flood Gates continue to creak.

Conventional wisdom appears to be suggesting Rates, Real Rates may continue to fall in the short run. This is certainly possible and with good cause, but will all those Variable Rate Products be allowed to shift to a Fixed environment? Unfortunately, most of this wisdom was imparted to us via the Federal Reserve’s own think tank.

I would suggest their convention is going to be tested and market forces are going to begin exerting themselves in rapid succession. The end of “Money for Nothing” is upon our “Planners” and their efforts are beginning to look tepid at best.

Forcibly lower Rates appear to remain in the playbook for now, but the bullet has not left the gun’s barrel, when it does we can rest assured Alan and Company will step aside.

Were the Federal Reserve to reverse course, as some have suggested, they will have blinked badly. Rising Fed Funds have been co-joined to an improving economic environment. This fallacy continues in play for now, but what happens when the inevitable “accident” comes calling.

It provides the excuse for a reversal, but will it in fact be “accepted” by the markets?

The Bond Market understands Chairman Greenspan is playing roulette, but has very little latitude in which to operate as the alternatives are in question. Equities have been the hot casino while Balance Sheets begin to suffer across the Fixed Income spectrum. Losses are being masked by rampant speculation at Alan’s punch bowl with absurd returns elsewhere to keep the game aloft a little longer.

Do we witness a loss of control and outright deflation or will Sir Alan attempt to plug every hole with confetti, yet once again thereby sending the dollar into it’s demise and altering reality once again?

Market forces are going to have the final word and I fully suspect they will temper any change in bias very quickly. A Financial System based upon Debt will require increasingly greater returns in order to maintain itself, or it simply will be left wanting.

Capital has behaved in a most unconventional way over the last three years as within the interlocked Global Financial System, our demise is going to assure a number of others join the ride in lock step.

At some point in the not too distant future, one of our Financiers is going to begin to beg the invariable “Quid Pro Quo Alan?” The equivalents will be few and far between.

Truly an “All or Nothing” gambit: As Russell suggests, “He who loses the least, wins.”

The Fed cannot afford a Credit tightening, it faces a deflating Mortgage Bubble and an unprecedented growth in Derivatives, yet unlimited credit elasticity has a way of snapping back rather suddenly when credit becomes scarce.

I happen to believe this is precisely what will happen.

Why?

Our Creditors are saying this is so.

[marketmaven]

How to Manipulate the Stock Market With Only $12 Million Per Day- Trannies
http://www.financialsense.com/Market/wrapup.htm

If I ever wanted to manipulate the stock market without being detected and using the smallest sum of money possible, here is what I would do. (Ethics aside) First, I would accept that I could not do the job by buying or selling bulk shares of stock because that would take too much of money and it would not be possible to avoid detection. Therefore, I would try to quietly influence the trading of large sums of money by institutions. The means I would use to mobilize these large sums of traded money would be to manipulate the technical analysis tools that many market participants are using.

We live in times where technical analysis is increasing in importance because as financial bubbles continue to re-inflate, the disparity between fundamentals and share prices widens. All that’s left, as a basis to own stocks is the technical charts. It would be impossible to manipulate company fundamentals or news in a meaningful way without being detected. Therefore I would concentrate my efforts on the technical analysis characteristics of company stocks.

I would attempt to manipulate the technical indicator that had the greatest combination of:

Extent that financial institutions and the public used it.

Ease by which the indicator could be manipulated.

This would lead me to the Dow Transportation Index. Why? Dow Theory is one of the most widely used of technical theories. (A summary of Dow Theory is below.) It involves establishing the trend of both the Dow Industrial and Transportation indices to establish whether their respective movements confirm each other to establish the primary trend of the stock market. According to Dow Theory, when there is confirmation of the direction of the trend, traders may trade in the direction of that trend. This Theory is a cornerstone of the most widely used textbooks on technical analysis, including those used by the Market Technicians Association to certify their members. Such market technicians are increasingly employed by financial institutions and therefore, have an increasing influence on markets. If enough people study and trade on the technical characteristics of the markets, they become the market. By manipulating the Dow Transportation index, I could keep a large proportion of technical traders on the same side of the market. At the very least, I could create enough Dow Theory confusion to keep many traders and a lot of money out of the market or away from shorting stocks. Could I do this with a relatively small amount of money? Yes! I will describe how. Below are some key statistics on each component of the Dow Transportation Index.

My goal would be to manipulate the Transportation index by moving the prices of stocks that had the best combination of share weighting (high is better), and share liquidity (low is better). The Dow Transportation Index is a share-price weighted index. For example, the first company listed, Alexander Baldwin (ALEX) comprises 4.76% of the Dow Transportation Index. Over 20% of the index is comprised of two companies - United Parcel, and Fed Ex. While it may be a good idea to try to manipulate the companies that comprised the largest proportion of the index, it would be more efficient to consider liquidity as well. All other things being equal, I could manipulate the index more efficiently if I could move the prices of those companies that had the least amount of liquidity. It would take fewer shares traded to move those company’s stock prices than the more liquid stocks in the index. For example, I could move Alexander Baldwin, which trades an average of 200,000 shares per day a lot more efficiently than Southwest Airlines, which averages 3.5 million shares per day traded.

In the fourth column of the Table above, I have listed what I will call a “Push Factor” for each company in the Dow Transports. The Push Factor is the percentage weighting in the index divided by the average daily volume traded (times 1million). Combining the companies, which the highest percentage index weighting and lowest liquidity results in the highest “Push Factors”. These are the companies that one can use to most efficiently move the entire index. As you can see from the table above, over 69% (105/152) of the combined Push Factor comes from a total of only 7 stocks. These 7 stocks trade a combined average daily volume of only 2.84 million shares per day. I could therefore account for about 10% of the trading volume of these stocks (containing 69% of the index “Push”) using only about $12 million per day. This would likely be sufficient to manipulate the prices of these stocks and as a result, of the entire index. By contrast only one stock in the Nasdaq index, Intel, trades an average of 57 million shares per day. It would take $161 million to provide the same support to Intel’s share price, as only $12 million would have for all of the 7 double-digit Push Factor Dow Transport stocks. Whereas the 7 stocks have a Push Factor accounting for 69% of the index, Intel makes up less than 5% of the capitalization-weighted Nasdaq index.

As you can see from the discussion above, manipulating the Dow Transportation index would be relatively easy. Moving this index by way of manipulation would have a ripple effect on the large number of traders and investors using Dow theory. It would be pretty efficient market manipulation for only $12 million per day. Since it can be shown that the Dow Transports can be manipulated relatively easily, and given the out performance of the Dow Transports, conspiracy theorists would have to question if that is happening now. Following is a 6-month chart of the Dow Transport to Dow Industrials Ratio. It makes one wonder if something is afoot.



Following is a graph showing the dividend payout percentage of the Dow Transport and Industrials indices from 1987 to the present. If there is something that is driving the transports higher in greater proportion than the overall stock market, it is not declared dividends. The transports, with a current dividend yield just over 1.09%, are anything but historically cheap. The Dow Transports presently trade at a 20-percent premium to the 17-year average dividend yield of 1.31 percent (not including the 1988 high “off the chart” yield). For what it is worth, the stock with the highest “push factor,” Alexander Baldwin, just announced their latest dividend last week (no increase).

Today’s Market
All of the major indices were down today on relatively high volume. Amongst all of the rah-rah talk that is ringing in my ears from the cable TV folks, some bearish patterns seem very much intact. The S&P, Dow Industrials, S&P 500, and Nasdaq have just finished making a lower high. Here are 6-month charts: