The Road To Hell: Nothing's Changed Except Options

On Monday, stocks fell in dramatic fashion right from the opening bell until the close of trading, without interruption or even a hint of a rally. Odd, isn't it, that after 6 consecutive weeks of gains, stocks would take their worst beating in well over a month?

Not at all, if one considers the power of the major players on Wall Street to influence the direction of stocks to their liking. The only thing that's changed since Friday is that there are no options close to expiration, no easy profits to be made on the backs of trusting investors, so the big money did on Monday what they always do when there's no "easy" money to be had, they sold off en masse.

My own family and friends often ridicule me for my extreme views on market manipulation, but I don't complain. Over the weekend, while at a family gathering, the "geniuses" of finance were all gloating over the recent rally, claiming that the economy was all well and good, and that my "gloom and doom" was once again proven wrong. I replied that there was 100% certitude that the rally was over and stocks would end their 6-week streak beginning this week, precisely for the aforementioned reasons.

Unfortunately for me, I didn't make any bets with the naysayers on my prediction, as I'd be cashing them later this week. Stocks have become overbought to the extreme and the big money knows it's time to take money off the table before the deluge of disappointing earnings commences.

The action on the street was one-way, broad-based and heavy. No surprise there. Where it goes from here is probably going to be a little more difficult to predict on a daily basis as the markets will gyrate through earnings season. Some stocks will do well while others will crack new 52-week lows. Overall, however, the action will be to the downside, as the media hypes unemployment, commercial real estate blowup, continuing housing crisis, banks that don't lend, consumers that don't spend and an economy that refuses to mend. (amazingly, gloom and doomers can rhyme pessimistically)

For some perspective, Monday's loss n the Dow was the largest since March 2nd, and the fifth largest of 2009. There have been some very bad days on Wall Street this year, and today's decline provides an argument that they are far from over. Investors refused to capitulate after the collapse from September to November of 2008, and the subsequent fall-over from January through mid-March, so logic dictates that the final leg of this great bear market has yet to occur. There is every reason to believe that stocks will retest and even surpass the March 9 lows, just as they have crushed September and October, 2008 lows and the November, 2008 lows. Brace for impact.

Dow 7,841.73, -289.60 (3.56%)
NASDAQ 1,608.21, -64.86 (3.88%)
S&P 500 832.39, -37.21 (4.28%)
NYSE Composite 5,220.12, -260.48 (4.75%)

To illustrate the depth of today's sell-off, consider that declining issues beat back advancing ones by a large ratio - 6 to 1 - 5548-918. The most persistent indicator - new highs vs. new lows - maintained its bias throughout the recent rally toward new lows as it has for the past 18 months running and expanded the gap on Monday with 68 new lows to just 8 new highs. Expect that margin to increase dramatically over the coming weeks.

And if there was any one indicator pointing directly to the false aspects of this six-week rally it was trading volume, which was literally at the highest level of the year.

NYSE Volume 1,761,254,000
NASDAQ Volume 3,246,035,000

The rally of the past six weeks was built entirely on hype, lies and manipulation, the catalyst being those billions of dollars passed out from the government to the banks, which also double as brokerages. Want to know where the TARP money went? Take a look at that massive rally. It went into stocks and is now going to disappear, just like the money thrown into phony structured mortgage securities and credit default swaps.

Let the arguments for inflation begin and end right here. All of the stimulus and excess spending will not result in inflation and a lower dollar. The dollar has been rising against other currencies throughout the recent spending spree, and for good reason, the money created was phony, just like the prices of stocks. Nobody except the most expert of traders actually made money during this rise, and many of them are in the process of giving that back and then some. As much as the Federal Reserve would like to re-ignite the flames of inflation, they cannot do it by simply creating more money. As much as they create, Lord Keynes' "invisible hand" of the market will seek it out and destroy it with greater purpose and efficiency.

The basic structure of the economy is unbalanced. Labor, capital and resources have nowhere to go. Jobs continue to be lost, capital wasted and resources idled. Unless money, labor and resources are put to productive use - not into the stock market for paper gains - recovery and balance is impossible. Inflating the amount of money "in circulation" when it is actually being hoarded and squandered by the banks will not produce prosperity. Only a real, true accounting of the malinvestments and an orderly disposition of the liabilities produced can produce a resumption of prosperity. Anything less than that will produce only what we've already seen: false market rallies, continued deflation and ultimately - unless we change our ways - the complete breakdown of all contracts - economic, political and social.

In brief, the government, by tinkering with money supply and public relations trickery instead of doing the hard, necessary work of admitting that certain large banks are insolvent, threatens the very existence of not just the economy, but of the political process by which they were elected and the social fabric the keeps the nation a functional democracy. It's likely that the government has less than a year left to mend its ways or the United States of America runs the very real risk of devolving into chaos and anarchy, complete with threats of state secession, gangs, riots, homelessness, starvation and death.

Sounds like fun, huh?

Government's answers so far have been confined to bank bailouts (handouts), extensions of unemployment insurance (more handouts), increases in welfare payments (even more handouts) all with borrowed money. The spigot is about to run dry as foreign investors refuse to buy our new toxic investments, US Treasury bills, notes and bonds. Meanwhile, the tax burden on individuals grows.

There is no way to spend ourselves out of this mess. Fiscal discipline is a necessity which, thus far, has not even warranted a mention in the congress and various state-houses. Taxes have to be lowered dramatically, along with the requisite cuts in government spending. Those policies - exactly the reverse of what's being tried - are a major part of the solution. The rest of the formula is for investment in actual working industries, in technology, agriculture and manufacturing, not education, public works and education, which produce nothing.

Another proxy for the health of the global economy could be seen on the commodity markets. Crude oil for May delivery lost $4.45, to $45.88, a massive pull-back off recent highs. The precious metals suddenly reversed course, with gold gaining $19.60, to $887.50 and silver adding 32 cents to $12.11 (still a bargain).

There is no pricing power anywhere in anything priced in dollars. From foodstuffs to consumable energy, i-pods to pianos, prices are plummeting as consumers retrench, just as out government entities should. For a change, government should take heed of what the public is doing - hunkering down, avoiding waste, saving - and do likewise.

I've got $1000 that says they won't until it's too late to save themselves from themselves. In the immortal words of the great comic strip Pogo, "we have met the enemy and it is us."