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The two most recent issues of Pictures
of Stock Market Mania featured previous Crosscurrents articles on
gold and derivatives. In the interest of presenting as many perspectives
as possible, we will not cover these subjects again until later in the
year, one of which we expect to present in our next issue to be published
As you probably know by now, this
feature is now published for free roughly every three months to an ever-widening
audience. If you are interested in seeing our articles earlier or
wish to see more of our work, there are links to additional samples, a
free trial to the Crosscurrents newsletter and subscription links elsewhere
on this website.
Our lead charts for years have focused
on total Dollar Trading Volume, which we believe was the first indicator
to clearly and accurately present the case for a veritable stock market
mania in progress. But much has changed in the last decade. The American
Stock Exchange has now been absorbed by the New York Stock Exchange, which
also trades Nasdaq issues. There are various electronic exchanges,
and data is difficult to come by and collate. Also, much of today's
transactions are in Exchange Traded Funds (ETFs), rather than individual
stocks, and as a result, fair comparisons to previous years are becoming
increasingly difficult. Program trading is once again on the rise
and now accounts for approximately 30% of all volume. So-called "dark
pools of liquidity" account for 9% of trading. These transactions
are "dark" since they do not even publish bids or offers for the public's
This is not your Father's stock
Nothing is as it appears, as
much the reason for the worst bear market in decades as any other reason
we might muster.
At least a year ago, we admitted
that the data for our lead charts were becoming increasingly difficult
to rely on. That said, we also claimed our charts were likely off
by no more than 2% from actual activity. We can no longer make
that assumption. Simply put, we cannot guarantee that we
will be able to reliably construct the dollar trading volume charts from
available data in the future. However, we believe this issue's charts
present a fairly accurate approximation of activity in the U.S. stock market.
In our last issue, we commented that we were "constantly
amazed by the statistics," and our focus has typically resided on the excesses
of the mania and previous periods of stupendous one-sided sentiment for
stocks. After all, total Dollar Trading Volume (DTV) didn't just
expand, it exploded 28-fold in a 20 year stretch from 1988
to 2008, an annualized average rate of gain of more than 18%. As
crazy as that statistic might sound, it doesn't fully describe the extent
of the mania, since in the 20 years leading to the manic 2000 peak in prices,
DTV advanced by an average of 23.4% per year!
However, it is about time we focused on the opposite
side of the equation; the bear market bottoms that inevitably follow the
manic peaks. The stats may be every bit as relevant and may offer
clues to when we may expect a solid and long lasting upside reversal in
prices. Thus far, the rally from the March bottom has been impressive
but three or four months is not a long term trend.
As prices surged into the 1929 manic peak and subsequently
crashed, $125 billion in stock changed hands, equivalent to 133% of GDP
and 228% of market capitalization. By 1932, when prices had collapsed
by nearly 90%, DTV sank to 23.7% of GDP and 73.1% of market capitalization,
both spectacular declines. Only $13.4 billion changed hands in the
entire year of 1932, an amount now typically traded in only 36 minutes.
Although there might be some controversy about
labeling the 1966-1972 era as a mania, there was a tremendous resurgence
of interest in stocks both large and small as the Dow approached and finally
exceeded the 1000 mark for the first time in February 1966. By 1972,
mutual funds had taken the spotlight and concentrated their sponsorship
on a small segment of the market, fifty rapidly growing companies commonly
known as the "Nifty Fifty." Clearly, this was not the same type of
lunacy that swept the public into margin-related purchases in 1929, but
an institutional mania that was nevertheless profoundly guilty of one-sided
sentiment. DTV nearly tripled in only 11 years and peaked at 19.2%
of GDP in 1968 only to fall dramatically to 7.8% of GDP in 1974.
In the current era, DTV reached 328% of GDP in
2000 and fell to 171% in 2002, then rebounded to 339% last year and has
subsequently declined to 255% of GDP.
Compared to either the public led lunacy
of the roaring Twenties or the institutional led lunacy of the 1970s,
the present contraction in trading is minimal.
We doubt that a replay of the Roaring Twenties
is in progress, thus any expectation of a collapse of DTV to anywhere near
the all time lows is nil. As our chart above illustrates, DTV averaged
roughly 29% of GDP from 1926 to 1999. The average over the entire
83 year period shown is 55%. Even that average seems unreachable,
if only for the reason that mechanical trading methodologies continue to
be so prevalent. Program trading has recently accounted for close
to 31% of all NYSE volume and the trend in programmed trades appears to
As you can see below, despite the halving of the
major averages from 2000-2002 and then again from 2007 to 2009, DTV versus
total U.S. stock market capitalization remains very much on an upwards
path. While the public has certainly pulled back from the arena,
sophisticated technologies and methodologies continue to proliferate and
dominate the arena.
For all intents and purposes,
the individual investor has become an endangered species.
There is every reason to believe that a contraction
to the same levels suffered in 2002 is achievable.
At that time, DTV fell to little
more than 170% of GDP.
If the same circumstance occurred
the volume of dollars trading
would be cut by fully ONE-THIRD from today.
The resulting contraction would likely translate
to a second capitulation phase for the secular bear market, an event we
believe would have the potential to end the secular bear market.
Three year wealth gains (losses) imply there is more downside in store.
Note how the huge plunge in wealth after the 1929 crash impacted investors
several years later. There were five positive years from 1934 to
1938 and then another series of poor years.
The similarities to the current
phase are striking.
However, the second series of negative readings
in the current phase measured from 2000 are far worse than what occurred
before and as a result, we have reason to believe investors do not yet
possess the courage to turn the market around.
Too much wealth has disappeared.
Individual investors have become
an endangered species.
The following article was the
lead article in our May 11, 2009 issue.
could have seen this article two-and-a-half months ago, when the Dow was
higher than today
Bear Market Still Threatens
Until Late 2010
Mixed measures continue to proliferate, both offering
hope for bulls and sustenance for bears. While there appears to be
good reason for believing prices have bottomed, with perhaps only a solid
retest of the March lows as a necessary component of the bear market, history
strongly suggests far more time will be required before a new bull market
Our featured chart illustrates the one year differential
in total margin debt as tallied by NYSE and NASD firms. Margin debt
at NASD firms is only a fraction of what we typically see at NYSE firms,
but there seems no point in ignoring any contribution to the overall problem
of an over leveraged market. As well, the NASD’s share of total margin
debt has grown larger in recent years. While margin debt at NASD
firms was only 7.1% of total margin debt in March 2000, the NASD’s share
was as high as 15.9% in October 2008.
The good news is that total margin debt has dropped
dramatically and rapidly from the July 2007 highs, shortly before prices
peaked. Thus, we can reasonably infer that much of the speculative
excess that catalyzed the price collapse has been removed from view.
After all, the post-mania collapse from 2000-2002 was one of the most significant
declines in stock market history and as the chart clearly illustrates,
the current annual contraction in margin extends beyond than that of the
mania’s dénouement. As of January 2009, margin was down 46%
over the preceding 12 months.
The bad news is that a horrific downside such as
the present collapse should not be expected to reverse before all traces
of speculation are removed from view. In the aftermath of the original
mania, the annualized rate of change in total margin debt did not dip below
zero until November 2000, eight months after the price peak. The
rate of change did not bottom until August 2001, 20 months after the price
peak and the rate of change did not forge above the zero line again until
June 2003, 32 months after the peak and only three months after a significant
test of the bear market bottom in March 2003. Margin debt declined
for 31 consecutive months on an annualized basis.
In the current bear market, the annual rate of
change did not pass below zero until April 2008, six months after prices
peaked. Thus far the rate of change for January 2009 represents the
worst case, 15 months after the top. A simple extrapolation leads
us to believe that the rate of change will not rise above the zero line
again until 27-32 months after the measure first fell below the zero mark.
That would take us into the period from July to December 2010. Bear
in mind that a rate of change below zero equates to net supply and that
a rate of change above zero equates to net demand. Interestingly,
we have already gone on record that a number of factors point to an end
of the bear market in October 2010 and we have even mentioned October 23,
2010 as a specific target. Given this issue’s analysis of margin
debt, we see yet another reason for the existence of our target time frame.
Clearly, as our chart below illustrates, stock
prices are not likely to go up for any serious length of time before and
unless margin debt is once again on the rise.
Thus far, the lowest margin debt reading occurred
in February 2009, down 52% from the June 2007 peak. Margin debt declined
55% from the mania’s peak into the 2002 bear market low. Q: Is this
similar decline in margin debt sufficient to mark the bottom? A:
Given the extent of the collapse in the economy, it is likely that margin
debt will continue to contract until there is visible evidence that the
economy is ready to turn. Despite the little blip of a reversal in
the month of March, our two arrows point to similar respites in which margin
debt briefly rose during prior bear market rallies. As well, the
level of margin stabilized from October 2001 to May of 2002 before once
again turning down to the bear market bottom. There is still good
reason to believe that the current contraction in margin debt will eventually
approach the levels of September 2002 before the next bull market can begin.
If we are correct, margin debt
could contract by as much as one-third from today.
Net demand, as shown by our
front page chart, is likely well over a year away.
Best bet; Autumn 2010.
Below, also reprinted from
the May 11, 2009 issue of Crosscurrents.
A Bull Market Requires Stocks
The chart below highlights just how incredible
the metamorphosis of the U.S. stock market has been for investors!
Less stocks trade but more ETFs trade. In our view, it is no mere
coincidence that the peak in traded issues occurred during the mania for
stocks and no mere coincidence that the tremendous growth exhibited for
ETFs occurred as the public’s interest in risk slid alongside prices.
It’s been all about product and many ETFs have been touted as all-purpose
vehicles for investors. However, it should be obvious that a bull
market requires value to discover in individual issues. The number
of issues traded on the NYSE rose during most of the secular bull market
and has declined during much of the secular bear market. We would
expect this indicator to once again be trending up before the bear market
Could we present a clearer
picture of "endangered species?"
And again below, our feature
article reprinted from the May 11, 2009 issue of Crosscurrents.
A recent Bloomberg interview (http://tinyurl.com/dhawxr)
highlighted the horribly broken nature of the U.S. stock market's mechanics,
specifically the facility with which naked short sales still exist.
The discussion between Former SEC Commissioner Roel Campos and short selling
activist Manuel Asensio took on the matters of the uptick rule and naked
short sales. Mr. Campos seemed lukewarm at best about a reinstatement
of the uptick rule and called it a bit of "chicken soup," which we guess
means all it will do is make folks feel a bit better, while not really
accomplishing much. While we believe that ANY move to foster confidence
in the U.S. stock market must be correct, we also must admit that in today’s
environment, it is exceedingly simple for the uptick rule to be circumvented,
which of course, negates most, if any benefit. The truth for investors
is that the playing field has been tilted again them for years and the
arena exists not for the benefit of the public, but for the benefit of
the institutions that can take advantage of investors.
Mr. Asensio, on the other hand, not only called
for elimination of any uptick restraint but also came down hard on the
side of no borrow requirements at all to short stock, claiming, "Any requirement
to borrow stock before you sell it is a negative for short selling.
The whole concept of the existence of naked short selling is an absurdity.
There should be no reason to borrow stock. One should be able to
sell stock at will."
The Bloomberg piece seems no more than the same
old story of a slavish and compliant SEC doing the bidding of its Wall
St. masters with zero recognition of the harm done to our financial markets
and a hedge fund activist who believes that the capital formation system
should have absolutely no foundation nor structure. Folks, this is
truly bizarre. It is pathetic that the mainstream media have been
so ignorant of the mechanics of the system and the harm generated by same
and it is pitiful that we have come to this point as the system has been
pillaged at the public's expense. Simply put, our financial markets
can only endure if those securities issued, listed and purchased by investors
are genuine. However, Asensio's views take us into a fantasy land
where a virtually unlimited number of shares can be shorted. May
we remind you that on the other side of each and every short sale, there
MUST be a buyer. Even if you sell short what you do not own or borrow,
someone is buying the shares that you sell. In the case of General
Electric (GE), the company has authorized the issuance of 10.6 billion
shares. Somehow, large block owners own 11.9 billion shares, 12.3%
more than are authorized to trade. Where did the extra shares come
from? Short sales. In the case of IBM, the company has authorized
the issuance of 1.3 billion shares. Somehow, large block owners own
1.6 billion shares, 23% more. Where did the extra shares come from?
Short sales. Bear in mind, we are not counting any of the shares
that might be held by individuals not counted as “large block owners.”
For kicks, we did a Google search for "most heavily
shorted stocks" and amongst the 52 million results found a list of ten
stocks from 2003 (http://tinyurl.com/dl3huf).
Did we say 52 million results?! Indeed, we did. Several of
the group are now extinct but the ones still extant are typically so incredibly
over owned even today that we can only wonder how anyone can trust the
stock market. Take Cheesecake Factory (CAKE) and Molex Corp. (MOLX)
for instance, each of which have at least 60% more stock owned by large
block owners than the companies have issued. These are not small
fly-by-night companies; CAKE has sales of $1.6 billion and MOLX has sales
of $3.2 billion. But we went another step further and then searched
for “highest percentage of float short” and came up with equally disturbing
results, pulling in a Bespoke Research study from September 28, 2008.
We only checked ten of the 25 listed stocks, enough to further fortify
our determination that the markets are broken. For each, large block
owners alone accounted for well over 100% of the total of authorized share
issuance. The companies included Web MD (WBMD), Sears Holding (SHLD),
Cree Inc. (CREE) and Mylan Labs (MYL). Five companies had large block
owners of more than DOUBLE the authorized shares issued. The five
included Lennar (LEN), Martin Marietta (MLM), Big Lots Ohio (BIG), Chipotle
Mexican Grill (CMG) and Panera Bread (PNRA). All have revenues well
in excess of $1 billion. The worst offense to shareholders was PNRA,
which has 29.5 million shares outstanding but somehow has large block owners
of 69.5 million shares.
Recently, we communicated with one very prominent
long time observer of the markets recently, who admitted being involved
in circumvention of the uptick rule. When specifically asked “Isn't
the facilitation of hedge funds you described clearly a gaming of the system?”,
our correspondent promptly answered, “Of course, that’s what Wall Street
does – game the system.” We do not make this stuff up. The
short sale mechanics of the U.S. stock market are horribly broken.
Investors are well advised not to trust anything they hear and only half
of what they see.
Most unfortunately, the agency responsible for
keeping track of stock ownership is fighting to do away with paper certificates,
the only way one can currently certify ownership without any doubt as to
legitimacy. Given the statistics we have presented in past months,
a brokerage account entry proves nothing. Our poster child company
Blue Nile (NILE) has 14.5 million shares authorized to trade, yet 38.2
million shares reside in brokerage accounts. Transfer Agent Lori
Livingston was so alarmed about the DTCC’s moves towards paperless “ownership”
that she wrote the SEC to question their operations, pleading that “it
has become more and more difficult to determine who owns the shares, who
is trading them and if the trading is proper.” You can read her letter
The DTC has termed the move to paperless ownership “dematerialization.”
For all intents and purposes, this is a perfect description of what is
to come and amply defines a sad future for investors.
Note: NASD has previously sanctioned
Asensio for matters involving short selling activities and he was later
barred "from association with any NASD member in any capacity."
The Long Term May Finally Portend
The conventional wisdom that stocks are one decision
investments - buy - has been totally crushed.
We have shown the perspective below many times
in the last few years, always insisting that the conventional wisdom was
wrong and that history showed resounding potential for another horrible
bear market, as in the 1930s and the 1970s. Clearly, we were correct.
We have repeatedly attempted to show how individual
investors were rapidly becoming an endangered species, through their own
actions and also as a result of a complete transformation of the U.S. stock
markets, a process we referred to as a metamorphosis
10-year annualized returns
fell to their lowest level since March 1941.
The good news is that these
returns have probably reached their nadir.
We do not expect this indicator
The bad news is that individual
are still an Endangered Species.
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In the last issue, we placed upside potential for
the Dow at 9000-9100, SPX 940 and Nasdaq 1665. The Dow and S&P
have yet to reach these levels but Nasdaq has traded as high as 1862.
Our Speculative Intensity indicator for Nasdaq has soared to its highest
upside trend reading since the mania peaked in 2000, in our view, a significant
We also estimated downside risk to Dow 6400 (the
March lows), SPX 660 and Nasdaq Composite 1200. We have adjusted
these levels slightly.
We also said "Volatility
should decline slowly over the next five months. The reward/risk ratio
is now temporarily positive for stocks" and were completely correct
on that score.
It is increasingly probable
possible that the lows for year have already been seen.
for the remainder of 2009 - odds 20%
9000 /// SPX 970 /// Nasdaq Composite 1940
Downside risk for
the remainder of 2009 - odds still relatively high at 40%
7000-7400 /// SPX 765-805 /// Nasdaq Composite 1500-1600
should decline slowly over the next five months.
reward/risk ratio is now temporarily positive for stocks.
expect a "retest" of the March lows will occur at some point.
does not point to an end of the bear market
somewhere between July to October 2010.
OF THE ENTIRE WEBSITE ARE COPYRIGHT 2009 CROSSCURRENTS PUBLICATIONS, LLC
I hope you have enjoyed your visit. Please
return again and feel free to invite your friends to visit as well.
Alan M. Newman, June 29, 2009
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All information on this website is
prepared from data obtained from sources believed reliable, but not guaranteed
by us, and is not considered to be all inclusive. Any stocks, sectors
or indexes mentioned on this page are not to be construed as buy, sell,
hold or short recommendations. This report is for informational and
entertainment purposes only. Persons affiliated with Crosscurrents
Publications, LLC may be long or short the securities or related options
or other derivative securities mentioned in this report. Our perspectives
are subject to change without notice. We assume no responsibility
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