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Just Another Brick In the Wall of Worry

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The Street seems to have put all its chips into the pot, betting heavily on the notion that the Fed is more powerful than the market itself.

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We don't need no education
We don't need no thought control
No dark sarcasm in the classroom
Another Brick in the Wall (Pink Floyd)


The old Wall Street adage that the market climbs a wall of worry has just been elected to the Rock 'N Roll Hall of Trading Fame.

It is certainly no secret that this market has shrugged off every concern hurled its way. Every worry has been but another brick in the wall that the market has steadfastly climbed. And, it has been doing so for over a year now.

Since the summer of 2006 when conflict broke out between Hamas and Israel and the market miraculously avoided a another leg down into an expected fourth quarter trough and, perhaps not coincidentally, not to long after Paulson became Treasury Secretary, the market has successfully ducked every brick thrown at it. Every brick has become just more grist for the momentum mill.

Many stocks have ignored a host of issues marching higher and higher, seemingly building an altar of worship with each new brick of woe and with the Mortar of the Bernanke Put. The question is at what point does the wall of worry surround those who embrace it? At what point does the wall of worry circumscribe those within? At what point does the wall of worry blot out the sun? At what point does the next brick in the wall of worry become one brick too many that sees the wall come crumbling down of its own weight? At what point is the tipping point? These are fair questions that have been ignored by all but veterans of more than one bull/bear cycle.

Other than sharp short-lived declines the market has shaken off:

  • Geopolitics: increasing tensions between the U.S. and Iran and indications that the current U.S. administration sees as its legacy a strike on Iran.

  • A continuing quagmire in Iraq with mounting tensions on the border with Turkey.

  • A deepening housing crisis despite Fed intervention since August.

  • Oil approaching $100 a barrel.

  • Gold approaching $800 an ounce.

  • Historic lows for the dollar against the euro. Most analysts warned months ago that if the dollar broke generational lows it would spell trouble for the financial markets.

For the time being the equity market has embraced a declining dollar as it makes U.S. assets "look cheap" to international investors. But this my be a specious argument as one could easily argue, for example, that the increasing value of some foreign currencies such as the yuan have made investments in China all the more attractive.

There is always a tipping point. At what point does the rate of descent of the dollar or the prospect of it not recapturing lost ground outweigh the lure of U.S. stocks looking cheap. The tipping point in the argument that correlates a bearish dollar to a bullish stock market may have its linchpin in bonds: the U.S. depends upon the kindness of strangers to finance its deficit----if at some point bonds belch at the continued debauchment of the dollar, it will send interest rates higher as international investors demand higher and higher returns.

Such is this high stakes game of chicken. And Bernanke seems an unlikely figure to play the James Dean role in this modern day version of Rebel Without A Cause.

Each day market participants face a proverbial Global Wailing Wall where speculators make a vertical pilgrimage on the back of money supply. M-3 money supply is setting new land speed records, expanding at a 15% annualized clip currently. Why is Paulnanke so desperate to prevent a normal recession? Why is the Fed so desperate to ward off the normal cycles of growth and destruction, expansion and contraction? To be sure, why?

Perhaps it is because the housing and credit situation are so abysmal and dire that a normal retrenchment would turn into something that Bernanke is all too familiar with in his academic studies, something he has promised the Fed would not let happen again?

Some say there is always a bull market somewhere. Perhaps if the current trend in money supply continues we will see parabolic advances in the stocks of Home Depot (HD) and Lowe's (LOW) on the heels of the Weimar Wheelbarrow Trade.

Lehman Brothers (LEH) economist Ethan Harris argues that "In the past six months, despite the Fed's best efforts, financial conditions have tightened and the housing market imbalance has worsened considerably."

The stock market has ignored the fact that the Emperor may not have any clothes. The charts below are just some examples of stocks that have exploded 100% in three to six months: Wynn Resorts (WYNN) is up 100% in three months. Deckers Outdoor (DECK) is up 100% in six months. Garmin (GRMN) is up 100% in just over three months. Apple (AAPL) is up 100% since breaking out of a base six months ago.


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The FXI truly has gone into a parabolic ascent, rocketing up 100% in less that three months.


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Yet, there is no lack of talking heads who bless the pointed little head of the FXI with the rationalization that it didn't do much prior to 2005. Go figure. They are braver than I to hold on to this kind of spike. They are bolder than I to buy into this sharp a spike.

A disastrous dollar, a credit crunch, a housing crisis, record crude prices, record gold prices, mixed third quarter earnings reports, signs of a slowing U.S. economy and a strained U.S. consumer, lackluster fourth quarter guidance, the threat of mortgage resets and more big mortgage write-offs looming by institutions have been largely shrugged off by the market.

The Street seems to have put all its chips into the pot, betting heavily on the notion that the Fed is more powerful than the market itself. Even the near 400 point drop in the DJIA on October 19th seems a distant memory: the market shook off the swoon on hopes that Bernanke will dress up as Cupid once again on Halloween. So, I'm wondering, will Paulson dress as Lil' Bo Peep?

There have been few tricks and mostly treats for those who have caught falling daggers in the market. To be sure, where, after the sharp decline from October 11 into October 19, the burden of proof was on the bulls, the burden of proof once again has shifted to the bears. Why? The DJIA dropped hundreds of points on October 22 and again on October 24 but recovered on both occasions to close virtually flat. With the end of October, seasonality turns positive. The S&P has recaptured 50% of the October range, which is 1533.

However, although the onus is on the bears, it is worth pointing out that what is usually tough going seasonally for the markets, September and October, proved to be anything but. Moreover, after the largest decline since the FOMC's September move (into October 19), the S&P may be tracing out a head and shoulders topping formation. If the market is at a turning point then the move up to the mid 1500 level in October and in July may be grand Test of a Test pattern----a mirror image to the Test of a Test pattern that the market carved out in July 2002, October 2002 and March of 2003. This Principle of Tests is worth watching as many key stocks such as show above have gone parabolic testing the Principle of 100% moves in short periods of time.

However, the market responds to what the central bank does or does not do on Wednesday, and however you are betting, the Fed card may be getting overplayed at the moment. The best bet going forward seems to me to be that of continued and increased volatility while those arguing for a trend one way or the other duke it out.

Be that as it may, the other bet that always seems to pay off on Wall Street is that, to paraphrase Gordon Gecko, information never sleeps. A chart below of Tesoro (TSO) shows how the stock ramped up in anticipation of Kirkorian announcing an increase in his stake in the company.


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A) On Friday it was announced that Kirk Kikorian was increasing his stake in TSO. A look at the action two days prior shows that the street almost always knows. The shadow never sleeps. Information dominates.

Oh yeah, and of course the bet is that, as traders, we don't need no education, we don't need no thought control. Because, as everyone knows, the market climbs a continual, never-ending wall of worry. Kinda like the Great Wall of China. Don't you think?


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Beginning Tuesday, November 6th, Jeff Cooper's daily column will be moving exclusively to his subscription service, Jeff Cooper's Daily Market Report. With his service, you will also receive daily swing and day trading setups as well as follow-ups from Jeff.

With any questions, or to sign up and make sure you don't miss a column, email
Josh Sander
or call 212-991-9357.

Position in WYNN and GRMN.

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