A Fools Viagra

Readers of my newsletter this month know it was titled, ‘Central Bank Viagra’. This article is a continuation of that theme. To get right to the point, Dow 12,000 seems to be the central bank Viagra line. In other words, whenever the Dow seems to be in danger of losing the 12,000 level, central bankers and other market manipulating shills get really active to boost the Dow higher. I won’t bore readers with a bunch of statistics that try to prove a point. Certainly the market indices are capable of rallying on their own. Certainly investors can push a rally. But good Lord, people! Most major economies are completely dependent upon central banking lifelines. Most major governments are insolvent. There are riots all over the world in response to the complete ineptitude of government. Economic data (what real data is allowed to escape the propagandist governments that compile such information) continues to imply weakness rather than strength. Yet, all bad news is quickly spun to be broadcast on financial teevee as either great news, good news, or not as bad as it could have been news. It’s all great. Pile on. There is a bull market in stocks and it is all based on fundamentals. Yeah sure!

Let us turn to a few charts. But first, we should now view charts with a disclaimer. Charts have always been the picture that investors draw with their buys and sells. We are now in this strange new land where the power elite artificially run everything. It’s like when Richard Nixon thought he could arbitrarily assign wage and price controls to impose government will on economics. Of course, that idiocy led to a horrible recession. Today, the elite know that no one pays attention to fundamentals anymore. We know they are all made up, massaged, and contorted to match a fantasy viewpoint. But charts have always been the revelation of truth. They simply show the daily activity of investors. Investment decisions are made based on charts. Aahh! Our market manipulators are on to us and now they, the manipulators, draw the charts. It appears that they now visualize how they want a chart to look over the course of the next few weeks and they simply draw upon central bank programs for ammunition. Thus, charts are now ‘drawn’ rather than reflect. 

June of 2011 was an interesting month. Thrice we flirted with the central bank Viagra line of 12,000 and thrice the central bank came charging to the rescue with massive buy programs. Housing foreclosures and loan defaults be damned. Double digit unemployment on the horizon for the next generation be damned. Government leaders debating on whether or not to raise a supposed sovereign nation’s borrowing ceiling above $14,300,000,000,000 dollars be damned. The Plunge Protection Team wanted us to be privy to a stock rally. It seems that the PPT now believes that a stock rally can only be procreated as long as the Dow keeps its head above 12,000. Okay, fellows - I think we all got the point! Geeez! The last week of June was the best week in two years, already! Chart 1 below shows the intervention process as marked by the little blue lines. 

Chart 1: 2 months - DJIA

Chart courtesy StockCharts.com

But with all this manipulation and intervention, there was something that seemed to be very curious. Yes, I know a lot of people doubt the existence of the PPT and they also deny the dark powers of stock manipulation. But, we can see from the chart that the volume of trading in June was nothing special. It was barely even average. The question always comes up with the PPT of ‘how do they do it’? Of course, no market manipulator would be willing to admit to their criminal deeds. That leaves us with an examination of the evidence. Since we all know that the markets are famous for vanishing trails and underhanded activity, proof is hard.

Let’s bring in another chart. Chart 2 below is a chart of the CBOE Put/ Call ratio. Generally, we could all agree that in times of rising risks, investors are more inclined to buy put options that of course appreciate when their associated underlying asset declines in value. Options have always been, and I believe they still are, the investment for the more sophisticated and wealthy investors. I also believe they are the product of choice for those inclined to manipulate the market with house money. We know the Federal Reserve has ownership in the DTCC where stock trades are cleared. We know the Fed has a printing press. We know the Fed, as Mr. Bernanke is on record, can invent money at no cost to them. So, if the Fed wanted to goose the Dow every time it dipped to 12,000, it would seem logical that they could stampede the options exchange with call options on everything. If the options never strike, it was never the Fed’s money anyway. If they pump enough money into calls, it forces traders to buy stocks and indexes so they can build up their inventory to meet the tsunami of demand from impending executions. 

Our second chart shows the Put/ Call ratio year-to-date on a daily basis. By mid-June of this year, the Dow was in a rapid decline. As expected, the Put/ Call ratio went above 1. That means that there were more puts being bought than calls. Once the Dow dipped below the Viagra line, the PPT struck and the ratio plunged back to .5. That means there were twice as many call options being bought as opposed to put options. Really? As the Dow dropped below 12,000, more calls were bought than puts. I wonder who put the word out that the PPT was coming to the rescue? Here is the real kicker. While actual trading volume on the NYSE was average to light through June, the CBOE (the exchange where options are traded) reported its best month ever! Again, for the month of June equity trading volume was about average and options volume was the best ever! Again, who bought all these options contracts? Again, who had the money to buy voluminous contracts? Who was willing to step in and buy almost nothing but call options? Study Chart 2.

Chart 2: Year-to-date daily CPCE

Chart courtesy StockCharts.com

To summarize, it seems that we have now entered into a world in which our governments and elite investment bankers want to draw charts so they can convince us to continue to work more for less pay while we extend our debt and spend our brains out. Most nations have complied as debt owed to big banks has done nothing but grow. The Put/ Call ratio has been very low for the entire year. It seems our politicians have a story they want to sell us and they are using the stock market as a salty snack to make us drink more of their beer. Who are these people? Do they really think they can set arbitrary lines for the market indices and that strategy will work over time? Well, it’s good to know how they think. Maybe the put/call ratio should be something we watch closely for clues on market direction. Should the ration push back to 1 again, we should infer less intervention and more market weakness. If the ratio holds low, we should infer that the call buying will underpin a market rally. Should the Dow fall back to the 12,000 level, maybe we should anticipate another rally. Can this kind of artificiality be sustained? Only a fool would fill a prescription for this form of Viagra and expect it to work. 

Disclaimer: The views discussed in this article are solely the opinion of the writer and have been presented for educational purposes. They are not meant to serve as individual investment advice and should not be taken as such. This is not a solicitation to buy or sell anything. Readers should consult their registered financial representative to determine the suitability of any investment strategies undertaken or implemented. BMF Investments, Inc. assumes no liability nor credit for any actions taken based on this article. Advisory services offered through BMF Investments, Inc.