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It should boggle everyone’s mind how easily bloggers are able to catch obvious fraud in the financial markets while the SEC and other regulatory bodies are looking the other way.

Here are some gems just from the last week alone:

  1. Perot Systems FrontRunning – ZeroHedge.
  2. Blatant reinflation of housing bubble – Denninger.
  3. Corruption at HUD – Karl Denninger.

The SEC was not able to catch a ponzi scheme even after Harry Markopolos delivered it to them on a silver platter. 

Paulson and Bernanke have been incredibly incorrect on their assessment of the health of the US economy.

Choose your sources of information/facts/news very carefully.  Stick with those that are honest enough to state their opinions openly and publish their predictions.

Read what you disagree with before drawing your conclusions.

There is a difference between loyalty and blind loyalty.  Blind loyalty to anything (religion, government, ideology, spouse) is deadly.

Takeaway:  Perpetual reliance on someone else’s seal of approval will rot your brain.  Complacency kills.

Obama reappointed Bernanke as Fed Chairman earlier today, effectively sealing their fates as men that will take us from a recession into the Greater Depression.

For those “economists” who’ve lately been singing his praises on CNBC, all I have to say is this…

It takes a special kind of system (government) to screw up this badly and still be resoundingly supported by its leader.

In his reappointment speech Obama also pledged support for the continued secrecy independence of the Federal Reserve.

How foolish of citizens to inquire where trillions of dollars are being spent… clearly we should trust the former bankers running the Federal Reserve that regulate the banking system. After all, they obviously know what they’re doing.

Instead of perpetuating the broken system financed by politically embedded financial organizations, Obama could have attempted any of the following:

Would that severely correct the housing and stock markets? Yes, probably. Can we continue on our current path? No. Will we eventually face unbearable consequences for our decisions? Yes.

Ironically, neither Bernanke nor Obama nor either political party seem to care about the following message:

It is not the responsibility of the Federal Reserve–nor would it be appropriate–to protect lenders and investors from the consequences of their financial decisions. – Ben Bernanke

So, Obama reappointing the guy who didn’t see any of this coming, who bailed out the irresponsible, who continues to provide cover for banks in the hopes that things will return to normal still makes Obama the “man of the people”? Why aren’t those who voted for Obama clamoring that this Bush appointee is more of the same? Why do horrible decisions not matter when *their* party is in charge?

The reappointment of Bernanke does have a silver lining. All the people that bought into the hope proffered in eloquent speeches that government can provide jobs, clean energy, healthcare, education and other goodies will eventually learn a valuable lesson. The love affair Americans have with celebrity, good looks and good speeches and a lack of discourse/intellectual honesty will finally meet its match against a tidal wave of financial reality.

We are witnessing firsthand government selling Hope while funding Grift.

A generation will learn that our government system, like all systems which redistribute power and wealth, is one that is relentlessly gamed and manipulated for the benefit of those in charge.

Takeaway: Strip away the external validation that media/family/friends give to people and institutions and think for yourself.

My Darden Puts were heading into expiration this week and I elected to close out the position with a decent profit.  I sold for $2.85 and bought for $2.25 for a gain of $60.  The profits were not enough to cover the loss on the Nasdaq Puts, but I learned many valuable lessons, which I will share below.

There are several reasons why I decided to take my gains last Friday and not get greedy:

  • Even though I am still bearish, I feel uncomfortable spending money in a market that is as distorted and manipulated as our current one.  There are too many examples to go into right now, but there are excellent examples of overt manipulation here, here, here and here.
  • Maximum Pain dictated that I sell before expiration and lock in my gains.   In the option market, wealth transfer between option buyers and sellers is a zero-sum game. On option expiration days, the underlying stock price often moves toward a point that brings maximum loss to option buyers. This specific price, calculated based on all outstanding options in the market, is called Option Pain. Option Pain is a proxy for the stock price manipulation target by the option selling group.
  • Technical analysts were broadcasting a head and shoulders pattern break (see below), which leads me to believe a lot of CNBC followers (non-institutional investors) are piling onto the short side for the “easy money”.  It makes sense to bet against the “easy money” crowd and not expect a decline.  On Monday, the market rallied very sharply.  Glad I got out.
Head and Shoulder - DJIA
Head and Shoulder – DJIA
  • My price target had been hit and the price was unlikely to go much lower.  Darden filled in the “gap” between $29 and $33 like I thought it would.
Darden Restaurant Group Chart
Darden Restaurant Group Chart
  • As a wise man told me, you never go broke taking profits!

Epilogue:  I have decided not to continue buying options since the market is clearly not a normal, healthy one.  Unrealistic balance sheets, excessive program trading and monetary manipulation have turned me off from the market.

Options buying is extremely difficult since it involves both forecasting the market and timing it.  I am proud I made money on the Darden trade, but I realize I got impatient with my Nasdaq trade.  Overall, a great learning experience.

Since capital gains are difficult to lock in without being an active trader, I am considering doing covered call writing on certain stocks.  If I decide to buy some shares and write calls on them for income, I’ll post it here.

I will continue to add to my RWM position, which I feel comfortable holding for the long-term.

Used to be we stole the trade secrets in the form of automated looms textile manufacture, or pillaged a patented steam harnessing device. This must be the ultra postindustrial state. Trade secrets are computer algorithms which make automated low latency entrance and exit to markets with no intent of ever taking delivery of any physical product nor are making purchases/sells based on any business, but are merely exploiting market rules to ratchet numerals to their gain.

How did we get here? How sick is that person who draws a paycheck and has neither produced, manufactured, distributed, or made any useful service? Isn’t that the very definition of a Babylon? An economy so distanced from agriculture, mining, manufacture that it provisions life with intangibles? Please wake me up. Please let me out of such a vacuous existence.

- Ben Frananke, Zero Hedge comment (emphasis Inthon)

“No warning can save a people determined to grow suddenly rich.” – Lord Overstone

The market has been on a tear lately and it looks like my Nasdaq options will expire worthless.  From this outcome, I have learned a few things.

  1. It is idiotic to “time” the market based on your gut.  Yes, the case for bearishness remains (see below), however, Getting a Piece of the Action (GAPOTA) is a moronic way to trade.
  2. Respect the chart.  Charts show us trends, consolidation, breakouts and the majority opinion.  It is foolhardy to go against the crowd.  I need to exercise discipline and wait for the top to form and develop before trying to rush things.  Let the chart tell me when the market is tired out and has exhausted its supply of buyers.
  3. Trying to score big is foolish. Investing is a marathon, not a track meet.  Invest with the long-term fundamentals in your favor and have some patience.  It will greatly improve my “win” rate.

As a result of these revelations, I am taking a slightly different, longer-term approach.

I have added significantly to my CEF holdings in my IRA and I’m going to be accumulating a larger position in one or more reverse ETFs.  A reverse ETF will allow me to hold my short position in the market indefinitely, rather than being forced to time a drop in the market, like I would have to do with an option.

I lose the upside of leverage that an option provides, however, it is far too difficult for me to time the market perfectly.  As you can see from this Nasdaq chart, markets can go parabolic (like they did in 1999) and throw reason right out the window.  The market went from 2,500 to 4,700 in a few months!  That’s an 88% move in five months on horrible fundamentals!

If the market keeps rising now due to irrationality, I will be more than happy to keep buying inverse ETFs each month since they would be getting cheaper and cheaper (more and more valuable).

From a fundamental perspective I am not buying the bullish argument for a second.  There are plenty of events which have not fully manifested:

  • GM Bankruptcy - The ripple effect has now begun.  Suppliers/Creditors will get haircuts and pass those losses down the line.  Visteon and Metaldyne, two large auto suppliers, have already declared bankruptcy and other large suppliers will eventually have to realign with decreased demand.
  • Municipal bankruptcies/insane pension obligations are still looming.
  • Credit cards are tapped - The consumer has limited purchasing power.
  • Geopolitics – Chinese students LAUGH at Geithner when he says purchasing power of the dollar is solid.

“Chinese assets are very safe,” Geithner said in response to a question after a speech at Peking University, where he studied Chinese as a student in the 1980s.

His answer drew loud laughter from his student audience, reflecting scepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves instead of spending the money to raise living standards at home.

  • Jobs are still being lost – Job losses ultimately lead to declines in the housing market as well as consumer spending, the engine of our “growth”.
  • Insane P/E ratios – S&P has the Q12009 PE ratio at 60!  60!!  Historic bear market bottoms typically occur with single-digit P/E’s.  Obviously this isn’t a perfect indicator, but it shows how far removed we are from stocks being cheap.

I remember the bubble of 1999 and how exciting it was to see stocks soaring and thinking how easy it was to buy tech stocks and sell them for huge profits.  I remember buying five shares of Yahoo in a fake portfolio for $205 a share (before a 2:1 split) and learning the lesson that bubbles can crash painfully and never come back.

There is no shame in “missing out” on returns in the stock market.  There is great shame in not learning from your mistakes.

Takeaway:  I lost on the Nasdaq options trade, but I realize that it is foolish to ignore the charts and risk capital when there is no need to do so.  I am coming around to the fact that I should be happy to not hit a home run with a juicy options trade, but rather accumulate quality positions at good prices.  I plan on adding more CEF and RWM in the days ahead.

Thanks for reading.

For the Trading Log, click here.