JP Morgan loses $5.8B and the Market loves it...

You don't have to be a conspiracy theorist to invest in this market but it sure would  help. Let's list some of the recent market events that have been reported :

• News from China confirms a major slowdown and possible hard landing.
• Brazil is running into the same headwinds as the rest of the world.
• The problems in Europe continue and there is no answer in sight.
• The Central Bankers of  the world have been fixing the Libor rates for years and everyone knew but the small investors.
• JP Morgan lies about everything and the markets think its a good thing.
• Brokerages (PFG-MF Global) steal your money to bankroll their riskiest deals and no one goes to jail. This is a much bigger issue than the markets reaction to it. (see www.PeterLBrandt.com)
• The economic numbers in the U.S. keep coming up red as we edge closer to a "fiscal cliff" 
• California has 3 cities that declared bankruptcy...likely only the tip of the iceberg.
• Bernanke admits he is out of bullets and wants Congress to start doing their job. God help us.
• The US is on the edge of the cliff with 4 major problems that need to be resolved, end of Bush tax cuts, automatic Pentagon budget cuts, Obamacare and social program revisions. Good luck Chuck.

And the good economic news from last week:

• Jobless claims surge...
• Foreclosure crisis hits older blacks, Hispanics hardest...
• Factory activity contracts...
• Home sales drop 5.4%, fewest since October...
• Grocery bills on rise as corn prices near record highs...

What's the reaction from the market...... ambivalence or maybe just pure ignorance. Given how the market reacts to stress, as we have seen for the last few years, you have to come to the conclusion that this market is broken. The funny thing is that the small (retail) investors have figured this out and the big boys are just trying anyway they can to make money off of it before it all comes crashing down.

What needs to change to bring back confidence in the markets. The market action on any day is a reflection (or it should be) of fear and greed. A free market allows for the buying and selling of issues without interference from political influences.  The VIX index reflects this ratio and tells us how the market is reacting to the news (internal and exogenous) of  the day. As soon as the market begins to falter out comes the "Greenspan/Bernanke Put" comments or the QE3 whispers and the market miraculously corrects and streaks higher for no good reason. (Witness Friday the 13th)


A few fixes to start the process of cleaning house:

1. In the future let's stop the Fed from interfering with the market in terms of flooding it with liquidity every time there is a hiccup. We're too late for this time so we'll have to suffer the consequences.
2. Start reporting actual economic data rather than politically polished BS. It's impossible to make good decisions based on bad data.
3. Get rid of the algorithm's (bots) that are running the trading currently. Even when the markets are heading lower when they should you can see the computers go off as soon as a mythical resistance level is hit and no amount of logic can explain it other than the computers thought that was a good idea. We are losing control people!
4. Start putting the Bankers, who abuse the system, in jail instead of allowing them to get away with murder. A few good hangings on Wall Street would also help set the right tone.
5. Put everyone who was on a Banking or Finance committee in Congress for the last 10 years in prison just for spite.

This credit cycle bubble we have been riding is coming to a end and there is no way to avoid the destruction it will have on our economies. We can kick it down the road a little longer but its now months instead of years until the payment comes due. Here's a few well chosen comments

 Andrew Jackson: (Quotation)

“Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out, and by the grace of the Eternal God, will rout you out.”

 Game Theory and Crowded Trades - Doug Noland - Safehaven.com

"But the downside of the Credit cycle radically alters rules of the game. Over time, reality sinks in that the previous prosperity was in fact an unsustainable boom-time phenomenon. The downside of the Credit cycle ensures faltering asset prices, deflating household net worth and financial sector deficiencies, along with the revelation of problematic economic imbalances and maladjustment. It's not long into the bust before many see themselves as losers - and to have lost unjustly at the hands of an unfair system. The growing ranks of losers become an increasingly powerful political force".

 James Howard Kunstler: It's Too Late for Solutions

"We are discovering more and more is that the world is comprehensively broke in every sphere, and in every dimension and in every way. The governments in every level are all broke, the households are going broke, the banks are insolvent, the money really is not there. And the pretense that the money is there has been kept going simply with accounting fraud. And accounting fraud really accounts for most of the so-called "innovation" that we chatter incessantly about – this is at the heart of (Jame's new book) Too Much Magic and the wishful thinking about technology. We are so intoxicated with this idea that we can create new and wonderful things. And we have absolutely no sense that the new and wonderful things that we created in the money system are destroying the money system".

Here's the updated monthly chart of the SP500 (SPX) and we are still trending - sideways to down. The markets are running out of momentum and will soon have to correct in a major way before a new bullish leg up can begin. We can still get a move higher for a few more weeks or as long as the markets remain oblivious to reality. Note: the leading indicator in red (first window below the price) has already flashed a sell signal. We still need confirmation from the other indicators. In the mean time stay safe