Year Ending

Year ends with trading performances whether fast or slow, algo or guesso, challenged to produce alpha mama. Now there were some standout failures by big name hedge fund managers like Harvard MBA John Paulson. Genius. All that money he made front running mortgage paper with the help of Goldman Sachs is gone and probably any other profits he has made as a manager in the last several years. All those engineered financial derivatives created by the expensive talent in banking and investing on Wall Street are still beating inside the balance sheets of banks and the prime rescuer, the Fed.

There are some positives however. Europe is looking good for a vacation next year. Oh I guess that's it.

The turbulence from volatile swings over this last year has convinced some this kind of action is here to stay. However, rarely has that been true in the over 30 years I have been around markets. The only thing for sure is the action coming in 2012 will be different enough to require trading operations to be vigilant. For most hedge funds, if up does not appear, it will be another disaster for their returns.

Traders Confounded by Opportunity

Seems hedge funds and trading organizations having trouble dealing with the volatility presented this year. According to an article in Bloomberg, Traders Confounded as Volatility Extends Run, trading has been attacked by too much opportunity.

Here are some of the points;

" Hedge funds are on track to post their second-worst year on record......."

"U.S. mutual funds are headed for their weakest year in two decades......"

"....banks posted their worst quarter in trading and investment banking since the depths of the 2008 financial crisis."

The underlying theme of the article is based on the idea that continued volatility has hurt managers and traders not because of they are not accustomed to volatility events, but the markets have not " established or returned to a medium to long-term trends....". In other words, they have not started going back up. For all the supposed skill claimed over the years by hedge fund types, they are simply bulls, and anything but up does not work.

Another reason for slumping trading skills given in the article is just not volatility, but correlation behavior. All things are moving in lock step, individual company stocks, asset classes, and such. This it is reasoned, does not reflect unique individual values and all things bright and beautiful. There is simply no opportunity to pump and dump.

If things were not bad enough, option traders it seems are having a difficult time because of the cost to finance the implied volatility. The fear of a world financial event has created a bid/offer gap as a result of a liquidity drain driven by price uncertainty. Geez.

Maybe this is all true. But the problem is primarily with the traditional methodology of pricing risk. First of all, market volatility is simply a part of the randomness of price discovery. The options market has always done a terrible job of predicting price moves as represented by the price of a particular strike. The VIX is the greatest example of telling you what just happened. So it is good to remember that option pricing is to pricing risk as brake lights are to forward vision. In the end, it is simply a hedge of chance.

As for increased correlation between asset classes, it is the natural progression of all trading markets. They are all tied together not because they all have the same investment make up but because they all now live at the same address. The proximity of the market maker used to be in the trading pits, next to the broker, next to the other traders. Now it is everywhere and that is forever. All edges are dulled, all information is free, and transaction costs are scant.

Money will find those entities making great returns consistently, in all types of markets. Not just those that eventually go back up.

Corzine/ Trades Worse Than He Drives

Some idiot Congressman today ask Corzine if he had read the MF mission statement when he first took the job. That kind of fool question is a peek into the mindset of a politician playing to a theme or image of a world they want you to believe is out there. In the fools world Corzine would have responded, " Yes, I read it. And then I prayed about it with my family and we asked for guidance. "

While formulating his actual answer, Corzine was clearly thinking, " Do you think I read it? I am the freaking head of the company not some sh--head who's just walk off the street. Next question."

The important questions will be asked in the discovery process and then repeated in court years from now. But the only important questions for Corzine are rhetorical. Do you really trade worse than you drive? How come all you guys from Goldman keep screwing up so much? I thought you all were so smart?

Utilties That Pay You

Risk is all about choices. Everyone knows people can look at the same market data and get different views of the risks lying ahead in any trade or investment . Why? Value and opportunity are rarely what you think. The person who asks the right question wins, as long as they have created the ability to maximize a utility which captures those opportunities. To build great utilities however is expensive both in time and money and few have the ability or desire to contribute to such efforts.

While there are many proprietary utilities on Wall Street, it prefers to use another utility to make money . They collect from opportunities created by tapping into wealth reserves of the general public. 401ks, home equity markets, and the sub prime market have been a source of great profits. But not better than the latest, the Fed. If the trades go bad in the other aforementioned areas, the Fed will not only cover it, but continue to feed you. Bloomberg reported yesterday that Wall Street investment banks made an estimated 13 billion dollars from access to secret, practically free money from the Fed.

Wall Street may have discovered their best utility yet.

Buffett

Warren Buffett has announced he has amassed a huge 5.5% piece of IBM, although it was kept from all of us under the double secret exclusion act derived through natural law, but implemented by special permission by the SEC. Normally, companies such as Bershire would have to disclose their purchases. But now we know why Buffett wants the rich to pay more in taxes. It is to pay for the special treatment and subsidization they receive from the government each year.

Warren touts the great free markets whenever possible and wants everybody to operate fairly in the market place, except when he is amassing a huge stock position. Now it may be he wanted to merely surprise us with the great news that he, much like the great JP Morgan had helped the banks and US Treasury in the Great Panic of 1907, was continuing to support the economic recovery.

Maybe we should all be thankful for Warren and his ability to possibly be illuminating a top by infusing billions at purchase prices which were initiated in March of this year after a 150% rally in the stock since 2008. Maybe he really want us to join him and help support the position he is now lugging.

Giving Them What They Demand

Since August of 2010, just after the Jackson Hole speech by Ben, and shortly before QE2 began, Nasdaq 100 stocks became the focus of an upside play where the index has gained over 34% as opposed to its neighbor the S&P500 gain of just over 20%. This of coarse on top of a massive rally in 2009. Odd price technicals, such as the QRiskValue chart shown to the left, continue to reveal unusual bloated positions where billions of dollars in share values sit on a thin perch fully expecting to be paid by the intervention strategies of the Fed and Treasury.

Given that the test of all governments these days is to placate Wall Street, all demands seem to be met. But even cash monster stocks such as AAPL are vulnerable to a large downside sell off if there is an event which triggers an unraveling by all the well laid demands of the markets

Life Support for Bankers

All the efforts of EU folks has certainly been filled with drama. Germany and France taking the lead which historically, politically, and financially has usually led to disaster in some form or another. But they slew the banker dragon by making him take a 50% hit, knowing that if the agreements fall apart, a starting point of 50% will easily become 80% . CDS fears have subsided but by the nature of the 50% deal sort of make that market unstable anyway. Why buy insurance if there is none?

Interventions can be a pump job, time out strategies in a political cycle. In the end the financial risks may be much greater than the political interests they are protecting. All these bail out measures are put on the spot and, as much as the Fed would not like to believe, there is an end game where no amount of cash held in reserve at banks can protect against the loss of confidence resulting in failed efforts. Economic expansion depends on the belief that there is a real upside, not just some sort of endless life support for bankers.

The Grand Speculation

Speculation usually leads to prices which markets will ultimately reject. We saw this with Tech Spec in 2000, Stock Spec every generation, Real Estate Spec, well, you know. Now we are seeing Intervention Spec, where governments around the world are supporting prices from fixed income, to stocks and commodities. The US Treasury and Federal Reserve are now in the mother of all strategies which is basically speculating on asset inflation as the only acceptable means to keep world economies from entering into a deflationary spiral. This of course would be bad for everyone it is reasoned and especially those at the Fed and Treasury who do not want to be lumped into history as the type of 'know it alls' who did not learn from the 'last know it alls', who let bad things happen.

And of coarse there is the lesson. Why fix something that is broken? Bad is bad and good is good. We should be able to live our lives without anything bad happening to us. No bad debts, no bad stocks, and most importantly, no bad life. Now this is especially applies to the richest of the world where all the energies and labors of the greater population are required to pay for the no bad life guarantees.

It definitely seems to working. Except for real estate, where it is hard to save people in trouble not viewed as material to saving the wealthy, stock prices have gone to the edge of bad several times of late and miraculously recovered each time. Now this is especially hard on rational thought let alone perennial market Bears. This economic crisis was their chance to gain on a whopper of a financial disaster. Instead they are repeatedly run over like road kill. Only Evangelical Bulls from cable business news are happy viewing each dunk in the markets as a cleansing of the unholy non believers of the markets true spiritual direction, up.

If we all get behind the limo and push it the hill there is no way all this intervention can fail. Somewhere along the line the gears of best economic practices will mesh with the broken parts and we shall have good. No jobs, but good.

Wall Street

From The New Yorker

Occupying Wall Street in 1967

Another Bottom Indicator?

Associated Press

30-year mortgage below 4 pct. for first time ever

By DEREK KRAVITZ

WASHINGTON -- The average rate on the 30-year fixed mortgage this week fell below 4 percent for the first time ever, to 3.94 percent...... (Entire Article)

Bears Fall Up

With reversal of the market on Tuesday, bears have been trying to find anyplace to hide as shorts are all chasing the same offer. Friday's unemployment number will provide some hope for the red side but the numbers will have to be extremely disappointing. Price configs are still bad but intervention policies are constructing world where pessimism about value is met with sand bags filled with liquidity. But as we have seen over the last months, do not get too comfortable with your position.

Price Technicals Still Bad

BaseOp2 has looked at the overall interventionist efforts by central governments to preserve and protect debt as the reason to make the 'buyside' the strategic play. However, the particular technical data mined by QRiskValue is continuing to portray a gloomy price construct where technical stocks seem particularly bloated by a blind faith that they are immune from the money problems of the world. These price technicals are awful and seem to claim a serious downside move will engulf equity markets if any hitch in the broad rescue efforts by the collective world financial players fails to materialize. Even worse, they may be saying a sell off in inevitable regardless of the current efforts to repair economies. The S&P 500 is less worrisome on the downside but only when playing a spread between the NQ 100.

Save It All

Equity markets still in a trading range with the path of least resistance on the upside. Europeans keep fumbling with debt issues but slowly seem to be dragging themselves to some kind of solution. Massive liquidity and top tier economic health leaves plenty of room for rallies given the pervasive bearish sentiment held by a large segment of the trading and non trading population.

Forty plus VIX, the great predictor of the last event, illustrates just how bearish the world has become given nearly all volatility currently represents downside bets.

The Fed and Treasury are taking no chances and have played overkill in providing anything stimulating as a prevention against Mr. Downside. Any blip lower in the Dow Jones now is a reason to plead with the rest of the world to keep on rescuing the wounded.

Things are not great out there for the many. Housing is a disaster. Job growth is nowhere in sight and creating jobs is going to be a challenge for years.

Governmental actions to stem financial trouble unfortunately has little to do creating economic growth in the US or anywhere else. Intervention is all about protecting assets. The notion that jobs will come if entities are saved is crap. If job growth happens, great, but these boys could really could care less.

Since the Lehman event, putting out every fire and saving everything but the middle class is the course of action. The best long term upside chance the latter may have is to let some it burn.

Is It Safe?

Markets are going through another round of ' is it safe?' as action has moved from steep break to sharp rally. European accommodations trying to avoid any chances for a systemic failure along with Fed and Treasury positive pronouncements of their own have helped the upside. Equity inflows have increased again as managers execute requests for more stock. Obama jobs initiative verbage, fat corporate cash reserves, and low values to alternative investments make the path of least resistance to the upside as long as markets are constantly reassured by governments of their willingness to be vigilant in arriving at a debt solution.

If all efforts allow world economies to limp to the next year, it is likely stocks will lead all returns as commodities and fixed income become less desirable. But stocks have to make it through the Fall first.

This Time For Sure

Equities have recovered substantially from their lows as continued accommodation from the Fed persists in order to defends its asset inflation strategy. Given the Feds decision at their last meeting to keep their lending rates at zero for the next two years, they have committed to an all out assault on world banking bears, who for a while, seemed to be gaining credibility as sovereign debt and US debt ceiling confusion seemed to increase chances of downward pressure on equity prices.

In their collective mind, the Fed believes that its best and or last chance is to keep the top of the economic ladder fed. Knowing the middle class is left out of the stimulus and any real ability to generate wealth through economic expansion, the Fed is concentrating on increasing excessive cash overflow at all levels of the banking/Fed system in the hope the upper strata will be cushioned against almost any financial calamity. Protecting those with the most virtually avoids large flights of capital. The middle has nothing to move including their largest investment, real estate, which can hardly move at all.

The question is whether the Fed's strategy will work. Without broad economic participation by a growing work force, pumping money usually creates asset bubbles. The Fed believes the severely depressed real estate sector allows a world of flooded cash reserves in order to buy time for economies to have an opportunity to take on risk by expanding operations by creating jobs. The Fed however is fighting a ' less is more ' productivity model adopted by nearly all corporations with the advance of 'app' technologies replacing every other worker.

Equity price volatility has the Fed extremely worried and it is reasonable for the Fed to redo its theme of forever accommodating each time price dives appear. The worry is legitimate. The Fed has now placed its last ' I am warning you ' out there with not much left for influencing their top tear strategy. If prices were to return to a sharp volatile retracement of the current recovery, the consequences to price will be much harsher. Safe harbor credibility will be lost and repricing will mean equities liquidation on a grand scale.

Waiting for Goodanke

Markets are waiting to hear from Bernanke to see if he can establish a safety line which will remind everyone that all is not lost if and when any dismal economic data appears. This is of coarse a fall back strategy appropriate for the Fed's place rather than a forward attack plan which one might think would come from the current administration. Treasury has been hoping all previous measures of support would do the trick especially given the estimated 1.2 trillion dollars of liquidity provided by the Fed in loans to banks in this country and abroad primarily in 2008 and 2009.

Knowing the world depends on continued massive breast feeding from the Fed to hold together economic order is unfortunate but a reality. Normal business growth seems to be threatened by a world banking system flush with public funds but little from enterprises big and small which create jobs. These public funds provided to banks are apparently for their use only thanks to the continued cash flow from lobbyist representing the financial industry.

As for trading, more positive market internals are healing the broad indexes although tech sensitive indexes have a more bearish construction. Tech is experiencing an aging process but still attracts the same interest as other puzzling investments such as gold. Google's purchase of Motorola is an example of how the large techs look to become utilities of commerce as opposed to innovators or inventors.

Fed Starts Clock

Fed seeks exit from ‘new normal’ economy

By Barry Wood

WASHINGTON (MarketWatch) — The commitment by the Federal Reserve last week to hold its short-term interest rate at the current near-zero level for two years was a bold move.

Knowing the Fed’s aversion to setting specific time frames, former central bank official Joseph Gagnon says he nearly fell off his chair when reading the statement. “I thought it must have been a typo,” says Gagnon, now an analyst at Washington’s Peterson Institute for International Economics.

There are two main messages from the Aug. 9 move. First is the sobering but honest assessment that the economy is weaker than thought only six weeks earlier. The Fed’s forecast of 3% second-half growth has been thrown out the window and a new assessment is being prepared. Secondly, with more fiscal stimulus unavailable, by committing to two years before short-term rates rise, the Fed is pushing harder on its own stimulus pedal to revive the weak economy, especially the long-depressed housing sector. (more.. entire article)

Up Sideways

Markets had big action last week which certainly looked like exhaustion selling. The technicals, while vastly improved for the 500index, are still lousy on the NQ100 side. Fed has answered the bell again for corporate accommodation although banks may have a tough time working any profits out of the flattening yield curve.

Today's rally action is a part of a story of a world where there is no big growth for business but stocks with dividends will provide at least a yield alternative to treasuries and other paper. Higher stock prices will not do much for the economy as in years past as the austerity frenzy provides fewer jobs. Corporations will continue to squeeze operations in order to be competitive as demand will remain lousy.

If there is a Euro bank disaster then US markets will be looking at momentum plays eroding prices to test the March 09 lows. Hiding from falling equities would lead to the zero rate Fed scenario.

Sub Prime Review Credibility Test

Talk about screwing up a brand name. Standard and Poors, already suffering from a major credibility issue from its approval of all things sub prime, has almost guaranteed irrelevancy for rating agencies in the years ahead. Rating a business is one thing, but rating any government with the ability to print money, tax, and claim almost any property, is kicking a sleeping dog.

Taken from the various colossal business strategy blunders such as New Coke, the business heads of S&P may have believed by attacking U.S./Obama credibility, they might create a stronger voice among Republicans in the yet to be determined rules regarding the implementation of financial regulations of Dodd/Frank. Whatever the reason, both political parties will ultimately find it in their best interest to hastened the day where S&P will be legislated to a minor role in the credit worthiness review process for all business entities.

Fed will have to defend itself and Treasury regarding the S&P attack and will probably develop another all things easy for business plan as markets price adjust to the continuing debt rating issues.

Bailing So Easily

Market rode despair lower as world banking seems to taking a bit of hit. Imagine all those smart government subsidized bankers not being able to get figure out how to run a world with no job growth, no return on savings, and no margins to screw people.

TARP, the debt ceiling deal, and every pro business ruling by the Supreme Court, all been to the corporate world's advantage. It may be an oversight by investors to bail so easily, but being burned again seems so cruel. Ultimately, the best investments are not in cash and fixed income but in US companies who will continue to have a world of economic accommodation each time world economic order tilts.

Let's Get Long

Let's get long and volatile.

Jobs are few, stocks are down, no return on any money. Banks won't lend. Republicans look to start reign of terror over the next several years. TARP for banks and investment firms while it is austerity for everyone else.

Weakness in stock and index markets demonstrates just how vulnerable investments are today to stupid action. Gold keeps a bid as the dumbest form of investor climbs into the eventual giant bubble master deluxe gold fail-a-thon. Each day herds of gold bugs stampede up the lane to the top, merrily, merrily, etc. I thought ag bulls were the dumbest form of trader.

Jobs number on Friday does not have any fans, and in part, some of the Bear action has already been played in the first two trading sessions of this week. Stimulus by the Fed is being designed from some scientific invention which will be put into the food chain for economic consumption.

Chicken De Fault II

Continuing on the default scenario, business have an odd relationship with government. Big banks, investment firms, and the corporate world have relied on the government for business, innovation,(Nasa, government research at universities,etc), and of coarse bail outs. The mere fact of a potential governmental cutoff in payments to the world is going to create a trading market death dive possibility.

However you may be saved. A story yesterday in MarketWatch had a headline that Apple was better than Gold. Now that says it all. Performance in itself by two overpriced entities reflects the push of investment dollars into those lemming flow manias which have the least resistance to selling because of a psychology about their value. It is always about the money. Apple and gold share a racing card where choices are narrowed into the ever so human habit of trading on a popular concept. The concept for gold is that it is an alternative currency. The concept for Apple is that it will forever be without peer in producing gadgetry. Gold is a medal popular in making jewelry and no one will ever use it as a currency. Every Apple product has an already functioning substitute. Sell them both.

Given the appallingly low confidence the world has in its economic future it is no doubt that investors should believe that by limiting their choices to just a few stocks or commodities, they are avoiding making bad investments. All in is always all bad.

As for stocks in general, default is like catching a cold when your immune system is already compromised with another disease. The species will survive but you may not.

Chicken De Fault

Default by the US will make interesting case studies for all the econ/business folks. At first, markets will try to determine where the next information edge will emerge from any default/recovery trading or any almost default action. Secondly however, world economic confidence in US governance and its ability to grow a recovery will slow things a bit.

You have to admire the Republicans, which is always hard to do, but at least they playing the risk side edge to the max in order to place everyone in a game of political chicken. Now the game of chicken in game theory would not just be who blinks first, but also who loses the least when no one blinks and a true collision occurs. The Republicans obviously figure they will lose the least in a default although that runs against what news talk folks are saying. But they are probably right. Since the worst possible outcome in this game is default, the least worst, if you will, is for the party not in the White House. Voters will remember the event as a leadership issue which is why the president is working so hard to avoid the default. Fair or unfair, when you are at the top, they blame you.

Forget what Geithner and everyone else is saying about the default. Everyone will line up to get paid a bit later. If we have learned anything is the last few years, the power folks always get paid and everyone else feeds on watered down economic opportunities.

Where Happiness Lives

Apple knows how to make money and game expectations on earnings. As mentioned several times on BaseOp2, analysts covering Apple are always surprised by the powerful earnings which they themselves always seen unable to anticipate. There motto should be, " if its news about Apple, its news to us."

Anyway, the tech sector has the greatest brand names which makes it easier for the forever hopeful investor to give it a shot. Debt talks yielding anything which raises the national tab will be viewed as favorable with the market Bears turning again to the Euro Zone and US jobs. A foul up on debt talk would of course scramble the nervous and the market would be playing with an unknown radical factor with weird negative volume and volatility.

There are some unusually negative indicators in the stock indexes which have been running all year. This year more than ever, every trading house of size and experience is committed to the momemtum play, running money infront of each second of opportinity. This has created an odd techinical profile which holds extremely negative downside potential if energy from the momentum lemmings decide down is where happiness lives.

Total Investment Serenity

There is a virtual drug formula which now allows the investment in all things of great potential and the same time permits one to forget about any risk. This formula, while quite simply, has been worked on for several years now by various world financial institutions, each contributing their own great thoughts to enable its completion. This drug formula will not be unveiled in any grand ceremony nor by any particular group. It is rather meant to be plugged into a central computing network to bring about Total Investment Serenity. TIS true. No more worries ever again.

The first to receive this new vaccine against economic disaster is Greece. While several drug companies have filed patents on similar notions, TIS is an attitude not a real drug. It makes you feel as if you can invest in anything stupid. Roll it all on any social network or any sovereign country debt without any unpleasant morning after effects. TIS is particularly affective on Credit Default Swaps. When used properly, TIS will create a feeling, no an obligation, that all things financial should be saved. This break through is believed to help corporations who might have given you a job feel better and also has proved affective in trial uses on the other guy who actually got the job but lives in another country. Similar trials are now being done to see if TIS works on bringing home off shore income with no taxes.

Side affects may include nausea, empty account syndrome, foreclosure, dizziness, and rash judgement.

Dead or Alive?

Rallies keep emerging out of potentially disastrous economic scenarios like a relentless zombie in a ' i thought it was dead' horror movie. The bulls look at the market this way.

Greeks will pass minimal legislation and a template for EU debt will emerge.

Stocks represent lean mean cash machines which are offered at a discount to future earnings.

All domestic government spending is going to decline which will please those who have jobs.

Those who have jobs represent a solid base from which further real declines are not likely and are enough to make the economy expand ever so slightly.

A drive out of government fixed income and into all corporate risk is about to take a giant leap.

Spreads between after debt service on rentals and the rents paid is widening which means the housing bust is over.


Bears on the other hand see it as a simple matter of jobs. They will give in when big job growth appears.

There is an interesting article in MarketWatch by Brett Arends reviewing data from Trim Tabs of corporate buying of their own stock to the tune of $124 billion in the first quarter. This money came from profits and a whopping increase in corporate borrowing by non financial firms of a $100 billion dollars, raising corporate non financial debt to a record $7.3 trillion.

Markets Ponder Several Problems

Equity markets have been nervous lately. Not just in terms of the current price retracement, but with a much greater degree of concern that the U.S., this time, is declining into an inevitable reckoning due to seemingly unsolvable governmental and private debt structures. Sovereign debt issues, QE2 cessation, and U.S. default fears, are all greasing the current slide. The markets also having an odd debate over the risks of inflation with, on the one hand, the belief there will be unavoidable repercussions of easy money, and on the other, the total lack of demand stemming from a stagnant and an increasingly jobless America. What with TARP being viewed correctly by the public as an entitlement program for the financial elite in this country, and the problem of two parties unable to provide hope for future job opportunities, traders are focusing on several primary realities.

(1) Job creation will be hard given that austerity means less growth and a slower economy. (2) China is a hype which has started to correct. (3) Over 25% of homes in the country are underwater and about 50% could not find a buyer for their market price if they tried. (4) Wall Street thinks Republicans are backing noble goals but are crazy to play with U.S. debt given the resulting negative play on world equity prices.

Number one. There is just no way around the negative impact of smaller government to the broader economy. Forget the economic debate. Cutting spending by cutting jobs will create a large whole which cannot be filled by the private sector. Traders are trying to determine whether the markets will have to cycle through a dominate Republican austerity reign of terror for several years or will have a milder not so austere compromise and split rule.

Number two. China has started a correction but who knows what an undemocratic monster economy correction will looks like. A hard correction would be unnerving since most strategic investment decisions by world economic giants would be altered.

Number three. Real estate is an orphan now with little hope. Practically ignored by the Obama Administration. It has always been the most important issue and for an Administration with a positive slogan as "Yes We Can", the reality became "Guess We Can't."

Number four. What can you say about tangling the possibility of the world largest economy defaulting for political gain. Now there's plan.

For traders, positive turns in any two of these four keeps this market moving higher.

View of Down

Disaster Not Averted
by Dean Baker, The New Republic

When the financial system was on the edge of melting down back in the fall of 2008, there was much talk in the punditocracy of a second Great Depression. The story was that we risked repeating the mistake at the onset of the first Great Depression: allowing a cascade of bank failures that both destroyed much of the country’s wealth and left the financial system badly crippled. Instead, however, we acted, and these days the accepted wisdom is that the TARP and other special lending facilities created by the Federal Reserve Board prevented a similar collapse that saved us from a second Great Depression. But this view badly misunderstands the nature of the first Great Depression—and may, in fact, result in the country suffering the second Great Depression that the pundits claim we have averted.

Allowing the cascade of financial collapses at the start of the first Great Depression was a mistake. However, there was nothing about this initial collapse that necessitated the decade of double-digit unemployment that was the central tragedy of the Great Depression. This was the result of the failure of the federal government to respond with sufficient vigor to mass unemployment. Indeed, the economy only broke out of the Depression when the federal government undertook massive deficit spending to fight World War II. Deficits peaked at more than 25 percent of GDP. This would be the equivalent, in today’s economy, of running annual deficits of $4 trillion.

Loss Aversion

Creating jobs and the psychological positives attached to growing employment numbers are apparently what markets are going to need in the months ahead. I can't get over the feeling however that this is about the old loss aversion theory; that people prefer avoiding losses to acquiring gains. I see it strategy choices all the time. Traders would rather choose a pattern of trading where the risk averse strategy limits there ability to participate in opportunities for gains. Bears choose the least up and Bulls pick the least down even when probabilities are equal. In the case of this market, participants do not want to be a party to the most anticipated Great Depression II on record. Ugly is going to get every opportunity to prove itself and whether it becomes self fulfilling or a sucker play, we will know soon.

Bad News For Bears?

Markets are experiencing a pull back and I cannot say I disagree with the direction. However, there have been several articles about how the small investor has turned negative on the stock market with bullish sentiment hovering around 25%. When has the small investor ever been right? Despite the proliferation of trading tools which allows small semi professional and self directed accounts to navigate in and out of the markets, they are always going to be fighting the last war. They got out on the bottom and got back in last August. Great trade and a great gain but now that they are taking their profits.

Tell me this does not mean new highs for the major averages.

Money Talks

Top All-Time Donors, 1989-2010

From OpenSecrets.org

LEGEND: Republican Democrat On the fence
	= Between 40% and 59% to both parties = Leans Dem/Repub (60%-69%) = Strongly Dem/Repub (70%-89%) = Solidly Dem/Repub (over 90%)

Rank	Organization	Total '89-'10	Dem %	Repub %	Tilt
1	ActBlue	$51,552,980	99%	0%
2	American Fedn of State, County & Municipal Employees	$45,037,993	94%	1%
3	AT&T Inc	$40,800,955	45%	54%
4	National Assn of Realtors	$39,494,410	47%	49%
5	National Education Assn	$36,188,345	81%	5%
6	Service Employees International Union	$35,854,539	78%	2%
7	American Assn for Justice	$33,664,771	89%	8%
8	Intl Brotherhood of Electrical Workers	$32,920,954	97%	2%
9	Laborers Union	$31,183,767	89%	7%
10	American Federation of Teachers	$31,021,128	90%	0%
11	Teamsters Union	$30,365,809	89%	6%
12	Carpenters & Joiners Union	$30,279,187	86%	9%
13	Communications Workers of America	$29,221,953	95%	0%
14	American Medical Assn	$27,285,290	39%	59%
15	United Auto Workers	$27,104,457	98%	0%
16	United Food & Commercial Workers Union	$26,596,859	93%	0%
17	National Auto Dealers Assn	$26,391,892	32%	67%
18	Machinists & Aerospace Workers Union	$26,177,624	98%	0%
19	United Parcel Service	$24,208,953	37%	62%
20	American Bankers Assn	$23,810,244	39%	59%
21	National Assn of Home Builders	$23,267,414	36%	63%
22	National Beer Wholesalers Assn	$22,918,532	33%	66%
23	Altria Group	$22,783,164	26%	73%
24	National Assn of Letter Carriers	$21,899,393	85%	10%
25	Goldman Sachs	$19,923,360	61%	38%
26	AFL-CIO	$19,284,610	92%	4%
27	Credit Union National Assn	$18,609,111	48%	50%
28	Sheet Metal Workers Union	$18,373,848	95%	1%
29	International Assn of Fire Fighters	$18,319,407	79%	17%
30	National Rifle Assn	$18,212,571	17%	81%
31	Plumbers & Pipefitters Union	$17,576,385	94%	4%
32	FedEx Corp	$17,396,597	41%	58%
33	American Dental Assn	$17,215,246	46%	52%
34	Operating Engineers Union	$17,023,932	85%	14%
35	American Hospital Assn	$16,801,277	53%	46%
36	Lockheed Martin	$16,586,664	44%	55%
37	Air Line Pilots Assn	$16,562,447	84%	15%
38	Verizon Communications	$16,523,709	39%	60%
39	Citigroup Inc	$16,489,577	46%	52%
40	Natl Assn/Insurance & Financial Advisors	$16,031,099	42%	57%
41	Microsoft Corp	$15,311,036	46%	52%
42	AFLAC Inc	$14,901,852	45%	54%
43	General Electric	$14,897,302	48%	51%
44	United Steelworkers	$14,522,151	99%	0%
45	United Transportation Union	$14,455,860	88%	10%
46	JPMorgan Chase & Co	$14,422,635	47%	52%
47	Blue Cross/Blue Shield	$14,218,115	39%	60%
48	Ironworkers Union	$14,078,448	92%	6%
49	Union Pacific Corp	$13,875,360	25%	74%
50	Bank of America	$13,699,200	45%	54%
51	Deloitte Touche Tohmatsu	$13,427,680	33%	66%
52	American Postal Workers Union	$13,327,303	96%	3%
53	American Institute of CPAs	$13,325,335	42%	57%
54	Ernst & Young	$13,202,570	44%	55%
55	National Rural Electric Cooperative Assn	$13,009,705	51%	48%
56	Time Warner	$12,993,890	67%	32%
57	Boeing Co	$12,821,405	46%	53%
58	Reynolds American	$12,813,884	24%	75%
59	Pfizer Inc	$12,766,762	30%	69%
60	PricewaterhouseCoopers	$12,621,542	37%	62%
61	Morgan Stanley	$11,898,925	44%	55%
62	National Air Traffic Controllers Assn	$11,686,338	80%	18%
63	Northrop Grumman	$11,519,450	43%	56%
64	BellSouth Corp	$11,512,059	46%	53%
65	Natl Active & Retired Fed Employees Assn	$11,266,500	77%	21%
66	General Dynamics	$11,167,303	47%	52%
67	Anheuser-Busch	$11,087,967	48%	51%
68	GlaxoSmithKline	$10,490,039	29%	70%
69	National Restaurant Assn	$10,366,295	16%	83%
70	Honeywell International	$10,262,397	47%	52%
71	Human Rights Campaign	$10,259,871	90%	9%
72	Associated Builders & Contractors	$10,181,421	1%	98%
73	Chevron	$10,100,048	24%	74%
74	Raytheon Co	$10,036,943	47%	52%
75	American Academy of Ophthalmology	$10,035,683	52%	47%
76	Exxon Mobil	$10,016,014	11%	88%
77	American Health Care Assn	$9,948,860	52%	46%
78	American Crystal Sugar	$9,828,164	62%	37%
79	Newsweb Corp	$9,817,646	96%	0%
80	American Society of Anesthesiologists	$9,759,437	43%	56%
81	Saban Capital Group	$9,721,037	99%	0%
82	Indep Insurance Agents & Brokers/America	$9,649,364	40%	59%
83	National Cmte to Preserve Social Security & Medicare	$9,636,171	81%	18%
84	American Optometric Assn	$9,441,013	59%	40%
85	Associated General Contractors	$9,330,413	14%	84%
86	KPMG LLP	$9,323,103	30%	69%
87	Koch Industries	$9,315,215	11%	88%
88	UBS AG	$9,219,354	38%	61%
89	Securities Industry & Financial Mkt Assn	$9,163,123	43%	55%
90	Wal-Mart Stores	$9,125,335	28%	71%
91	American Maritime Officers	$9,089,012	47%	51%
92	Transport Workers Union	$8,986,599	95%	4%
93	Seafarers International Union	$8,707,094	85%	14%
94	National Cmte for an Effective Congress	$8,695,668	99%	0%
95	Eli Lilly & Co	$8,646,995	30%	69%
96	Freddie Mac	$8,613,709	43%	56%
97	National Fedn of Independent Business	$8,531,860	7%	92%
98	Comcast Corp	$8,520,857	52%	47%
99	CSX Corp	$8,494,712	36%	63%
100	New York Life Insurance	$8,492,483	51%	48%
101	Painters & Allied Trades Union	$8,485,171	88%	11%
102	Southern Co	$8,392,935	34%	65%
103	MetLife Inc	$8,374,700	54%	45%
104	Massachusetts Mutual Life Insurance	$8,361,739	39%	60%
105	News Corp	$8,301,228	56%	43%
106	Walt Disney Co	$8,197,155	66%	33%
107	Credit Suisse Group	$7,989,262	42%	56%
108	UST Inc	$7,989,027	22%	77%
109	American Financial Group	$7,968,416	24%	70%
110	General Motors	$7,942,787	37%	62%
111	National Assn of Broadcasters	$7,760,014	46%	53%
112	Amalgamated Transit Union	$7,742,684	93%	6%
113	Amway/Alticor Inc	$7,718,649	0%	99%
114	Aircraft Owners & Pilots Assn	$7,711,567	45%	54%
115	Burlington Northern Santa Fe Corp	$7,666,279	32%	67%
116	American Council of Life Insurers	$7,663,662	38%	61%
117	Marine Engineers Beneficial Assn	$7,532,355	74%	24%
118	American Airlines	$7,114,721	47%	52%
119	MCI Inc	$7,043,984	48%	51%
120	Ford Motor Co	$6,885,434	36%	63%
121	American Trucking Assns	$6,781,325	31%	68%
122	Prudential Financial	$6,700,573	51%	48%
123	Archer Daniels Midland	$6,671,593	50%	49%
124	AIG	$6,630,362	53%	46%
125	MBNA Corp	$6,350,271	19%	80%
126	Bristol-Myers Squibb	$6,312,159	22%	77%
127	DLA Piper	$6,268,527	57%	41%
128	Merrill Lynch	$6,247,705	36%	63%
129	Fannie Mae	$5,949,582	51%	48%
130	Enron Corp	$5,339,240	29%	70%
131	EMILY's List	$5,245,127	95%	0%
132	BP	$5,109,920	30%	69%
133	Lehman Brothers	$4,878,103	48%	51%
134	Wachovia Corp	$4,854,572	26%	72%
135	MGM Resorts International	$4,698,221	44%	49%
136	Andersen	$4,572,691	38%	61%
137	Vivendi	$3,711,564	62%	37%
138	Skadden, Arps et al	$3,425,431	74%	24%
139	Bear Stearns	$3,374,125	54%	45%
140	Club for Growth	$1,535,099	0%	41%

Based on data released by the FEC on March 27, 2011.

Feel free to distribute or cite this material, but please credit the Center for Responsive Politics. For permission to reprint for commercial uses, such as textbooks, contact the Center