Conspiracy Theory

The Mogambo Market Indicators have found that banks have been getting rid of government securities over the last month. The Mogambo looks closely at this bad omen…

There are those who lay awake at night wondering things like, "What does The Mogambo use as technical indicators?" and "What in the hell is wrong with me that I even care what the stupid Mogambo thinks about anything?" I’ll ignore that last remark, but I will be happy to address the first question by example. Let’s mosey on over to the banks and start rooting around in their fetid bowels. What do we find? Well, for one thing, we find that the banks are getting rid of government securities, and their total stash of that toxic waste went down over the last month. This is, as one of the Famous Mogambo Market Indicators (FMMI), a very bad omen. For one thing, it means, since bond prices have fallen over the last few weeks, that the banks have lost a lot of money as they sold the bonds.

Sticking just to the facts and not launching into a long, tiresome tirade about how the banks and the Federal Reserve banking system are killing us and how they have doomed us with their stupid neo-Keynesian idiocy, the last time this kind of weird thing happened was in 2000, just prior to the market tanking! Of course, it may have been just a coincidence, but maybe not. Anyway, after the stock market dropped, the banks started buying government debt like crazy in 2001, and by the middle of 2003 had increased their holdings of government debt by 40%. Then the stock market stopped falling and was rising. By the middle of 2004 the banks pretty much stopped accumulating government debt, but only after they had increased their total holdings by 50% in just a couple of years!

Also, this forecasted decline in the market is strangely in keeping with the famed Fibonacci ratio. The SP500 topped out at about 1520, whereupon it fell to about 820. The difference is 700. So, a multiply that 700 point difference by .the Fibonacci number of .618, and you can expect a market rise of 432 points. The market is now at about 1220. So it has climbed 400 points from its low of 820, which is pretty close to what the Fibonacci predicts. The next step is, as I understand the theory, another big leg down in the market, breaking the previous low, as the secular downtrend continues.

Mutual Fund Cash Levels: Lower Than Ever

And Samex Capital has observed that mutual fund cash levels have again reached historic lows. According to the Investment Company Institute, mutual funds decreased the amount of cash on hand to very low levels. How low? Well, cash is 2% LESS than what they are required to hold! They have sunk more than every available dime into the market!

Now, I am sure that there are lots and lots of very good reasons why this could be so. After all, they are hotshot investment type guys pulling down the big money because they are so smart and handsome and bathe regularly, and I am just a guy sorting through the neighbor’s trash as my tentative entry into the lucrative "identity theft" racket. But the stock market has been flat, despite all of this buying, and so that means that somebody was taking money OUT of the market at the same time as all this money was flowing INTO the market. Hmmm I smell a big, fat, stinking conspiracy here! Only this time it does NOT involve brain-sucking lizards from outer space or the CIA.

Samex writes, "This is only the third time in history that mutual fund cash-to-assets ratios have been this low. December 1972 marked the high point for more than a decade, and was followed by a 50% loss. March 2000 has marked the high point for more than five years to date and was followed by a 50% loss."

Another interesting market-timing indicator is found in a recent research paper entitled "Congress and the Stock Market" by Michael Ferguson of the University of Cincinnati and Hugh Witte of The University of Missouri reports that "an astonishing 90% of all the gains in the Dow Jones Industrial Average occurred while Congress was not in session. Dow Jones gains during Congressional sessions have been rare, they typically occurred when Congress had a high approval rating."

But before you run out and construct a new financial plan to time the market based on this highly interesting fact, perhaps you should also note "According to a recent poll by the Gallup Organization, only 35% of the U.S. currently approves of the way Congress is handling its job." Which proves, I guess, is that more than a third of Americans have absolutely no clue as to what in the hell they are talking about. What is more important, however, is that this is not an omen for a rising market!

Mutual Fund Cash Levels: The Advance-Decline Line

And another indicator of the future of the stock market is the NYSE advance-decline line. If you have been watching the advance-decline line, you can’t help but notice the rise. This is usually a very good indicator of how the stock market prices have been going, which is, in turn, a pretty good indicator of where prices WILL be going. Well, maybe yes and maybe no. John P. Hussman writes, "In short, despite the apparent serenity of the NYSE advance-decline line, the market is already exhibiting the sort of internal turbulence and speculative characteristics that are hallmarks of late-stage bull markets. That’s not to make any pointed forecast that stocks will or must turn down any time soon. Rather, the point is to emphasize that there are emerging signs of distribution in market action that investors shouldn’t ignore." And "distribution" is the polite term used to mean "dumping these dog stocks onto some dumb suckers at high prices."

Eric J. Fry of Rude Awakening knows Jay Shartsis by sight, whereas I only know him as the guy who yells at me "Don’t call here again trying to borrow any money, you creepy little jerk!" Anyway, he says that he has noticed some interesting market indicators, too, and has found "A dizzying array of troubling signs, omens and auguries are warning that the stock market is due for a drop of some significance." And how does he figure that? "The small-time option traders – those who buy or sell less than 10 contracts at a time – have been aggressively buying into the market. On only two prior occasions in the last five years – July 21, 2000 and Jan. 16, 2004 – did small-time options traders buy more call options than they did last week." The upshot to all of this? Oh, nothing important. Forget I even said anything. Well, if you MUST know, he says that "On both of those two prior occasions, they soon regretted their buying binges…and they probably will again this time."

Even Carl Swenlin in the "Did You Notice…?" column of Daily Reckoning, has noticed some interesting things, and writes "A good way to determine overbought (and oversold) conditions is by tracking the percentage of stocks above their 20-, 50-, and 200-day moving averages, indicators which measure market conditions in the short-, medium-, and long-term respectively." Well, he has taken the time to look at the stocks in the S&P 500 Index, and he notes, "They are all approaching the 90% level, a level that represents the most extreme overbought conditions."

Mr. Hussman goes on to say "If investors don’t keep valuations, skew, and other factors in mind, it may be relatively easy to get sucked in by the continual talk of ‘4-year highs,’ while forgetting that the annualized total return on the S&P 500 over those 4 years has been just 2%, and that the index still shows a negative return over 5 years." So the average investor has been earning just 2% over the last four years? Hahahaha! That’s a mighty fine investment manager you got there, dude! Hahahaha! And this moron has actually given you a NEGATIVE return over five years? Hahahaha! I’m laughing so hard that my stomach hurts! You lost 5% in nominal terms, and you also lost at least 25% in buying power because the dollar has lost that much in value. So adding them together, you lost 30% over the last five years? Hahahaha! Mr. Hussman sneers at my impolite guffawing, and showing what a class act he is, with understated dignity simply says, "Suffice it to say that I don’t find the talk of 4-year highs, economic sweet spots, and ‘great earnings’ overly compelling."

The monetary base has stopped growing, and M3 is not growing much either.

The dollar has obviously started to roll over, as I gather from the chart. So SOMEBODY is out there dumping dollar-denominated financial crap!

And maybe last by not least; from UPI we learn that Saudi Arabia said it was "working to bring back to the kingdom a total of $360 billion invested abroad in the last 18 months." A third of a trillion dollars is coming out of something, and into Saudi Arabia? Wow! Woes betide whatever in the hell it is that is facing a withdrawal/sale of $360 billion!

Putting all of this together, if you are the gambling type, (and if you are married then you ARE the gambling type and you already know what it means to lose and lose big! Hahaha!), this is the time to start thinking about index put options, with all that lovely leverage and limited downside.


The Mogambo Guru
for The Daily Reckoning

August 15, 2005

The Mogambo Sez: My mood is dark. The world of economics is dark. Dark dark dark. Only the glittering of gold consoles me now.

Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter, an avocational exercise to heap disrespect on those who desperately deserve it.

The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning and other fine publications.

Our poor mother.

Living with us for the last 10 years seems to have taken the spunk out of her. She’s decided to return to the United States. This morning, I’ll drive her to the airport.

With no time to write, we nevertheless pass along the following, adapted from a speech given last week in Vancouver:

Watching the news is a bit like watching a bad opera. You can tell from all the shrieking that something very important is supposed to be happening; but you don’t quite know what it is. What you’re missing is the plot.

Let us begin by noticing that this is a comic opera that seems as though it might veer into tragedy at any moment. The characters on stage are familiar to us – consumers, economists, politicians, investors, and businessmen. They are the same hustlers, clowns, rubes and dumbbells that we always see before us. But in today’s performance they are doing something extraordinary. They are the richest people on the planet, but they have come to rely on the savings of the world’s poorest people just to pay their bills. They routinely spend more than they make – and think they can continue doing so indefinitely. So do they go deeper and deeper in debt, believing they will never have to settle up. They buy houses and then mortgage them out – room by room, until they have almost nothing left. They invade foreign countries in the belief that they are spreading freedom and democracy – and depend on lending from Communist China to pay for it.

But people come to believe whatever they must believe when they must believe it. All these conceits and illusions – which we find so amusing in The Daily Reckoning – come not from thinking, but from circumstances. As they say on Wall Street, "markets make opinions," not the other way around. The circumstance that makes sense of this strange performance is that the U.S.A. is an empire – whether we like it or not. It must play a well-known role on the world stage, just as you and I must play our roles – not because we have thought our way to them…but simply because of who we are, where we are, and when we are. Primitive people play primitive roles. They are no less intelligent than the rest of us. But they would be out of character if they began doing calculus. They have their parts to play just as we do. Sophisticated people play sophisticated roles. They are no smarter than anyone else…but you still don’t expect them to wear bones through their noses. We, citizens of the last, great empire, have our roles to play, too. And the empire itself, must do what an empire must do.

Now, if you deny that the United States is an empire, you are as big a fool as we are. For a very long time we resisted the concept. We did not want the United States to be an empire. We thought it was a political choice. We liked the old republic of Jefferson, Washington, the U.S. Constitution…the humble nation of hard money and soft heads; we didn’t want to give it up. We thought that if the U.S. acted as though it was an empire it was making an error.

What morons we were. We missed the point completely. It didn’t matter what we wanted. There was no more choice in the matter than a caterpillar has a choice about whether to become a butterfly.

To be continued…but first, the news from our currency counselor:


Chuck Butler, reporting from the EverBank trading desk in St. Louis…

"These holders of the oil contracts have so many dollars now they are coming out their collective ears! So, when they receive the dollars, they are probably converting them to a currency that has promise…"


Bill Bonner, back in Ouzilly:

*** At the end of last week, some of our faith in humanity was restored…

Addison Wiggin’s new book, The Demise of the Dollar (and why it’s great for your investments) was Amazon’s number one top seller, knocking Harry Potter off of his throne.

Finally, we thought to ourselves, people have started to open their eyes to the truths about the state of our economy and the trouble with the U.S. currency. We breathed a sigh of relief.

Unfortunately, over the weekend, The Demise of the Dollar was pushed to number three – the boy wizard resumed his spot, and in second place is Why Do Men Have Nipples? (We swear that’s the real title.)

*** If there is a mean, things will regress to it. You can expect, relatively speaking, Asian incomes to rise and American incomes to fall. That is, of course, just what is happening now. In India, for example, real incomes have more than doubled in the last 10 years. In America there is some dispute about the numbers, but if there has been any income growth at all it has been slight.

Just to introduce a gloomy remark, we note that we are personally and individually regressing to the mean. The mean for a human being is death…or non-existence. A person walks the earth for only 3-score and ten, as it says in the Bible. The rest of the time, he is only a potential person…or a former person. For millions of years, he is either in the future…or in the grave. All of us in this room, happily, are enjoying that ever-so-brief period of exaggeration…of hyperbole…of extraordinary, mean-busting usualness we call ‘life.’ It is not for us to know the time or place when it comes to an end. But like all mean-reverting phenomena, only a fool would bet that it would never end.

For our own part, we do not particularly care when or how we meet our end. We just wish to know where, so we can avoid the place.

But betting against the end is just what most Americans are doing. They are borrowing and spending as if there were no tomorrow. And they are investing as though there were no yesterday. All they would have to do would be to look at the patterns of the past; they would see that it doesn’t make sense to buy at high prices – you can’t make money that way. The way people have always made money is by buying low and selling high. Doing it the other way around doesn’t work. Nor does borrowing and spending make you rich. Tomorrow always comes – at least it always has up until now – and you have to pay your debts.

Over time, prices go up and down. So do a lot of other things ebb and flow…boom and bust…bloom and wither. All of these phenomena go through predictable cycles that can be roughly modeled. Analysts study the cycles to try to figure out where in the habitual pattern we are currently. It is often frustrating work, because the patterns are rarely quite as regular and well-defined in the present as they appear to have been in the past. Still, it is a question worth asking: where in the cycle are we?

One of the ways you can tell where you are in the cycle is to look at what your friends and neighbors believe. Markets make opinions. When people you know are all of the opinion that stocks will rise 15% per year – indefinitely – you can be sure you are nearer to a top than a bottom. When people believe the opposite – that stocks will never go up – most likely, you are near a bottom.

Beliefs give us a clue to the larger cycles too. People play the comic roles that have been thrust upon them. They are bullish near the end of a bull market; they are bearish near the end of the bear market. If it were otherwise, the market could never fully express itself. If investors grew suddenly cautious while nearing an epic bull market peak, they would sell their stocks; the peak would never be reached. Or, suppose that after several years of soaring house prices homeowners came to believe that housing prices would fall? How could you have a proper housing bubble? How can you have a rip-roaring party without anyone getting drunk, in other words? How can people make fools of themselves if they are unwilling to take leave of their senses?

These are deep, philosophical questions, we understand. But they help us recognize where we may be in the cycle. As prices reach a loony excess, peoples’ ideas are loony too. Ergo, the loonier the ideas the more likely it is that a turning point is near; the wilder the party, the more likely someone will call the police.

More to come…