Goldman Trumps Froth and Fluff

April 16

I have been watching the market and had been preparing something to write on the Froth and Fluff in the market. That Goldman Sachs is being sued by the U.S. Securities & Exchange Commission with civil fraud trumps those concerns.

However, let me first comment on the Froth and Fluff because the major U.S. stock market indices have continued to advance and have now gotten back to their September 2008 pre Lehman levels or 18 month highs but are still off significantly from 2007 all time highs. This is despite the fact that the confidence of small business owners remains at all time lows (most new jobs are created by small businesses) and the number of home mortgage foreclosures continue to set all time new monthly records.

The froth in the market has been the sharp advances of the lower priced financials such as Citigroup (NYSE:C) and especially Ambac (NYSE:ABK) whose shares have risen six fold from about $.50 to as high as over $3.00 in the last two weeks alone. The fluff is the reporting of better than expected first quarter earnings by banks and financial companies such as J.P. Morgan, whose results were based on their reduction of loan loss reserves and increasing proprietary trading profits instead of an increase in actual loan demand.

Additionally the volatility index (Symbol:VIX) which gauges the differences in volatility and complacency hit its lowest point since July of 2007 indicating an extreme in market complacency that had only been reached just months before the Dow and S&P 500 hit their all time highs. Investors should pay a lot of attention to the VIX which increased by over 14% alone today because a sharp increase in volatility at the same time the stock market has hit a 18 month high means that the roller coaster is on its way back down.

Froth and fluff aside the SEC’s action against Goldman will put a big crimp in the market because its only a tip of the iceberg on the bad news that is coming regarding the packaging and selling of mortgage backed securities by all of the broker dealers. The next shoe to drop for Goldman will likely be the filing of a criminal law suit by New York’s Attorney General, Andrew Cuomo and the filing of hundreds of civil actions by those investors who actually purchased the securities. Given the distaste that the politicians and voting public have for Goldman investors should expect a long drawn out legal battle in which Goldman will likely have to settle for tens of billions of dollars. The bottom line is that it will be very difficult for a U.S. stcok market, which has been steadily increasing on steadily decreasing volume to act well. For market historians the SEC v. Goldman Sachs law suit will likely prove to be a watershed event which signaled a bear market top. I continue to suggest that investors remain in 80% cash.

For more information on the super or secular bear market and why I believe that it will last until 2015, I suggest a visit to www.bearmarkettracker.com.

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