Are Stocks Overbought Right Now? Expert Market Technician Weighs In

A rare CNBC treat! An appearance from Elliott Wave's Steve Hochberg, as he shares his thoughts on why the current market looks (extremely) overbought, and why safety is the order of the day.

Best part of the interview for us EWI fans/subscribers - he gets fired up near the end, and mentions social mood as the driver of the stock market/economy! Yes, he went there, on mainstream financial TV! Love it.

More from Steve Hochberg: Financial Euphoria and Record High Trading Volume - What It All Means

An Exclusive Socionomic History of Goldman Sachs - Part 2

Here's Part 2 of EWI's guest expose on Goldman Sachs - if you missed Part 1, you can read that here - A Brief History of Goldman Sachs, Part I. Enjoy!

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Goldman Sachs Charged With Fraud: Who Could Have Guessed? Part II

The firm's history suggests its vulnerability in periods of negative social mood.

By Elliott Wave International

In the November 2009 issue of Elliott Wave International's monthly Elliott Wave Financial Forecast, co-editors Steven Hochberg and Peter Kendall published a careful study of Goldman Sachs company history -- and made a sobering forecast for the firm's future: "Goldman Sachs will experience an epic fall."

In this special three-part series, we will release the entire Special Report to you free of charge.

Get tomorrow's financial news today! To understand what that means, you must think and act independently from the crowd. Learn how by downloading Elliott Wave International's FREE 118-page Independent Investor eBook here.

Special Section: A Flickering Financial Star (Part II)

Despite careful stewardship, Goldman's reputation faltered as stocks fell in 1969-1970. When the Penn Central Railroad went under, it was revealed that Goldman sold off most of its own Penn Central holdings before the June 1970 bankruptcy. This was another case of shifting standards, as Goldman's customers were all institutions dealing in unregistered commercial paper. They should have known the high odds of failure, as the railroad’s stock was down almost 90% when it finally failed.

As Cycle wave IV touched its low in October 1974 (S&P; see historic chart in Part I), a jury ruled, however, that Goldman “knew or should have known” that the railroad was in trouble. But Goldman Sachs company survived the negative judgment and grew quickly as the Cycle wave V bull market took off beginning in 1975.

As the chart shows, its rise to 2007 was meteoric. It was in this period that Goldman “reinvented itself” as a “risk-taking principal.” By 1994, Goldman Sachs: The Culture of Success (by Lisa Endlich) says compensation policies had tilted so heavily toward risk taking that one vice president noted, “everyone decided that they were going to become a proprietary trader.” In that year, the firm suffered its first capital loss in decades as stocks sputtered, but, within a year, the Great Asset Mania was in full force and Goldman's appetite for risk took off with that of the investment public.

In 1999, the last year of a 200-year Grand-Supercycle-degree bull market, Goldman Sachs, appropriately, went public, becoming the last major Wall Street partnership to do so. As Bob Prechter's Elliott Wave Theorist said at the time, “Some of the most conspicuous cashing in has come from the brokerage sector, which has a long history of reaching for the brass ring near peaks.”

The Partnership notes that by May 2006, when a wholesale financial flight to ever-riskier financial investments was in its very latter stages, Goldman had “the largest appetite and capacity for taking risks of all sorts, with the ability to commit substantial capital.” As other firms felt the sting of an emerging risk aversion, Goldman profited by shorting the subprime housing market and putting the squeeze on its rivals. The firm earned $11.6 billion in 2007, more than Morgan Stanley, Lehman Brothers, Bear Stearns and Citigroup combined. Merrill Lynch lost $7.8 billion that year.

Another bull market initiative explains Goldman's relative strength since 2007. It dates back to the hiring of a former U.S. Treasury Secretary, as the Dow peaked in Cycle III in 1968 (see chart in Part I). This was the firm’s first foray into the upper reaches of the U.S. government. In wave V, the flow of talent went the other way and tightened the bond, as executives regularly moved from Goldman to Washington. This process was aided in part by a Goldman policy that pays out all deferred compensation to any partner who accepts a senior position in the federal government.

In May 2006, Henry Paulson, Goldman's chairman, left to become Secretary of the U.S. Treasury. Over the course of wave V and its aftermath, when government was increasingly relied upon as the buyer of last resort, these associations proved valuable to Goldman. Eventually they will weigh heavily upon the firm, but the value persists for now because the government is playing its socionomic role and clinging tenaciously to the expired trend.

Another important late-cycle development is Goldman's all-out effort to court, rather than avoid, conflicts of interest. From the 1950s through the early 1980s, Goldman leaders assiduously avoided even the perception of a conflict of interest between the firm’s positions and those of its clients. Goldman's current leader, Lloyd Blankfein, “spends a significant part of his time managing real or perceived conflicts.” Says Blankfein, “If major clients -- governments, institutional investors, corporations, and wealthy families -- believe they can trust our judgment, we can invite them to partner with us and share in the success.”

The strategy paid off big in 2008 when Henry Paulson, who was still in charge at the Treasury, helped the taxpayer step in to rescue Goldman. According to a Vanity Fair article by Andrew Ross Sorkin, Paulson had signed an ethics letter agreeing to stay out of any matter related to Goldman. In September 2008, however, Paulson received a waiver that freed him “to help Goldman Sachs,” which was faltering under the financial meltdown of a Primary-degree bear market.

It may be that the best interests of Goldman are perfectly in line with those of the nation, but in the combative atmosphere of the next downtrend in social mood, we are quite sure that voters will not see it that way. Also, the potential for self-enrichment already appears to have overwhelmed a key player. The latest headlines reveal that another former Goldman Sachs chairman, Stephen Friedman, negotiated the “secret deal” that paid Goldman Sachs $14 billion for credit-default swaps from a bankrupt AIG. He did this as chairman of the New York Fed while also serving on the board of Goldman Sachs.

Get tomorrow's financial news today! To understand what that means, you must think and act independently from the crowd. Learn how by downloading Elliott Wave International's FREE 118-page Independent Investor eBook here.

This article was syndicated by Elliott Wave International. EWI is the world's largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private investors around the world.

Ed. note - I am an EWI subscriber and affiliate - I highly recommend their work.

A Brief, Unapologetic History of Goldman Sachs - Part 1

While the consensus opinion in America right now about Goldman Sachs is along the lines of "screw those a-holes!" - exactly how'd we get to this point?

The history of Goldman Sachs (aka Golden Slacks, aka Government Sachs, etc) is a very interesting one, especially when intertwined with the ebbs and flows of the stock market and social mood in America.

In this guest piece, Vadim Pokhlebkin brings together a very insightful history in the investment bank we all love to hate. Enjoy Part I, and come back later in the week for the completion of the trilogy!

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Goldman Sachs Charged With Fraud: Who Could Have Guessed? Part 1

The firm's history suggests its vulnerability in periods of negative social mood.

By Vadim Pokhlebkin

April 16, (Reuters) - Goldman Sachs Group Inc was charged with fraud on Friday by the U.S. Securities and Exchange Commission in the structuring and marketing of a debt product tied to subprime mortgages.

Shocked? Most of the subscribers to Elliott Wave International's monthly Elliott Wave Financial Forecast probably weren't. In the November 2009 issue, the EWFF co-editors Steven Hochberg and Peter Kendall published a careful study of Goldman Sachs' history -- and made a grim forecast for the firm's future.

In this special three-part series, we will release the entire Special Report to you. Here is Part I; come back tomorrow for Part II.

Special Section: A Flickering Financial Star
At the Dow’s all-time peak in October 2007, Goldman Sachs Group Inc., was the undisputed heavyweight champion of the financial markets. And, thanks to its bailout by Warren Buffett and the U.S. Treasury as well as the liquidation of rivals Bear Stearns and Lehman Brothers, its reign lives on. Come December, earnings and bonuses will reputedly approach the record levels of 2007. If the market can hold up, it might happen. But as the stock market retreat grabs hold, Goldman Sachs will experience an epic fall.

To understand the basis for this forecast, we need to review the firm’s history in light of socionomics.

At the beginning of the last century, Goldman Sachs originally made a name for itself with its first initial public offerings, United Cigar and Sears Roebuck. The deals came as the stock market made a multi-year top in 1906. Within months, the panic of 1907 was on, and a U.S. Interstate Commerce Commission investigation of the Alton Railroad Company bond offering, in which Goldman participated, was in full swing. According to The Partnership, Charles Ellis’ history of Goldman Sachs, the deal was “long remembered as ‘that unfortunate Alton deal’.” The bond issue allowed a considerable cash surplus to be paid out to shareholders in the form of a one-time dividend, a standard financial maneuver in the preceding bull market. In fact, the deal was unknown to the public until it came before the ICC in 1907. “Then, probably to the surprise of the syndicate, the verdict was practically unanimous against them. They were tried before the bar of public opinion and found guilty,” said author William H. Lough in Corporation Finance. Lough added that syndicate members “ought not be too severely criticized for they merely acted in accordance with the custom of the period.”

So it goes when social mood, and concurrently the market’s trend, changes; customary Wall Street devices are invariably recast as the instruments of evil financiers.

Another bear market problem is that Wall Street firms are just as susceptible to negative mood forces that tear away at even the most close-knit social units. From 1914-1917, a major rift emerged between the founding Goldman and Sachs families, and the Goldman side of the partnership left the firm. The tension endured through several generations, and as late as 1967 it was said that “hardly any Goldmans are on speaking terms with any Sachses.”

Larger degree social-mood reversals create larger bear-market complications. The firm’s biggest and most devastating setback came after the Supercycle degree top of 1929.

Goldman Sach's Bull Market Successes, Bear Market Messes

Leading up to the market high, Goldman Sachs Trust Company took off, playing a role in the then-financial mania similar to the one that hedge funds perform today. With the help of successively higher levels of leverage, GSTC issued a quarter billion dollars worth of new shares the month before the September 1929 peak (many of which were held in its own account), leaving it completely exposed to the decline that followed. The firm survived only because a quick-witted former mailroom employee, Sidney Weinberg, took charge and used the stock market rally in early 1930 to jettison many of the firm’s equity positions. Weinberg also turned out to be an investment banking savant. While the firm made no money for the next 16 years, he served on the war production board and carefully cultivated key relationships in business and government. In the middle of Cycle wave III in 1956, Goldman completed the largest IPO in history, delivering Ford Motor Company into the public’s hands.

The firm was not yet a major force on Wall Street, but by hiring MBAs from top schools, fostering a reputation for fair dealing and maintaining a partnership structure that aligned the ownership of its principals with the long-term success of the firm, Weinberg laid the foundation for rapid growth. In the words of Gus Levy, Weinberg’s successor, Goldman Sachs was “long-term greedy.” Another Levy secret was to be certain that positions exposing capital were “half-sold” before they were entered into.

Come back tomorrow for Part II of this three-part Special Report from Elliott Wave International (EWI). In the meantime, get more free and insightful analysis from EWI in the Market Myths Exposed eBook. The 33-page eBook takes the 10 most dangerous investment myths head on and exposes the truth about each in a way every investor can understand. You will uncover important myths about diversifying your portfolio, the safety of your bank deposits, earnings reports, investment bubbles, inflation and deflation, small stocks, speculation, and more! Learn more about the free eBook here.

PLUS -- don't miss Bob Prechter's just-published forecast for 2010-2016 in the new, April Elliott Wave Theorist. Get it here.

Vadim Pokhlebkin joined Robert Prechter's Elliott Wave International in 1998. A Moscow, Russia, native, Vadim has a Bachelor's in Business from Bryan College, where he got his first introduction to the ideas of free market and investors' irrational collective behavior. Vadim's articles focus on the application of the Wave Principle in real-time market trading, as well as on dispersing investment myths through understanding of what really drives people's collective investment decisions.

Ed. note - I am an EWI subscriber and affiliate - I highly recommend their work.

Do Earnings REALLY Drive Stock Prices? The Answer May Surprise You

Growing earnings lead to increasing stock prices. Of course.

Or do they?

The folks over at Elliott Wave International say this is an old wives tale - and I have to admit, they make a compelling, interesting case.

Read on, for an eye opening challenge of this basic assumption!

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Earnings: Is That REALLY What's Driving The DJIA Higher?
The idea of earnings driving the broad stock market is a myth.
October 23, 2009

By Vadim Pokhlebkin

It's corporate earnings season again, and everywhere you turn, analysts talk about the influence of earnings on the broad stock market:

• US Stocks Surge On Data, 3Q Earnings From JPMorgan, Intel (Wall Street Journal)
• Stocks Open Down on J&J Earnings (Washington Post)
• European Stocks Surge; US Earnings Lift Mood (Wall Street Journal)

With so much emphasis on earnings, this may come as a shock: The idea of earnings driving the broad stock market is a myth.

When making a statement like that, you'd better have proof. Robert Prechter, EWI's founder and CEO, presented some of it in his 1999 Wave Principle of Human Social Behavior (excerpt; italics added):

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Are stocks driven by corporate earnings? In June 1991, The Wall Street Journal reported on a study by Goldman Sachs’s Barrie Wigmore, who found that “only 35% of stock price growth [in the 1980s] can be attributed to earnings and interest rates.” Wigmore concludes that all the rest is due simply to changing social attitudes toward holding stocks. Says the Journal, “[This] may have just blown a hole through this most cherished of Wall Street convictions.”

What about simply the trend of earnings vs. the stock market? Well, since 1932, corporate profits have been down in 19 years. The Dow rose in 14 of those years. In 1973-74, the Dow fell 46% while earnings rose 47%. 12-month earnings peaked at the bear market low. Earnings do not drive stocks.

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And in 2004, EWI's monthly Elliott Wave Financial Forecast added this chart and comment:

Earnings don’t drive stock prices. We’ve said it a thousand times and showed the history that proves the point time and again. But that’s not to say earnings don’t matter. When earnings give investors a rising sense of confidence, they can be a powerful backdrop for a downturn in stock prices. This was certainly true in 2000, as the chart shows. Peak earnings coincided with the stock market’s all-time high and stayed strong right through the third quarter before finally succumbing to the bear market in stock prices. Investors who bought stocks based on strong earnings (and the trend of higher earnings) got killed.

So if earnings don't drive the stock market's broad trend, what does? The Elliott Wave Principle says that what shapes stock market trends is how investors collectively feel about the future. Investors' mood -- or social mood -- changes before "the fundamentals" reflect that change, which is why trying to predict the markets by following the earnings reports and other "fundamentals" will often leave you puzzled. The chart above makes that clear.

Get Your FREE 8-Lesson "Conquer the Crash Collection" Now! You'll get valuable lessons on what to do with your pension plan, what to do if you run a business, how to handle calling in loans and paying off debt and so much more. Learn more and get your free 8 lessons here.

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Robert Prechter, Chartered Market Technician, is the world’s foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

BBQ, Beer, and Contrarian Investment Indicators

Welcome back from the long weekend - I hope you had a great 4th celebration. Even us folks who are not so keen on the Federal Government can appreciate many of the founding values of our country...despite how frustrated it is when Constitution seems to be a forgotten document...in a world where "whatever it takes" is Uncle Sam's new mantra!

After a great weekend of beer, BBQ, and socializing, I thought it'd be interesting to reflect on some data points I gathered from folks...to discern the social mood and outlook from the people I spoke with. Of course this is a completely ad hoc sample...the qualification being that these folks either had a beer with me, or served me a beer, over the last two days!

I hope these anecdotes will be entertaining, and perhaps even a bit insightful, as we engage in the challenging, humbling exercise of trying to figure out where the world is heading...so that we can invest accordingly.

If you have any anecdotal stories, I'd love to hear them - drop a comment below, and let's see what we come up with!

The Hot Bartender Who Disapproves of Money Printing

Regular readers know that we've been on a deflationist kick over the last couple of weeks - simply due to the contrarian appeal of it all. Since the collapse hit, I've believed that inflation - more specifically hyperinflation - would be the end result, mostly because the government can print as much money as it wants.

Honestly, though, what the hell do I know? The common sense consequence of money printing is price inflation...but what if common wisdom is incorrect here (as it often is!)

Anyway this Friday evening, some friends and I were at a new bar (with a fantastic happy hour, and an even better bartender, "Shelley" (stage name to protect the innocent :) ) - very good looking, and quite patron friendly).

Shelley's a very nice girl who you'd initially surmise to be a "knee jerk liberal". Lives in Northern California...into raw foods and organic farms...all that good stuff.

We got into a conversation about some boondoggle going on a few blocks away at the State Capitol (Sacramento), and I figured I'd toss a pseudo-libertarian comment into the fray, see if we kick start anything interesting.

Me: The only way to fund that idiotic program would be to print up the money.

Shelley: Ha, yeah, and then comes hyperinflation.

My heart skipped about four beats...best bartender ever.

Now I thought it was very interesting she didn't say merely "inflation", but "hyperinflation." Pretty impressive financial acumen - and also another hyperinflation data point.

We'll keep our ears open for deflation talk from bartenders...right now it's 1-0 in favor of IN-flation.

Renting: The New Buying

Markets don't bottom when everyone is looking for the bottom. They bottom when there is a

final capituation in which the market basically vomits all over itself.

When nobody wants to talk about stocks, that's when you want to back up the truck.

The housing market has been in free fall for about 4 years now, and I've been intrigued to watch the shift in social mood.

Back in 2004, I recall riding the MUNI in San Francisco, and overhearing a conversation between two other riders about how "housing never went down". The common mantra in the Bay Area at the time was that even if housing goes down in some locations, it never goes down in the Bay Area, because there's such limited supply.

Bay Area home prices are now down over 50% from the peak.

The first year or two of the downturn, we heard a lot of the "now is a great time to buy" bad advice. Home buyers were trying to catch the bottom of the market before it went back up again. In reality, all they caught was a falling knife.

Yesterday we hosted a 4th of July BBQ in our backyard (of our rental). I recall when we moved into it nearly 3 years ago, and we had people over, often the first question was around when we would buy our own place.

This year, I noticed a lot of the shine seems to have come off home ownership. When I mentioned that we rented the place and didn't own it, the feedback around renting was more positive than I remember. Several of my friends who are home owners even said they wouldn't mind being renters themselves.

Not necessarily a bottom in the real estate market, but maybe we're getting closer.

As an aside - real estate is often a terrible investment during a depression. The first thing folks do when they hit hard times is they bunk up together, cutting their own housing costs, and sending a lot of supply on the market.

During the salad days of the 80's and 90's, you had people really "spreading out" across the country. Times were good, money was flush - hey let's go grab our own place.

Today in 2009 - maybe not so bad to stay with family. If unemployment continues to worsen, this could be a wild card in the real estate market that I don't hear many people talking about...another potential monkey wrench in a recovery. Why buy two homes when one cozy place will suffice?

So it seems like we are starting to see a bit of a shift in the social mood about renting and home ownership, but we may have a ways to go.

How Long Do Turnings Last?

For the past month or two, one of my favorite discussion topics has been The Fourth Turning - the book/concept that society goes through cycles. And every 80 years in the US, a crisis hits - The Revolutionary War, the Civil War, the Great Depression/WWII, and potentially the mess we're in now.

I'll tell you, this has been a real hit at weddings and cocktail hours - people think I'm nuts when I say "Hey, we're in the 4th Turning...get used to it, we're screwed!"

Again yesterday, I had a few friends who I had previously floated this "odd ball" idea to come up to me and start asking me about these societal cycles! How long did you say Turnings last? Are we almost out of this one?

To me it seems like people are beginning to resign themselves to the fact that this is a depression, not a recession, and that things are going to be bad for awhile.

This is very important because the stock market could have a hard time maintaining these levels when folks start to accept the cold, hard reality that the recent "green shoots" rally was built on optimism that just isn't materializing.

And we may have gotten a taste of this at the end of last week, with the disappointing unemployment numbers. Maybe "less bad" is no longer a good thing.

Quick Reader Survey - Please Share Your Thoughs!

I tossed together a quick 3-question reader survey, and I'd appreciate it if you could take a minute or two to share your thoughts and suggestions with me using the survey link here.

It's always great to connect with you, and your feedback and input help me figure out where to focus my energies...namely on stuff you like, and stuff you'd like to see more of.

The Week's 3 Most Popular Posts...

1. Is Deflation "So 2008"? Hyperinflation Trade Looking Crowded
2. Why Silver and Gold "in the Ground" is Seriousy Undervalued Right Now
3. Marc Faber: You Don't Want to be in Cash
   

Positions Update

No trades this week...I'm watching the trailing stops on each position (A$ and sugar), and will sell on a 15-day low.

Honestly I don't know whether the A$ is correcting or out of gas - so I'll let the market tell me.

If you're looking at either of these trades, I personally wouldn't initiate a position here...I'd wait for a breakout to a new high to confirm that the trend is still UP!

Current Account Value: $30,499.46

Cashed out: $20,000.00

Total value: $50,499.46

Weekly return:

2009 YTD return: -38.0% (I like to think it takes skill to lose this much money in 6-months :) )

Prior year's results: --> Don't try this at home...this is what is known as wreckless trading

2008: -8%

2007: 175%

2006: 60%

2005: 805%

Initial stake: $2,000.00