Profit from and Protection Against Defensive Sector Stocks
Gold and Silver versus The Cartel "End Game"
by DeepCaster LLC, deepcaster.com | February 2, 2008
PrintHell is truth seen too late.” Thomas Hobbes
Unfortunately, traditionally Defensive Sector Stocks increasingly can not regularly be relied upon to provide defense against Bear Markets.
One primary reason is that in recent years prices in Major Markets are not only subject to Fundamental and Technical Forces, but also to Interventions by The Cartel of Central Bankers*. These Interventions skew and distort normal market action, even for Gold and Silver shares, otherwise the safest of safe havens.
One consequence of Intervention is that a “Buy and Hold’ Strategy for securities is increasingly likely to fail, as Deepcaster has long claimed.
So, let us consider the first claim - - that Defensive Sector Stocks increasingly do not provide such protection. Specifically, consider the ostensibly defensive Healthcare Sector in the month of January, 2008. According to the Morningstar Healthcare Specialty listing of Funds, the average Specialty Healthcare Fund dropped by nearly 6% in the month of January while the S&P dropped by about 71/2%.
A Sector that drops only slightly less than a Major Market Index can not be deemed to be defensive in any sense of the word.
Moreover, a 6% drop in one month does not constitute adequate defense, in any event.
One major reason that such a traditionally Defensive Sector as healthcare tends to drop along with drops in Major Equities Indices is Cartel Interventions. As we detail in our January, 2008 Letter, it is quite apparent that the overall level of equities markets is controlled by the injection or removal of funds which are collateralized by Repurchase Agreements (Repos). To greatly oversimplify, The Cartel causes funds to be injected almost every business day into the markets via Repurchase Agreements provided to its Primary Dealers. The pool of these un-expired Repos (the typical agreement length is 1 to 30 days) enables support, or lack thereof, for the Dow and other Major Indices.
One can practically track the levels of the Major Indices by tracking the size of this unexpired Repo Pool (for further details see our January, 2008 Letter “Market Intervention, Data Manipulation, Increasing Risks, The Cartel End Game, and Latest Forecast”). Thus, when The Cartel decides to remove Repo support (which, for example, would otherwise been available to buy equity index futures or other derivatives to manipulate market levels) then so-called Defensive Sectors Stocks take a bath along with the markets in general.
This is why monitoring The “Interventionals” is at least as important as monitoring The Fundamentals and Technicals.
Consider a related reason why Defensive Sector Stocks increasingly can not be relied on to provide defense: they are infected, or potentially infected, with the same financial contagion (subprime loan defaults, credit market freeze-ups, etc.) about which Deepcaster and others have been commenting for months.
Consider a Bright Star of the Healthcare Sector, Bristol-Myers Squibb, a Big Pharma stock involved, we thought, solely in the healthcare business.
But, lo and behold, on January 31, 2008, Bristol-Myers Squibb announced a $275 million write-off due to investments gone sour in the last quarter of 2007. These losses were caused by investments backed by subprime securities. “Some of the underlying collateral for the auction rate securities held by the company consists of subprime mortgages…. If credit and capital markets continue to deteriorate, it may incur additional impairments to its investment portfolio, which could negatively affect the company’s financial condition, cash flow, and reported earnings,” said Bristol-Myers.
Stunning, we must say, but not surprising.
Deepcaster has long predicted that the financial contagion of easy credit and “dark liquidity” policies permitted and/or encouraged by The Fed-led Cartel would lead to such increasing risks of financial contagion and systemic collapse. Indeed, Deepcaster forecast such difficulties early in 2007 when it exposed the increasing number of “dark liquidity” transactions in which many major companies were, and still are, participating (“Protecting From Dark Liquidity and Other Systemic Risks,” April 8, 2007, at www.deepcaster.com, > Alerts Cache, > Archives).
So already we see one significant casualty from “dark liquidity” - - a major drug company (we thought), Bristol-Myers Squibb, engaged in dark liquidity transactions (no one knew about the subprime mortgage risk held by Bristol-Myers until they revealed the losses, did they?) which company now suffers a serious loss and discloses that additional such losses may be coming.
Deepcaster reiterates that we expect there will be increasing numbers of such losses in many Sectors.
Unfortunately, even though the Fed-led Cartel was a major cause of this Systemic Threat - - via allowing, and tacitly encouraging, “easy credit,” “dark liquidity” and an explosion of “dark OTC derivatives,” (to use Deepcaster’s favored term) its actions in reducing the Fed Fund’s and Discount Rates likely will be relatively ineffective in reducing The Systemic Threat.
Nobel Prize winning Economist, Joseph Stiglitz, at the recent conference in Davos, Switzerland indicates one reason for the ineffectiveness. “The United States is headed toward a “liquidity trap” similar to the one of Great Depression years of the 1930s. To summarize, he fears that long bond rates might fail to respond to short-term interest rate cuts enacted by the Federal Reserve. “The mechanism of monetary policy is ineffective in these circumstances…. The Fed is pushing on a string…people have been drawing home equity out of the houses at a rate of $700 billion or $800 billion a year. It’s been a huge boost to consumption, but that game is now up…house prices are going to continue falling, and lower rates won’t stop that at this point,” said Stiglitz.
One factor for which Stiglitz apparently does not account is a massively greater Cartel Intervention in all markets in recent years, including in the interest rate markets, precious metals markets, equities markets and commodities markets. This Intervention which has been facilitated by the massive increases in derivatives positions (in the order of magnitude of trillions of dollars for the aforementioned Sectors) reflected on the Bank for International Settlements (BIS) website (www.big.org), as Deepcaster has pointed out in its January, 2008 Letter, “Market Intervention, Data Manipulation, Increasing Risks, The Cartel End Game, and Latest Forecast.”
The unfortunate conclusion (from the aforementioned, including the referenced articles) is that while The Fed-led Cartel has gotten the international financial system “hooked” on the use of increasingly massive derivatives positions to manipulate market levels and achieve market stability or lack thereof, the markets have become increasingly dependent on such derivatives injections.
The increasing Systemic Risk is of course reflected in the fact that accelerating amounts of derivatives are necessary to maintain some semblance of financial system stability. Even so, the Systemic Risks are inexorably increasing.
It is this increasing Systemic Risk, and consequent, highly likely, future systemic collapse which has led the Cartel to develop its End Game which we describe in our June, 2007 Letter “Profiting From the Push to Denationalize Currencies and Deconstruct Nations” and our August 13, 2007 Alert “Massive Financial-Geopolitical Scheme Not Reported by the Big Media,” posted at www.deepcaster.com in the Letters and Alerts Archives.
It is Deepcaster’s view that The Cartel End Game is a recipe for disaster and that an Alternative Approach is necessary - - an Approach which we outline in the articles referenced above. At the core of our Alternative are sovereign independent nations with currencies linked to Gold and Silver - - but that Alternative is diametrically opposed to the one being envisioned and implemented via The Cartel’s “End Game.”
Consideration of The Interventionals, as well as the Fundamentals and Technicals, can help one profit from, as well as protect against, the manipulation of Defensive (and other) Sector Stocks.
Copyright © 2008 DeepCaster LLC
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