Signup for our free newsletter:

Anatomy of a Stock Market Rip-off

Written By Brian Hicks

Posted July 13, 2011

Anatomy of a…


Fraud? Highway robbery? Con job? Perfectly legal puffery? The usual smoke and mirrors?

How about, “opportunity of a lifetime”?

It’s Not a Foul if the Ref Doesn’t See It

If I say the word “fraud,” entire squads of rabid corporate lawyers will stuff napkins in their collars and sharpen their knives, looking to dine on my ass(ets).

And it’s a fair cop — at least, from a strictly legal point of view. I have no hard proof that a million investors were deliberately robbed blind last week.

Unfortunately, I wasn’t a fly on the wall when the meeting took place. And unlike our friends at Sunday News of the World, I don’t hack into other folks’ email accounts.

Technical Radar Reveals the Outlines of a Con

I can’t see into the corrupt core of last week’s bizarre episode, so I can’t reveal the specific actors in this drama. I’ll have to leave that end of the story to the gumshoes and prosecutors with the stones to go after these guys.

I am a memetic technician; I specialize in the patterns of behavior of large groups of people and how their previous actions prejudice their likely reactions to fresh ideas.

As such, I can show you the clear outline of a million-dollar rip-off — both the specific newsfeed stimulants and the predictable herd reactions to same.

In the end, we are like paleontologists confronted by fossilized footprints in the mud… but the path marked out is pretty screwy and disturbing.

The Setup

Let’s start with the setup.

To the untrained eye, the Dow’s tepid action the first few days of last week was nothing but a breather, a short pause halfway up a veritable ladder to the moon.

Million Dollar Dow Rip Offclick image to enlarge

But to a memetic technician (and trust me when I tell you the Washington/Wall Street Axis of Weasels (W/WSAoW) has a bunch of ’em on staff), it was a very dangerous turning point.

Without some kind of intervention, the next probable step would be a cyclical downturn to the bottom of the short-term trend.

That’s the good news.

The bad news is there’s a HUGE chance this reversal could lead to a mid-term cyclical downside move that would see the blue chips give away anywhere from 38.6% to 61.5%

The Mickey

About an hour or so before the market opened on Thursday morning, employment data handler Automated Data Processing Inc.(NASDAQGS: ADP) released its “June 2011 National Employment Report.”

Here’s the short version, straight from the horse’s mouth. (Pay careful attention to the part I highlighted for you.):

Today’s ADP National Employment Report estimates employment in the service-providing sector rose by 130,000 in June, nearly three times faster than in May, marking 18 consecutive months of employment gains. Employment in the goods-producing sector rose 27,000 in June, more than reversing the decline of 10,000 in May. Manufacturing employment rose 24,000 in June, which has seen growth in seven of the past eight months.

These figures are above the consensus forecast for today’s report and for Friday’s jobs number from the BLS. Payroll employment growth at this pace usually implies a steady unemployment rate, perhaps even a modest decline. June’s figures suggest that the economic recovery, which slipped in the spring, might have found new traction in early summer.

Swell Stuff, if Only it Were True

I have to say, there’s nobody out there that couldn’t use a real economic recovery right about now. That whole “weak hiring” thing in particular has been a real thorn in everyone’s side. Solve the employment problem, and it really would be off to the races for the whole damned stock market.

Needless to say, shares took off big-time on this news.

There’s only one catch: It was pretty much a complete and total lie. Well, maybe I shouldn’t say “lie,” because, as mentioned earlier, I can’t prove that ADP was put up to this by the W/WSAoW. Heck, for all I know, ADP’s analysts really believed in the crock they were putting out.

One thing’s for sure: ADP’s happy gas sure as heck didn’t match the facts on the ground as we know them.

The Facts on the Ground

Here are a few of the more salient stats available to us last week…

The bean counters at the Department of Labor tell us only 18,000 new jobs were created in June. This dismal figure misses the analysts’ guestimate by some 83%! Contrary to ADP’s happy talk, unemployment actually climbed to 9.2% last month.

From the folks at employment consultant Challenger, Gray and Christmas, we hear that U.S. firms are actually increasing planned layoffs for the second month in a row:

The hiring picture is a little cloudier. While the government attempts to enact policies that will spur job creation, it really comes down to consumer and business demand for products and services and, right now, that demand remains relatively weak. Any progress made on the hiring front will appear anemic due to the fact that we started in such a deep hole.

Empty Wallets

The American Bankers Association warned us that more shoppers were falling behind on their credit card bills in the first quarter of 2011, reporting, “Bank card delinquencies rose 12 basis points to 3.40 percent of all accounts compared to the previous quarter, but remain well below the 15-year average (3.95 percent) and below where they stood one year ago at 3.88 percent of all accounts.”  

According to ABA Chief Economist James Chessen: “Rising gas and food prices took a big bite out of family budgets in the first quarter of 2011… With a slow-growing economy and weak job growth, there will continue to be financial stress that will make it hard for some people to pay their bills on time.”  

A recent Harris Poll noted 67% of American shoppers are cutting back at the mall and grocery store; the poll listed the top ten ways respondents are trying to save money.

Stocks Eat a Bullet

On the stock front, analysts across the board are warning that all this parsimony will plow headlong into corporate gains for the current reporting quarter. Two quarters ago, we saw a 37% increase in earnings as we busted clear of the worst recession in recent memory. Last quarter, that figure was down to +18%. This quarter, the optimists are calling for a 13% gain at best.

Problem is, that crazy rally we saw on ADP’s bogus hiring numbers drove the Dow to 12,753.89. That’s a 7.41% gain since mid June, more than 30% since last July, and more than 90% since the dark days of March 2009.

So what happens when a drunken market trips over a big ole wad of ruination like that?

First, it stumbles, just as it did this week when it negated most all of the previous week’s action…

And Then it Falls
Because all of this proves, once again, that while the Axis of Weasels can bend the market for an hour, a day, maybe even a week, it can’t truly turn a market that is finally confronting the truth about its dire circumstances.

Next stop: Dow 11,635.

Take care,

adam english sig

Adam English
Editor, Outsider Club

follow basic @AdamEnglishOC on Twitter

Adam’s editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor’s page

*Follow Outsider Club on Facebook and Twitter.