StreetSmartPost

Friday, December 11th, 2009. 9:15 a.m.

After every serious bear market in history Congress, and the financial sector regulators, have expressed shock when investigations revealed how blatantly Wall Street and the big banks had gamed the system to take advantage of public investors in the run-up to the peak before the downturn.

Every time Congress and the regulators have vowed to make changes that would prevent it from happening ever again.

Every time Wall Street firms and the big banks have poured $millions into lobbying Congress to have the regulatory changes watered down, making sure they leave loopholes through which they can later drive their armored cars full of loot.

Once in awhile, regulations are passed that actually have an effect on at least some areas of abuse. But, those are left in place only until Wall Street needs them changed, which is usually just when the regulations will be most needed.

So for instance, after the 1929 crash we saw Congress pass the Glass-Steagall Act to separate the financial activities in which banks, brokerage firms, mutual funds, insurance companies, etc. could operate, thus preventing some of the major abuses of prior years.

But in 1998, when banks saw the huge profits being raked in by brokerage firms, mutual funds, money management firms, etc., and brokerage firms recognized the huge profits that could be made from providing banking services and packaging mortgages and other loans into leveraged derivatives that could be sold to investors, the financial industry began lobbying Congress to have major parts of the Glass-Steagall Act repealed. And Congress did so in 1999.

Also in an effort to prevent another major cause of the severity of the 1929 crash, Congress and the regulators instituted the ‘up-tick’ rule on short-selling. That prevented traders and firms from continuing to drive a declining market down further and faster than it would normally go by relentlessly selling short.

Interestingly Wall Street lobbied for the abolishment of the uptick rule in 2007, and it was rescinded with exquisite timing, in June, 2007, as the 2007-2009 bear market got underway.

It was also interesting that last year, when short-sellers were aggressively selling the stocks of the major banks short,  the regulators rushed in and said, “Oh no, you can’t do that”, and a new rule was quickly made, with a list of some 85 financial firms that investors and traders could not sell short, because it would be detrimental to the financial sector and system. But, in spite of loud calls for re-instituting the ‘up-tick’ rule, nothing was down. It was apparently alright to sell them short without limit, even though it could be detrimental to their survival.

After the 1987 crash, restrictions were placed on program-trading, a new innovation that had resulted in the major Wall Street firms flooding the declining market with heavy waves of sell-programs, driving the market down into an even more severe one-day crash that was seen in 1929. But the NYSE requested in 2007 that it be allowed to eliminate most of those restrictions, and the SEC granted the request.

So now, Congress is debating a financial sector overhaul bill this week. Wall Street firms, including major banks, have been lobbying Congress all year to make sure the changes are watered down. And already the loopholes in the proposed overhaul can be seen.

I’m running late this morning, so more on the subject tomorrow morning.

Yesterday in the U.S. market.

Another positive day. So far this week, the market has been down 2 days and up two days, which has the S&P 500 down only 3 points, or 0.3% for the week so far in this frequently negative week before the quarter’s quadruple-witching expirations week.

The performance of the indexes relative to each other continues to indicate a shift away from riskier holdings to more conservative stocks, with the Dow and S&P 500 gaining more than the Nasdaq and Russell 2000.

The Dow closed up 68 points, or 0.7%. The S&P 500 closed up 0.6%. The NYSE Composite closed up 0.5%. The Nasdaq closed up 0.3%. The Russell 2000 closed down 0.4%. The DJ Transportation Avg. closed up 0.3%.

Asian markets closed mostly higher last night. 

The DJ-Asia index closed up 0.9%.

Among individual countries;  Australia closed up 0.6%. China closed down 0.2%.  Hong Kong closed up 0.9%. Japan closed up 2.5%. India closed down 0.4%. Singapore closed up 0.7%. South Korea closed up 0.3%. Taiwan closed up 1.5%.

NOTE: If you’d like to see charts of how these and other markets have performed for the week so far, month so far, and last 3-months, click here, and click on any of the market indexes at the left side of the page it takes you to.

Markets this morning:

European markets are up quite strongly again this morning, about 1% on average.

Oil is up $.41 a barrel at 70.90 at the moment, but has lost its upside momentum since mid-October when it reached $81.37.

Gold is up $15.60 an ounce at $1,142, after hitting a new intraday low for the pull-back yesterday at $1,121 an ounce.

Subscribers: A ‘Gold, Bonds, Dollar, Inflation’ update is in the subscribers’ area of the website from yesterday, and an in-depth intermediate-term ‘Stock Market Signals and Recommendations’ update from Wednesday.

In the U.S.

The Retail Sales report for November was just released, and showed sales unexpectedly surged up 1.3% in November, almost double the consensus forecast of a 0.7% rise. A super number.

The final economic report for the week, Consumer Sentiment, will be out at 9:55 a.m.

The retail sales report had little influence on our early morning indicators, which had been fairly positive for several hours, but have actually weakened since the report.

Our pre-open indicators are pointing to the Dow being up 25points or so in the early going.

Stock Market Patterns.

The ‘monthly strength period’ was due to end last Friday, and did so.

This week is the week before this quarter’s quadruple-witching expirations week, and the week before tends to be negative, but has been only fractionally so to yesterday’s close, with the S&P 500 down only 0.3% for the week so far.

The next pattern is that next week is the expirations week, and it tends to be positive, particularly if the week before is negative.

Interesting Chart of the Morning.

The previously hot bank sect
or has certainly been cooled off since October. Down yesterday even as the rest of the market closed up. The S&P 500 Bank Sector, is down 11% since its October peak.

Another important previously hot area of the financial sector, the brokerage firms, have a similar appearance.  It does not look like the financials will lead the next leg up.

Please scroll down to see other recent ‘Interesting Charts of the Morning’.

To read my newspaper column of last weekend ‘The Economic Recovery is Looking Stronger Every Week!’ click here! It will be replaced with this weekend’s column tomorrow morning.

NOTE: Although tomorrow is Saturday and the markets are closed, I will be back in the morning with a wrap-up of today’s market action, and the week’s, and an outlook for Monday and next week.

Subscribers: A ‘Gold, Bonds, Dollar, Inflation’ update is in the subscribers’ area of the website from yesterday, and an in-depth intermediate-term ‘Stock Market Signals and Recommendations’ update from Wednesday.

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