Toto, this certainly isn’t Kansas anymore?!

Jeff Saut has been disciple of the markets for more than 30 years. He is well known for his insightful and colorful stock market commentary when appearing on various shows on PBS, CNBC, Bloomberg, Fox, NPR, as well as local radio and TV networks. He is often quoted in publications such as The Wall Street Journal, New York Times, Barron’s, Washington Post, Business Week, U.S. News and World Report, Fortune, and SmartMoney, as well as on Web sites such as and


“Toto, this certainly isn’t Kansas anymore?!”
… Dorothy from the “Wizard of Oz”
November 17, 2008

The holiday season officially began at the Saut household last weekend, for as I sat down in front of the TV to catch up on some overdue reading, the movie “The Wizard of Oz” appeared. Followers of our work know that three movies really put us in the holiday mood. “The Wizard of Oz” is always first, as well as prior to Thanksgiving. Following Turkey Day comes Frank Capra’s 1946 Christmas classic “It’s a Wonderful Life,” whose theme of a collapsing bank threatening to leave its president George Bailey destitute should resonate with participants as well today as it did in 1946. Finally, usually a few weeks before Christmas, comes George Seaton’s 1947 movie “Miracle on 34th Street.” This morning, however, we focus on “The Wizard of Oz.”

While most people know “The Wizard of Oz” as one of the most popular films ever made, what is little known is that the book was based on an economic and political commentary surrounding the debate over “sound money” that occurred in the late 1800s. Indeed, L. Frank Baum’s book was penned in 1900 following unrest in the agriculture arena due to the debate between gold, silver, and the dollar standard. The book, therefore, is supposedly an allegory of these historical events, making the events easier to understand. In said book, Dorothy represents traditional American values. The Scarecrow portrays the American farmer, while the Tin Man represents the workers, and the Cowardly Lion depicts William Jennings Bryan. Recall that at the time Mr. Bryan was the official standard bearer for the “silver movement,” as well as the unsuccessful Democratic presidential candidate of 1896 who gave the “Crucified on the Cross of Gold” speech at that year’s Democratic National Convention. Interestingly, in the original story Dorothy’s slippers were made of silver, not ruby, implying that silver was the Populists’ solution to the nation’s econ omic woes. Meanwhile, the Yellow Brick Road was the gold standard, and Toto (Dorothy’s faithful dog) represented the Prohibitionists, who were an important part of the silverite coalition. The Wicked Witch of the West symbolizes President William McKinley; and the Wizard is Mark Hanna, who was the chairman of the Republican Party and made promises that he could not keep. Obviously, “Oz” is the abbreviation for “ounce.”

Plainly, the turmoil following the “1873 Coinage Act,” the “Sherman Silver Purchase Act of 1890,” and the subsequent panic, and depression, of 1893 left the phrase “time for a change” swirling across the country as citizens struggled to correct the numerous wrong-footed plans/schemes that were so hastily conceived by the country’s then elected “nimnods.” If that sounds familiar, it should, because as repeatedly noted in these missives following the Bear Stearns bailout a similar series of hastily conceived reactive, rather than thoughtfully conceived proactive, “plans” have been enacted only to subsequently find that they should have been constructed better. That happened again last week as Treasury Secretary Hank Paulson abandoned the Treasury’s plan/scheme to buy toxic assets under the original TARP legislation in lieu of “capital injections.” Ladies and gentlemen, this is a stunning reversal by “stammerin’ Hank,” who made “toxic asset” purchases the centerpiece of the $700 billion Troubled Asset Relief Program (TARP). His switch-and-bait tactics caused “howls” from Congress about how ANYONE can be rational when the “powers that be” change the rules of the game at whim?!

Change the rules indeed, for eliminating the short-sale “uptick rule” was one of the dumbest decisions I have seen in 38 years in this business. Of course it would not have been so bad if “they” would have strictly enforced the no “naked shorts” provision; but alas, for while there was much lip-service paid to this dirty little secret of Wall Street, not much has been done to correct it. Adding insult to injury, overnight “they” eliminated the ability of participants to sell-short nearly 800 different companies’ shares, some of which were NOT even financials; and then there was the $140 billion tax break for financials that “they” snuck by under the TARP legislation. Adding to the manipulative environment was the billions of dollars worth of pork-barrel spending, as well as “earmarks,” which also missed the radar screen. Or how about this game changer – according to The Wall Street Journal, “The New York Stock Exchange has begun allowing floor traders known as specialists to place orders for 30 minutes after the market closes in an unprecedented effort to deal with the wild swings in stock prices that have been occurring in the last minutes of trading.” Blatantly, this “game changer” is designed to manipulate stocks to show higher closing prices. No wonder the volatility has increased as participants are uncertain what “rules of the game” will show up tomorrow.

The ever changing rules have left retail investors disgusted, and liquidating positions, the hedge funds have been eviscerated, having lost half of their assets and likely to lose more, the mutual funds are getting net redemption, which leaves the buyers of last resort only those folks with “permanent capital,” namely pension funds and Warren Buffett. No wonder the volatility is legend; and, last week was no exception as we lost 660 points over the first three sessions of the week, rallied 552 points on Thursday in what looked like a one-day upside reversal, only to give much of Thursday’s triumph back in Friday’s last hour of trading where the senior index shed 449 points in just 45 minutes. While much of the final hour machinations were attributed to rumors that Congress was not going to bail out Detroit, the late-day dive was pretty disconcerting. Still, we are sticking with the view that October 10th represented the capitulation price lows when of the 3130 stocks that traded on the NYSE, an unbelievable 2901 of them made new yearly lows combined with 16-to-1 downside over upside volume. We also opined that the psychological lows were made on October 24th. That said, we have never given up on a full downside retest of the October 10th lows, which is why we have tended to use a hedging strategy for trading and investment positions. As often stated, in downside retests 60% of the time the previous lows hold; the 40% of the time they don’t stocks go lower, but not by much.

Obviously, we thought that was the case last Thursday when the S&P 500 (SPX/873.29) breeched its October 10th intraday low of 839.80 and went lower, but not by much. Reinforcing that view was the fact that the DJIA (8497.31) did NOT breech its respective October 10th intraday low of 7882.51, setting-up the potential for a huge downside non-confirmation. Moreover, of the 3268 stocks that traded on the NYSE, only 776 of them made new yearly lows in Thursday’s session. Interestingly, the DJIA/SPX’s pricing action since October 10th has traced out a spread triple-bottom in the charts. Often a strong move “up” from a third downside test, like we saw last Thursday, tends to develop into a strong rally as participants are caught in a “bear trap.” defines “bear trap” as, “A situation that occurs when prices break below a significant level and generate a sell signal, but then reverse course and negate the sell signal, thus ‘trapping’ the bears that acted on the signal with losses. A bear trap in another form of whipsaw.” Hopefully, that is what we experienced last week. This week should resolve that question.

The call for this week: The stage version of “The Wizard of Oz” begins at the Warner Theater in Washington D.C. on December 2nd. If past is prelude it will be a sellout. Why is Frank Baum’s play so popular in the nation’s capital? Our sense is that it’s because people inside the Beltway easily relate to fantasy! That’s why “they” continue to proffer reactively considered “schemes” rather than thoughtfully crafted proactive “plans.” Given the ever-changing “rules of the game,” no wonder the equity markets are having such a tough time gaining any upside traction, which is why we continue to employ a hedging strategy, as well as the strategy of being the “second mouse that gets the cheese.” Nevertheless, we are treating October 10th as the capitulation panic low (until proven wrong) and remain hopeful that last week represented a triple-bottom in the charts for the DJIA and SPX. Further, the Commodity Research Bureau Index (CRB) recently registered a similar “capitulation low” reading. According to the institutional service “Chartworks,” “There have only been five instances (of this) since 1956. In each occurrence, once prices reversed up by producing a week with a higher high the index took no more than six weeks to reach the 20-week moving average.” Obviously, if the CRB is ripe for a rally, it would benefit the high-yielding commodity-centric convertible securities we have been recommending, as well as the Canadian dollar.

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