Preparing for Re-Entry

Shawn Baldwin form CMG (Chicago) discusses capital markets and capital management




March 18 Commentary


“Bewares the Ides of March…” the ancients forewarned and from the looks of the U.S. equity market as of late these warnings would seem to be incorrect given the gains. Or, so at least, it would seem to the uninitiated. Do not reinvest your life savings in the market yet, my friend, because this clearly looks like a bear market rally. Let us examine the details.


At the end of October I instructed the readers of my commentary to take a hiatus from momentum trading due to what I saw as extreme, gut-wrenching volatility that would be coupled with a strong short sentiment going forward for an undetermined time. My direct advice was that if you weren’t able to sit on your positions without looking at them for 3 to 5 years—that this wasn’t the time for you to be in the markets. In November, my oft stated ,oft used and trusted (read loved) indicator of over a decade failed me—the formerly all important Vix. The Vix is the indicator of volatility and for the first time in my career it no longer correctly gauged investor sentiment. I often wondered to myself if I and so many others hadn’t negated it’s effectiveness by making too many people aware of its existence. Since I no longer had that little monkey wrench in my back pocket, I decided that it was time to focus on other things and allow some normalcy to come back. So I drifted, out away from the S+P, 500 and the Nasdaq no longer attentive to CNBC….my thoughts floated off into space and away from my orbit of the last 15 years of the: U.S. Equity Markets.



However, even hiatus in deep space can’t last forever. Market conditions have now changed. The factors necessary to establish a foundation for a strong bull run are forming. It is close to time for Re-Entry.


 In this commentary I will outline the factors that will aid the flailing market along with the detrimental issues that will have a drag effect on potential success. There are many positive and negative factors to discuss that have hindered traction and maintaining of the markets in positive territory. We will examine the market to determine trend and magnitude before we begin taking positions. We will also determine the necessary mechanisms and actions needed to generate positive returns macro-economically with an academic perspective. The rigor must begin with a discussion of the tactical points.




In October, I bemoaned the stupid ban on shorting and the even more ridiculous elimination of the Uptick Rule. I saw, as anyone else who trades for a living saw, that this would be the demise of positive pressure on the markets. The short sellers have to cover their bets. Short covering (buying) creates tremendous positive pressure on the markets. This is absolutely necessary if you want to see the broad market rise, the lack short covering causes the contrary—no buying. Sorry Mr. Cox, you clearly never read Bernard Baruch’s book or studied Jesse Livermore (please Google if you don’t know who they are–additional reading and investigation is a requirement here) — we are so glad that Mr. Cox has departed.


The Uptick Rule more formally known as 10a-1 was implemented by none other than our first SEC Commissioner – Joseph P. Kennedy, Sr.  Kennedy was appointed by Roosevelt himself, aside from his skills at being a master bootlegger, Mr. Kennedy was also a master market manipulator who shorted the market heavily in 1929….that’s right… just before the crash in 29’ -of which he either caused or greatly exacerbated. In either case, Roosevelt decided that it would be most prudent to put the fox in charge of the henhouse, lest he have to worry about Kennedy ravaging the markets again. So he pleaded with him to be the first commissioner since Kennedy knew every trick in the book when it came to market manipulation. Luckily for us he accepted. One of the first things he did was put the rule in place in 1938, mainly because he was aware of its power to decimate value. I guess the guys at the SEC weren’t students of history. Probably didn’t see a need to review. Unfortunate.


 The essential tenet of the Uptick Rule is that it mandates that a stock can only be sold short at price higher than the immediate sale. This negates complete negative pressure and what is known as a “Death Spiral”. When this rule was eliminated it allowed complete hammering of prices without relief. A very stupid move with a market full of leverage hungry capital wielding short-sellers, there was absolutely no relief from the pounding. The return of this rule next month will dramatically reduce the power of the bears in driving down prices and inducing fear. When that rule is implemented, more institutional investors along with medium and long term investors will return. Bet on it.




The demise of Glass Steagall came after years of deregulation doctrine aimed at freeing markets started in the 1980’s by the Reagan era Republicans. The Glass Steagall act was passed in 1933 to reduce and control speculation along with keeping banking, insurance and securities separate. The Act also established the Federal Deposit Insurance Corporation (FDIC). The very specific purpose was to prohibit a bank holding company from owning financial companies, therefore reducing systemic risk. Gramm-Leech-Bliley 1999 (yes that would be the same Phil Gramm who said that the “recession was in our minds”) sufficiently repealed the act. This was powered by the efforts of Sandy Weill who cobbled together Primerica, Citibank and Traveler’s to fulfill his dream of a financial supermarket which he culminated into the behemoth known as Citigroup.


Given the heavy focus on government and regulation by the Obama administration—we can say with clarity and surety that a version of Glass-Steagall (GSII?) will be resurrected to assuage the masses and induce trust among the American public. President Obama and his team will want to fully assure the people that Wall Street Masters cannot use leverage and light rules to destroy the financial landscape under their watch.


Those future terrors will have to be constructed offshore but that is another commentary unto itself so I will not digress. Let it suffice to say that the GSII will adequately eradicate much of Gramm-Leech-Blilely. To that trois’ the bulls will bid them a Bon Voyage!




Uncertainty played a tremendous role in market demise in the 4th quarter of 2008. I outlined in September one of the little known instruments (at that time) that I believed would cause tremendous damage in the markets—the CDS mainly because of it’s prolific growth, uncertain clearing process and lack of awareness or understanding.  That assumption turned out to be right. We will outline the particular factors that will be the levers in the ratcheting up of the market.



About the author

Shawn D. Baldwin is Chairman of the AIA Group (AIA), an alternative investment and advisory firm based in Chicago.