Funny how hope works. It can drag you into doing things you wouldn't normally do, because you hope that what seems impossible might actually be possible. That sounds like what happened to many of Bernie Madoff's clients. They turned their money over to his securities firm on the hope that what he claimed he would do – make money on investments in both up years and down years – was actually possible.
Now, hundreds of these same people sat in a packed auditorium in Manhattan this week to hear the unhappy truth from the trustee liquidating Madoff's firm: For the past 13 years, it appears that Madoff never bought or sold any securities. He simply took money from new clients and gave it to old clients – the classic Ponzi scheme.
The trustee also mentioned that although investors should be eligible for $500,000 recompense under the Securities Investor Protection Act, if records show that an investor has received more money in payments than he or she had put into the firm, that investor won't be eligible for the $500,000. In fact, that investor will have to return the excess payments in what is known as a "clawback." As the trustee's law partner put it, “We will be seeking to recover false profits from people who received them in substantial amounts over the years. You have to think of it this way: It’s your money.”
Or at least it was their money. Now most of it is gone with the wind. Their hope was completely unfounded. In his most recent Elliott Wave Theorist, Bob Prechter writes about that same kind of hope and optimism shining forth as the markets continue to tumble. It's human nature to hope for the best, but, in this excerpt, he points out that hope can also turn into complacency – and that's when the bear's claws clamp down.
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The stock market is an animal of terrible beauty. Watching it work is like glimpsing an owl swoop down and grasp a mouse in its claws or watching a shark hone in on its prey. Its motions are efficient, and its dead eyes convey no emotion.
For a dozen years, from 1995 to 2007, a vicious bear, disguised as a siren, whistled and sang to its future victims, drawing them into its den. It is still whistling and singing, but only when it has the time to breathe between bites of feasting.
The December 2008 issue of The Elliott Wave Theorist discussed one of the faux siren’s sweetest-sounding songs: the hope – expressed throughout the media in stunning excess – that the market had bottomed and that President-elect Obama would save the economy. Economists were so bullish in December that two polls asking them to make predictions for 2009 registered not one bear; the average prediction for the Dow was for a double-digit gain of 17 percent. Positive mood among short-term investors became so extreme that the put/call ratio last month fell to levels it had not seen since December 2007, when the Dow was only 3 percent from its all-time high and just before it swooned 2000 points in six weeks and 46 percent in less than a year.
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Back in April 2008, a New York Times/CBS News poll showed that only 39 percent of Americans believed that “things” would be better in five years. Early this month, the same poll shows that 61 percent of them believe it. This Fibonacci switch (from .382 to .618) is another manifestation of the change toward optimism reflected in the sideways trend of stock prices from October 10 to January 6.
This re-blossoming of optimism peaked just in time for the market to have its largest early-January decline on record. Even so, the positive sentiment has hardly abated. A headline from the U.K.’s Daily Mail (1/17) reads, “Obama can save us, says America as polls show new wave of optimism.” USA Today (1/22/09) announces: “Country’s optimism swells as Obama takes oath.” The article cites the very latest poll: “By nearly 6-1, those surveyed Tuesday in a USA Today/Gallup poll say Obama’s inauguration has made them feel more hopeful about the next four years.” Other articles have graduated to calling him a “savior.” In Obama’s first speech as President, he made a statement that is 100 percent accurate: “We have chosen hope over fear.”
Perversely, which is to say characteristically, the market kept its victims disoriented by sliding right through the Presidential inauguration. Whenever complacency reigns, the claws close and the shark bites.
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The Elliott Wave Theorist. Bob will publish his latest Theorist next week. You can be ready to receive it by signing up now and getting last month's issue.
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