Wow, the end of another wild week in the markets!
It's been a rocky one for us as we got a little too bullish and have been punished for it but I still believe that THEY are not going to let the dollar fall to 70 and we will have a Deux ex machina come down from the heavens and save the markets. While I realize that this is not the kind of solid fundamental reasoning that is going to help you sleep well at night with your open calls under your pillow, I have to view this very much like when I have to tell my children there are no monsters in the closet. How do I show you no monsters?
As I mentioned in last night's article, it is very easy to scare investors by telling them that horrors await them at every corner. This is the type of thing rich people like to tell poor people while they buy up all of their assets. Believing there are no monsters requires the same act of faith that believing that there are angels entails as neither one is very likely to pop out from under your bed on the average evening but why are we, as a society, so much more willing to believe in bad things than good?
Dr. Brett has written exensively on the subject so I won't get into it here but I will say, very simply, that as a fundamental analyst – we are way past the point of reasonable concern about the markets and the financials in particular. BSC did not fall apart over fundamentals, Bear has a good, old fashioned run on the bank that turned them from solvent to insolvent in a matter of just seven days.
Any bank is subject to a liquidity crisis if more than 10% of the investors, if only 5% of the investors, ask for their money back because it just isn't readily on hand. As Jimmy Stewart points out at the Baily Building and Loan when the townsfolk are panicked into demanding their money back by the evil Mr. Potter (who just so happens to look just like our Treasury Secretary!): "you're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house -right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?"
That is EXACTLY what is going on here, the moneyed wealth of this country has an extremely vested interest in converted the massive influx of cash that has been transferred to them over the past 7 years into the only asset they really trust – real estate, and they want real estate, and interest rates, to go as low as possible so that they can buy the homes, land and businesses that they sold to you for the past 20 years back for the same price they sold them to you for 20 years ago. This is a cycle that endlessly repeats itself all over the world but point it out in this country and your patriotism is called into question…
Any student of the markets will tell you that the great money to be made at the market comes at the troughs, not the peaks – so why is so much of the media's energy being put into telling you to get out at the bottom (or possible bottom). Don't get me wrong, panic is a very powerful thing and these sell-offs can become a self fulfilling prophesy but my take on the global economy indicates that the hyenas have miscalculated the move and that a combination of runaway US debt and a liquid global economy is going to prevent the blow-off bottom they are working so hard to foment.
Consumer spending came in weak today but how can that not be expected when we have record low consumer confidence. Even so, the number, up 0.1%, was better than the down 0.1% expected and personal income was UP 0.5%, high enough to be a little inflationary and indicative of a still-strong job market. JCP cut guidance and is tanking the retail sector pre-market but this is again based on consumers buying into the doom and gloom outlook more so than based on any real change in economic conditions.
It is oil and oil alone that is choking the life out of the economy and that bubble is very close to popping as THERE IS NOT ENOUGH MONEY IN THE WORLD to support $110 barrel oil without some massive inflation that will, in turn, make the oil not one penny more "valuable" than it is now, which is $60 a barrel worth of 2004 dollars. Energy investors are merely fooling themselves by projecting an every weakening dollar as future profits while ignoring the massive underlying cost increases that are crippling the integrated majors. We've shorted XOM, SU, OIH and USO this week and it's time to take another look at a long put on the XLEs, as the June $76 puts are very attractive at $6 and we can immediately sell March 31 $73 puts against them for .75 (HGHOU).
The Shanghai compostie jumped back 5% on rumors that the BOC would intervene (they haven't yet) and the Hang Seng ran up 621 points into the 2.5% rule while the Nikkei gained another 215 points for a nice finish to the week. Japan's inflation hit 3.9%, the most in a decade but that's good news in a deflationary economy except that, like US, it's all about the oil.
Europe is mainly flat against the US open and now British Airways is canceling dozens of flights due to baggage delays at Heathrow (or maybe they don't want to admit they are checking their planes too). Either way, that's a whole lot of jet fuel that won't be used in next weeks inventory report so let's keep an eye out! The ECB continues to pump a steady stream of money into the banking system but, as I said earlier in the week, we need to see how the markets go when they are not fueled by a steady stream of Central Bank funds.
We should have a decent day today with end of quarter window dressing that should continue through Monday morning and, if we continue to be weak, I will become a little more concerned. My premise is that this is nothing more than fearful investors being shoved out of their positions by the people who are looking to move all that deflated cash off the sidelines and back into assets but, as we learned in the 30s, these kind of things CAN snowball out of control.
We need a line in the sand to be drawn by our Machine God – it's going to be a hell of a finish!
