Fall Down Friday – Stop the Week, We Want To Get Off!

January 22, 2010

1214

Boy, when sentiment shifts – it REALLY shifts!

Suddenly nothing is good enough for this market. A beat from GOOG send the stock plummeting, massive earnings at GS sent the stock lower even before Obama read them the riot act (now called the "Volker Rule"). On the one hand, it’s all an overreaction but, on the very large other hand, it’s about freakin’ time this market finally acted normally and pulled back a little because 10,700 was pretty irrational given the underlying fundamentals.

On the whole, we’re loving it as we went to cash last week and played bearish into the drop. Last week I detailed how we had a great time day-trading in both directions and this week we hit it again with our upside DIA play on Wednesday (a 26% winner on the day) and yesterday I sent out a morning Alert to Members at 9:50 saying: "I am for shorting into this morning spike as it’s nonsense, especially this run in the Nas – most likely it will reverse but I’d like to see a clear move back to resistance first. QQQQ $45 puts give you great leverage at .56 and you can use $46.20 on the Qs as a stop out, looking for .70+ on the day." We hit .85 by lunch and pulled it just off the day’s high for a nice 51% gain on the day.

I point this out both to encourage you to subscribe to our Newsletter (all 19,000 subscribers got yesterday’s free Alert) as well as to emphasize that WE DO NOT CARE which way the market goes. Yes, I am very bearish on the short-term economy as I feel we are overbought and due for a correction but I also think we are probably OK over the longer term and we are taking advantage of these dips to pick up some long positions. We are opportunistic players and we are investing along the premise I laid out in my 2010 outlook, which was titled "A Tale of Two Economies" as we see a great divide forming between the top 10% and the companies that service them and the bottom 90% of our population who are in dire straights, as are the companies that rely on selling to the masses to make a living.

For an example of "Rich Company/Poor Company" just look at the earnings of two ends of the Financial Services sector: Goldman Sach beat earnings expectations yesterday by 60% ($8.20 vs. $5.20) while Interactive Brokers, who service the "lower end" clientelle, missed by 72% (.06 vs. .22) on 53.3% lower revenues. This was exactly what we expected as the rich, serviced by Blankfein and Co., got much, much richer last year while retail trading volume (as we often point out) ground to a halt, punishing the brokers who service the masses.

UNP beat on earnings but had 12.4% less revenues than last year – an last year was AWFUL! BNI also reported yesterday and their revenues are down 15.8% – this is a recovery? Just like in the Great Depression – there are plenty of empty rail cars for homeless people to move into. IIIN saw 33% less revenues, LUV down 8%, XRX down 3.5%… While people are buying far less commodities than last year, dumb, rich speculators are paying 2-300% more for them and that has pumped FCX’s revenues up 123% – EVEN THOUGH THEY SOLD 21% LESS COPPER! That’s right, you may feel like you are being fleeced by Wall Street crooks but our dumb mistakes don’t hold a candle to the wealthy suckers who get conned into coughing up their hard-earned cash in exchange for shiny bits of metal at random price spikes while pretending the laws of supply and demand have been repealed.

Speaking of demand, or lack thereof, we had another disappointing oil inventory yesterday with a MASSIVE 3.9M barrel build in gasoline despite the lowest level of refinery output (78%) since 1987. Now, I don’t want to make it sound suspicious but I went to find a clip of the CNBC segment where they,at 3:50 yesterday, gave an oil report which omitted the build in gasoline but, surprise, it’s been deleted. Also missing from CNBC’s page is the 11 am oil report where they cut the archives at 59 seconds and have no follow-up clip until 11:05.

At least I was able to dig up Sharon Epperson’s report direct from the NYMEX at 4pm in a report titled "Oil Tomorrow," surely she will give us the facts… Oops, no, not a single one. You would think it’s hard to give an entire 2 minute report on oil on inventory day without mentioning the inventories but Sharon pulls it off like a pro and tells us all about the draw in natural gas. This is why we call them Criminal Narrators Boosting Crude – if you think the Volker Rule is harsh, just you wait until the Davis Rule on commodities comes out!

Speaking of rule changes – the Supreme Court has effectively overturned the 2002 McCain-Fiengold Campaign Reform Act that was meant to restrict soft-money donations by corporations and limit political advertising by corporations and has now given corporations sweeping rights usually reserved for individuals. As Rob Warmowski neatly summarizes: "Already deeply corrupted at every level by influence of private interests, with this decision, the entire political and electoral communications process will be placed directly in the manicured hands of big business. The millions of corporate dollars that once stood between you and your government will be fondly remembered after they are replaced by billions of corporate dollars."

Next time you think it doesn’t matter what kind of President you elect and what kind of Supreme Court that President will empower, remember this day because we just handed the keys to government back to Corporations. In his dissent, Justice Stevens wrote: "The Court’s ruling threatens to undermine the integrity of elected institutions across the Nation… Going forward, corporations and unions will be free to spend as much general treasury money as they wish on ads that support or attack specific candidates, whereas national parties will not be able to spend a dime of soft money on ads of any kind. The Court’s ruling thus dramatically enhances the role of corporations and unions—and the narrow interests they represent—vis-à-vis the role of political parties—and the broad coalitions they represent—in determining who will hold public office."

Of course the good news is that we already know what we get when corporations and special interests take over the government – ROLLERBALL! So we have that to look forward to at least… In an interesting side note, funny how the awful 2002 remake of the movie deleted all references to the evils of corporate dominance over the common man – I guess they had trouble getting the original script funded… Speaking of lack of funding – Air America shut down in Chapter 7 Bankruptcy yesterday teaching us once again the valuable lesson that LIBERALISM DOESN’T PAY!

Japan was taken over by corporations long ago and the Nikkei dropped to the 2.5% rule today – something I predicted at 11:59 yesterday, when I said to Members: "Dollar was MURDERED on Obama’s speech. Now $1.414 to the Euro, $1.624 to the Pound and 90.22 Yen, which is really going to bum Japan out!" The dollar opened on the Nikkei under 90, which sent that index all the way back to 10,550 (finished at 10,590), wiping out all of 2010s gains in 90 minutes of trading. This is why we have fun being bears – it’s torture on the way up but then – WHEEEEE! You need a million reasons to take the market higher but, usually, just one can take it all back…

Nonetheless we did flip bullish yesterday as we hit our own 2.5% rule on the US indexes at Dow 10,432, S&P 1,119, Nasdaq 2,256, NYSE 7,263 and Russell 632. Absent of another major downside catalyst, we expect a bounce of at least 0.5% to test resistance to the upside and then we will have to wait and see which way things go but it’s likely we’ll be back to mainly cash over the weekend unless we get some high-volume consolidation today. On a low-volume move up, we’ll be taking the money and running – which has been an excellent strategy lately. China held up fairly well with the Hang Seng falling "just" 136 more points (0.65%) but the Shanghai lost a full point as did the BSE but we’ll be keying off the Baltic Dry Index, which has been barely holding on to it’s 40 WMA at 3,077. Below that spot and we may have a big leg down ahead of us across the emerging markets.

[GREECE] Europe is down about a point ahead of our open as Greece is forced to get real and offer a whopping 6.6% interest rate in order to entice investors to purchase $1.5Bn worth of bonds they need to sell in order to keep the lights on for another month. Not only that but they are being forced to do a road show to peddle the notes as Greek officials said they planned to sell the bonds globally, in part because demand in Europe was weak.

President Papaconstantinou will travel in late February to market the bonds to investors in Beijing, Shanghai, Tokyo, probably Singapore, New York and perhaps the West Coast, Mr. Papanicolaou said. If the US had to pay investors 6.6% on our $14Tn in debt, our interest payments alone would be $924Bn a year! Brave carry traders meanwhile, can borrow dollars and yen at 3% and make a nice $54M a year playing the 3.6% spread on $1.5Bn – not a bad way to play with other people’s money…

We got the good news we expected from both Google and GE but SLB was the disappointment we expected (great for our OIH puts) and even HOG missed on weak demand (not to many top 10% Harley riders). MCD is another Dow component reporting good numbers (our Happy Meal hypothesis) and a lot of the downside pressure is coming from fear and panic regarding the Volker Rule, which is very likely all sound and fury, ultimately signifying nothing and GS is one of our "buy on the dip" picks as will be BAC and, of course, C who are both banks that are big enough to make money from actually banking – rather than playing the markets.