Tumbling Tuesday – China, Korea and Europe, Oh My!

Man was yesterday silly!  

We ran with some upside plays out of the box but they died by 10:10.  I called the top at 10:12 when I pointed out to Members that 2,530 was Friday's top-out on the Nas and 2,532 was resistance going back to the Friday before.  By 10:54, the Nasdaq was back down to 2,515 and I said to Members:

Wow, that turned fast! What a joke that the Nas can pop from 2,500 to 2,530 in 30 mins and then all the way back down 30 mins later – as I said this morning – an untradable market unless you are a real cowboy day-trader.

Of course we ARE cowboy day traders and Mega Kudows to JRW, who called a move into TZA at $20.06 and a move out at $20.84 (4%) at 1pm.  My own 1:31 note to Members was: "Volume died at 77M on the Dow at 1:27, only 50M since 10am so very slow at the moment, which means we could start heading up again." And, of course, we did!  At 1:57, I added: "Meanwhile, Nas looks like it’s going to make another run back to 2,532 – just to make sure it’s totally obvious what a farce this market is…"  

Of course, at PSW, we don't care IF the market is fixed as long as know HOW it's fixed so we can play along at home.  As the Nas headed back to our 2,532 target (where they closed exactly for the day), we added the WEEKLY QQQQ $53 puts at .45, which was a play I called at 3:01 in Member Chat, while the puts were still selling for .55 – THAT'S HOW FIXED THE MARKET IS – WE KNOW OPTION PRICES AN HOUR IN ADVANCE!  

Speaking of fixed markets, the image on the left is from Bess Levin's well-titled "Insider Trading Festivus 2010" in which she suggests sending FBI strip-o-grams to the evil hedge fund of your choice "just to f*ck with them!"  Bess cautions fund managers not to assume that all FBI agents bursting through their doors are strippers as that can lead to some very awkward moments…  

Meanwhile, it's a Festivus for the rest of us (who are short) as the markets roll back over.  Of course, yesterday's insane market moves served to reinforce our "take the money and run" sentiment as we got a drop on the Dow all the way to 11,060 at 12:48 yet the Dow recovered 120 points into the close on weak volume that gave us the que to move in short – despite our bullish expectations for HPQ earnings (we sold puts earlier in the session).  

The Nikkei was up 1% this morning but the rest of Asia had a rotten day with the Hang Seng falling 627 points (2.67%) and the Shanghai off 56 points (2%) and the BSE down 265 points (1.33%).  This knocked the FXI below support and down to the 22 DMA at 42.67 (see David Fry's chart) and breaking that would be – BAD.  China is experiencing runaway inflation and Wen Jiabao's price controls are doing nothing to reign in the 54% increase in the money supply over the past two years – an amount our own Fed calls "a good start."  

Bloomberg has an article today with this little anecdote:  

Standing near his 12-table noodle shop on Beijing’s Yonghegong Avenue, owner Liu Heliang says meat and vegetable prices have climbed 10 percent in a year and staff wages are up 40 percent.

“I’m struggling to make ends meet with costs going up like this,” said Liu, a native of Sichuan province who pays his workers as much as 1,800 yuan ($271) a month, or 88 percent more than the Beijing minimum wage, to serve up a staple Chinese meal. “Raising prices is the only way out,” he said, predicting he won’t be able to hold out beyond two months.

I mean, really people, how is a man supposed to run a successful business when he is forced to pay his workers close to $10 a day?!?  This is why we must protect the business owners in THIS country before our own workers start getting funny ideas about being able to afford to eat the food they serve or buy the things they make…  This is a great example of why China's growth is unsustainable.  Just the way Egypt's growth was unsustainable 3,000 years ago because it was based on slavery, China's growth also reaches a breaking point if the workers are no longer willing to accept their lot in life.  

Paying a worker $271 a month (and that dollar matters when it's only $271!) for 160 hours of work (and you know it's more than that) is $1.70 per hour or about what I made as a busboy in 1976, when my plan was to buy a brand new VW Beetle for $1,999.  That's why Tata motors has cars for $2,499 – that's what the market will bear over there!  Of course, in 1976 gas was $1 per gallon and we'd put 6 kids in that VW and $1 each would get us to the shore and back and another Dollar would pay for lunch so I was happy to work one hour to pay for a day off and save the rest.  Modern workers are not so lucky as they work all 40 hours of the week just to buy necessities and spend their free time praying nothing happens that will force them to borrow money.  

“They are just not addressing the fundamental problem at all,” said Patrick Chovanec, an associate professor at Beijing’s Tsinghua University. With the expansion of credit and cash in the economy stemming from China’s response to the global crisis, “you’re sitting on a volcano,” he said.  China’s plans to rein in prices include selling state food reserves, stabilizing the cost of natural gas and cracking down on speculation in and hoarding of agricultural products, the State Council said. The aim is to damp food inflation that reached 10 percent in October, more than twice the 4.4 percent headline rate.

If you think you don't have to worry about whether or not Chinese workers can afford a Big Mac, think again.  The myth of infinite Chinese demand is what's spurring the speculative rally in America.  Since the people PHYSICALLY cannot afford price increases, margins are being squeezed and sales are dropping fast.  Bloomberg points to another example of an apple seller whose prices went up 60% which led directly to a 60% drop in sales – all this is right on the money with my call on the 2010 outlook I made last year – it's "A Tale of Two Economies" and the wealthy investing class simply does not see (or does not want to see) the abject suffering of the working class – whether it's Chinese or US workers, as the situation reaches a breaking point.  

Even the mighty US consumers are nearing the breaking point with just 15.7% of holiday shopping completed by the week ending Nov 14th compared to 20.5% at this time last year and 28.3% in 2008 – the last year we had a "healthy" economy and when 10M more people had jobs and 4M more families had homes to put a Christmas tree up in.  

Food companies are still reeling from lower sales volumes that began in 2008 with what some dub "pantry deloading." Over the past two years, the number of items kept in American pantries has fallen about 20%, according to a recent SymphonyIRI survey. Consumers are also cutting back on the range of goods they stock.The average household had 369 unique items in its medicine cabinets, pantries and cosmetics bags this year, compared with 404 in 2006, the survey found.

We're going to run our annual PSW Holiday Shopping Survey this weekend so our Members can give us their observations of Black Friday's from around the nation.  Our holiday surveys have been excellent predictors in the past so I look forward to this year's results!  The Government revised GDP UP this morning, to 2.5% in Q3 from 2% originally estimated.  That's a nice 50% improvement over Q2's 1.7% although we still have 9.6% official unemployment but I guess those bums weren't shopping anyway.  A big contributor to GDP was a 28.2% boost in year over year profits in the Financial Sector, which is about 20% of the S&P these days.  Thank goodness for that as we were sure worried about our Bankster buddies in this rough economy!  

Fed Minutes are out at 2pm and we can expect the Fed to LOWER their forecasts, despite the GDP.  They have to do this to justify QE2, of course, as "The Bernank" does whatever it takes to distract you from what's really happening.  

Ireland is NOT "fixed."  As I mentioned in yesterday's post, they are two weeks away from a budget vote and, if they can't agree on the loan terms that are being shoved down their throats – we could be right back to chaos over there.  Now that Ireland does appear to have a life-line, the sharks have moved on to surround Portugal, Italy and Spain with Antonio Garcia Pascual, chief southern European economist at Barclays Capital in London saying “Spain is bit too big to be bailed out, the size of a rescue required would use up all the funds available and then you have Italy with contagion as well,” prompting “a situation where the euro itself is put into question.”

So happy Tuesday to you and GOOD LUCK – we're going to need it to get through this mess!  We'll be watching our 10% lines and taking the money and running on our short plays because we don't really have the volume for a proper breakdown just yet but the trend is no longer the friend of the bulls who need to do more than last minute stick-saves to turn things around at this point.  

Things should be interesting this afternoon with the Fed Minutes and, for the morning, we'll be looking to hold the floor we established last Thurs and Friday at Dow 11,120 (already lost), S&P 1,185 (already lost), Nasdaq 2,500 (holding), NYSE 7,550 (oops again), and Russell 715 (holding).  If those break down, we've got a clean shot for another 2.5% drop below those lines and that's going to make for a very worried Thanksgiving for those who ignored my cash calls of the past month.