Monday Market Movement – Do or Dive!

January 24, 2011

1415

Big week ahead!

$30Bn in POMO from the Fed runs headlong into earnings reports from 15 of the 30 Dow components along with MoMo darlings like VMW (tonight), BLK (tomorrow morning), POT (Thursday morning) and AMZN (Thursday night). I already sent out an Alert to Members this morning outlining our strategy and Stock World Weekly did it's usual amazing job of wrapping up last week's action and laying out the week ahead so I won't be too redundant here. The key driver for the markets continues to be the dollar, which is making more sense now as it saved the Dow and the S&P last week (50% of revenues come from overseas) but not the Russell (only 10% of revs from overseas) or the Nasdaq (30%).

The Dollar was relentlessly driven down last week, bottoming out at 78 on Friday evening, back to November lows, where they ditched the Dollar all the way down to 75.63 in early November before it broke back up and ran to 81.44 on the last day of the month. Now we're back down 4.2% from the Thanksgiving highs for the Dollar and the Dow and S&P are up 8%, which is our usual 2:1 correlation yet Uncle Rupert's Journal would have you believe that the Dollar no longer matters and that this rally is about (please sit down, PSW cannot be responsible for any beverages you are about to spit on your keyboad) – wait for it – Fundamentals!

According to the Journal: In recent weeks, for example, moves in stocks and the U.S. dollar have had little connection—a breakdown of the trend during much of 2010, when they were virtual mirror images of each other. Stocks were considered risky and would rise when investors were feeling confident, while the dollar was a haven, benefiting when investors were worried. Commodities, too, have broken away from rising and falling with risk perceptions. Now more old-fashioned concerns, like the weather, are having an impact. Corn, soybean and wheat prices jumped this month after supply estimates were cut due to dry weather in South America and floods in Australia.

Really? So the run in DBA from 22.85 in June of last year to 31.65 (38.5%) in early November was speculation but the run from 31.65 to 33.50 (6%) since then has been based on solid fundamentals. ROFL!!! That logic is so Cramerish that Rupert should be ashamed of himself! "Sure, we know the first 40% was pure BS but the 6% on top of that – now THAT's fundamentals!" Are you guy's friggin' insane??? Do you know what fundamentals are? Fundamentals are CREE falling 25% off their run after posting earnings that in no way, shape or form support a 50% run-up. The same goes for FCX, BHI, CMG and many other MoMo stocks we have been shooting down like fish in a barrel.

We will be putting our virtual money where our mouth is this week as we begin our brand new $25,000 Virtual Portfolio. Except for our DIA shorts, we have wrapped up the $10,000 Virtual Portfolio with over $30,000 virtual dollars (as noted last Friday) and this weekend Option Sage and I updated our primer series on "Smart Virtual Portfolio Management – The $25,000 Virtual Portfolio" with tip on managing a virtual portfolio of that size. We will NOT be following "smart" virtual portfolio management in the $25KP – that's going to be an aggressive attempt to get us to $100,000 by the year's end but it will be a fun thing to do with a small portion of a larger virtual portfolio! Since we started with $10K last year, getting to $100K in 18 months would be very nice…

Meanwhile, we are still very cautious and mainly in cash as we navigate the busier weeks of earnings season and, of course, it's crunch time for the Alpha 2 pattern we've been tracking since January 3rd and, after two weeks, it is SCARY how on track we are. Elliott over at Stock World Weekly fixed the alignment to match the expiration days and also to match our 11,850 projected top with last year's 10,700 top to give you a better idea of how we're lining up and it is, as I just said, SCARY:

Do we open flat today and get some bad news mid-day and plunge 200 points? If so – I don't think I'd be buying that dip! Surely the Fed can break this patten as we have as much as $9Bn worth of POMO today, $8Bn tomorrow, $6Bn on Thursday and $9Bn on Friday (see SWW for chart) for a whopping $32Bn of fresh money created by the Fed in just 5 days. As I said to Members this morning – that is like handing everyone in America $100 to spend – you would think that would boost the markets just a little, right?

Of course, unfortunately, the Fed is not giving the taxpayers the $100 per person of debt they are creating, they are giving it to the their Bankster buddies, who can then lever it 10:1 ($320Bn!) and use that money to buy the things you buy BEFORE you can buy them – like oil and natural gas and copper and cotton and coal and corn. What's great about this is, by doing this, the Fed still gets you to spend $100 per person but, rather than giving you $100 to spend on something you WANT, they raise the price of things you NEED through inflation and that forces you to pull that extra $100 a week out of your pocket anyway – BRILLIANT!

As long as you are willing to mindlessly wallow in debt and continue to consume mass quantities without, as ordinary consumers used to do, complaining about prices or altering your spending habits – then this system can continue to extract your wealth at an ever-increasing rate and The Bernank has already strongly affirmed his commitment to keeping the pedal to the metal until either the economy improves or the entire Global economy is plunged into the Abyss – either way his place in history is secured.

John Mauldin tells us we are reaching the end game as "the unsustainability of the federal government’s fiscal trajectory becomes increasingly clear" and clearly, The Bernank has become a one-trick pony, who can no longer lower rates (are you going to pay people to borrow money?) and is all gas and no brakes in increasing the money supply on a weekly basis. We can expect the same old, same old this Wednesday, when the Fed issues their first policy statement of 2011 but before that we'll have Case-Shiller Housing Numbers, Consumer Confidence (or lack thereof), FHFA Housing Prices, MBA Mortgages, and December New Home Sales – along with earnings reports from roughly 100 US Corporations including MCD, AXP, TXN, VMW, JNJ, VZ, MMM, DDD, ERICK, BLK, GILD, COP, OXY, ABT and BA – all that before Wednesday afternoon – and you wonder why we have our cash on the sidelines!

Keep in mind it is all about the dollar and the Euro is getting a boost this morning as Trichet says he expects the EU to agree on automatic enforcement of budget rules. No one is expecting that kind of statement from our own Government as the states are facing a $150Bn budget hole in 2011 and a 25% rise in Wold Food Prices has a UN Meeting of Farm Ministers are warning that speculation and price swings are now threatening International Food Security.

America may not care about food shortages but we sure do like to drive and gas prices rose another 1% over the weekend to $3.11 according to the latest Lundberg Survey. This is truly amazing as gasoline storage is up 15% from last year and gasoline consumption is down 10% which, of course (as we all know from basic economics) leads to a 9.1% INCREASE in prices.

If you were able to keep your breakfast down earlier as we looked at the BS being spouted by the WSJ – you may be strong enough to take a peek at the World Economic Forum's "Global Risk Report" but I don't recommend it as I had trouble sleeping after I read it. Da Boyz will meet in Davos this week and they like to get that report out early so they can ignore it and concentrate on the more positive sound-bytes for the assembled Global Press because, after all – why would they want to tell you what they are worried about?

Trichet is trying to keep a lid on EU inflation and that strengthens the Euro relative to the Dollar, which drives up the price of the commodities we buy and that is now evidenced by our record yield curve, which some bond analysts believe will force a downgrade of US Debt (has NEVER happened before) by the ratings agencies, who are now being held accountable for lying about the credit-worthiness of the bonds they rate.

The S&P has already issued a downgrade warning on Muni Bonds and, last I heard, municipalities were and extension of the National Government so this is kind of like saying "oh YOU'RE fine, it's just your body that has cancer." There are 25 nations identified by Business Insider and Nomura as already being in critical condition – generally net importers of food with high percentages of household consumption going towards food consumption like Venezuela (32.6% of the household budget is food), Vietnam (50.7%), India (49.5%), Pakistan (47.6%), Philippines (45.6%), of course Nigeria (already screwed with 73%) and even China (39.8% and a net importer of food). Have I mentioned what a nice hedge EDZ is? Ireland couldn't wait and their Government, along with Tunisia and Algeria, fell apart over the weekend.

Don't worry though, JP Morgan is fighting inflation by giving their top 15 executives a $72M bonus – that should just about cover my Super Bowl order from Whole Foods! Morgan Stanley gave CEO Jim Gorman $7.4M to tide him over but the award for generosity for the month (so far) goes to Google, who gave outgoing CEO Eric Schmidt $100M in gas money AND he gets to keep his current salary even after giving up half his job! Nice work if you can get it…