Reality, reality, wherefore art thou reality?
I like to put up this chart of the Macro Indicators (this one from Zero Hedge) every once in awhile, just to keep us grounded as we play the market at these nose-bleed levels. And yes, I know I sound like a grumpy old bear, the same way I was accused of being a perma-bull 8 months ago, when the S&P had crashed 10%, back to 1,343 and I wrote articles like:
- "Thankless Thursday – Still Waiting for that Stimulus to Kick In" (11/1/12)
- "Two Term Tuesday – Obama Victory Allows 4-year Rally to Continue" (11/6)
- "Fed Up Thursday – WMT and the Fed Fail to Boost the Market" (11/15)
- "Testy Tuesday – Can We Hold Our Weak Bounce Levels?" (11/20)
- "Dividend Investing – Giving Yourself an Automatic Edge" (11/25)
- "Cyber Monday – Record Retail Sales Trump Cliff Concerns, for Now" (11/26)
- "GDPhursday – Fiscal Cliff Progress Good for 200 Points Ahead of GDP" (11/29)
After that, we were off to the races and people finally stopped making fun of me for being so bullish in such an "obviously" declining market. Yes, I was early – that's the problem with reading too much and looking at the Fundamentals – sometimes you see things that seem "obvious" to you but it does take the crowd a while to catch up and, for better or worse, it's the crowd that does the buying and selling.
So now I'm worried and, although I was clear (I thought) at the beginning of the month that we may keep going up until Options Expiration Day (today), or even to the end of May, into the holiday weekend – I've still been branded a perma-bear by readers (not our Members, who know me better) who seem angry that I dare question the market.
Well, I have to dare – it's my job. And I'd love to be a sell-out as bullish market newsletters make more money so we attract less new people when we go bearish but I kind of think it's my job to tell you what I think is going to happen – not just what you want to hear.
As noted yesterday, my plan for the weekend is to do some soul-searching and try to figure out if MORE FREE MONEY will continue to trump the underlying weakness in the Global Economy. The question is, where does the money flow and it's a complex question to say the least. As the Fed's Fisher noted yesterday:
The Federal Reserve has undertaken a grand experiment to reignite the economy through unprecedented monetary accommodation. We cut to zero the base rate that anchors the yield curve and have pursued a policy aimed at driving rates throughout the curve to historic lows by buying Treasuries and mortgage-backed securities (MBS). Our portfolio totals about $3 trillion, which we have recently been expanding at a rate of $85 billion per month.
So, no real point in reading a newspaper or economic reports or looking at, for example, the only 50% sold new World Trade Center or other economic worry points – the free money keeps coming and, when it rains like that – we're all going to get wet. I always like the old bathtub analogy as yes, the Fed and the BOJ are currently pouring a combined $160Bn a month into the tub and Switzerland and China and the BOE are doing whatever they're doing behind closed doors and now Draghi has indicated something from the ECB that is thought to be around $50Bn more per month at least.
So the money is pouring in. The only remaining question is – how big is the hole they are trying to fill? We stopped counting when the bailout passed the $7Tn mark back in late 2011 but then we had QE2 and now QE3 and the funny thing is that the Financials (XLF) have rocketed up, as you might expect for a sector that gets handed an average of $2Tn a year to play with. BUT – CLEARLY – they were lying to us when they said they were solvent 5 years ago. Industries that are solvent don't need $7Tn in bailouts, do they?
So now, WHILE we are still giving the Banksters another $1Tn a year in the US alone, we believe that not only are they solvent, but that they could sustain these record profits on their own and they only needed $7Tn and not the $300Tn worst-case that was calculated if all those nasty derivatives ever had to be unwound. The derivatives are still out there (DB alone has $72.8Tn outstanding) – no one unwound them (that's what the real crisis would have been!) so we're back to "ignore and soar," which was pretty much business as usual in 2007-8.
While it's hard to love this rally, if we do get more easing from the ECB next week (or any time), then it's going to be here for quite a while and we'll have to at least learn to live with it. In case we DON'T get a sell-off next week, I'll be putting up 5 more 500% plays for an up market over the weekend and we're starting a new Short-Term Portfolio next week to take full advantage of this crazy-assed market.
This morning I sent out an Alert to Members at 3:08 am, that the Nikkei Futures (/NKD) were making a shortable top at 15,250 (exactly caught up to the Dow now) and we caught that ride down very quickly as well as a nice dip in oil but oil has reversed sharply and is now up at $96.47 on the new July contracts (/CLN3) while the June contracts are trading at $96.12 so about .35 apart as the NYMEX traders are desperate to roll their last 100,000 contracts out of June because the last thing oil traders want is to actually end up owning any oil at the end of the cycle!
We expected a pump into the 9am NYMEX open but this is getting restickulous (as they say in the biz) and, in fact, we were just looking at Doug Short's article which pointed out that Vehicle Miles Driven were hitting new lows, despite the "recovering" economy.
As you can see, the fact that we're using much less gas doesn't stop the scam on the NYMEX from keeping the price we pay at record highs. Our beloved VLO is now trading at just under $40 and even TSO is at $58, outperforming VLO all year. XOM and CVX are Dow components and they sell a lot of gas so they are thrilled to see gas prices holding up – even though oil prices are declining. Selling less stuff for more money while employing less people is the theme of our current rally – why should the energy sector be any different?
We still like shorting oil at $96.50 and maybe we'll add a USO put to our new portfolio today as our first trade. Like the rest of the market – it's only sustainable as long as someone keeps pumping money into it and what an exciting drop it will be when they stop!
Have a great weekend,
– Phil
