And up we go again!
This time we're led by Japan, whose market flew up 5% this morning as the Q1 GDP was revised up to 4.1% from 3.5% in an earlier reading. Fortunately, our last bet of the week in our Short-Term Portfolio on Friday was a long play on EWJ, grabbing the June $10 calls for $1.02 as a great upside cover to our still pretty bearish positions. 5% up in the Nikkei should give us at least 20% in our options – not a bad hedge, though we'll take that money and run at the open.
As you can see from the chart on the right, Dave Fry isn't buying the "rally" quite yet, either. The S&P finished well over our strong bounce goal of 1,634 at 1,643, which is why we wanted some upside hedges, but the next level we need to see is that 50% line at 1,645 – and it looks like we'll be testing that this morning.
All the other indices hit our Strong Bounce lines, except the NYSE – which finished just below it's 9,360 at 9,355. We're still DEEPLY concerned about the underlying Global Fundamentals and the fact that the US added 175,000 jobs in May, we're still 6M jobs short of where we were pre-Bush and, at this pace, it will take us the whole rest of Obama's turn in office to get back to "full employment" (4.5% unemployment).
So, on the bright side – it seems like the FREE MONEY train is never going to stop but, in reality, the Fed can't drop another $3Tn on the market and book it into what would become a $6.6Tn balance sheet. People will lose confidence in our Central Bank long before their balance sheet becomes bigger than Japan's GDP!
The ADP chart on the left illustrates how it's small business (Russell) that's driving our job growth with companies under 50 employees now creating MORE jobs than the "job creators" in bigger businesses. When Big Business refuses to pay living wages – Americans are still innovative enough to create their own jobs and, as that yellow line crosses higher, you'll see labor costs finally rise for Big Business as it becomes harder and harder to find cheap talent – as it is used against them in the local markets by their smaller competitors.
That's a good cycle, but a slow one and it's also one that impacts on Big Business profits, which we'll begin seeing as Q2 earnings begin to pour in. Unfortunately, the vast majority of those small-business jobs are in the service sector and, whether you are flipping burgers at MCD or greeting your fellow townspeople as they walk into WMT – those aren't exactly the jobs we went to college for. The needle has hardly moved on Goods-Producing Jobs in the past 12 months:
Anyway, don't worry about that – worry about this:
This is China's 1-year bond rate and yes, it went from 2.8% to 3.08% last week. That's in an economy with declining inflation, declining manufacturing output, declining exports, etc. So, what's going on here?
Well, China's interbank rates have unexpectedly spiked last week as the SHIBOR curve (China's LIBOR equivalent) became highly inverted. Given that there have been no indications of a change in policy by the PBoC (the central bank), there is only one thing that can cause such a move: a liquidity squeeze. According to Sober Look:
China analysts point to a number of possibilities for this spike, including some action by the authorities to curb FX speculation or other trading activities. The best explanation however was that a panic ensued among China's banking institutions due to a rumor that several banks were about to fail. This rumor, though unverified, caused banks to cut lending to each other, creating a liquidity squeeze. The squeeze was exacerbated by China's markets being closed this Monday through Wednesday for the Dragon Boat Festival and liquidity already being tight coming into last week.
So tick, tick, tick CHINA!!! may explode when it reopens on Thursday – we'll just have to wait and see on that one. We're already ignoring a 4-year collapse in their manufacturing sector so why not ignore a collapse of their Financial sector as well. After all – that worked so well for us in 2008, didn't it?
I hate to sound like a nervous Nelly but the sky does, on occasion, actually fall and I'm very glad we cashed out into the May close and now I urge caution before jumping back in to what, at best, may be a double top. If we're over our 50% lines today – we can re-activate our 5 Trade Ideas that can Make 500% in an Up Market as our our collection from 4/14 did make 1,816% in just 21 days – so it's not like you're going to miss much by saving your cash until we're sure of direction…
We also had our "5 Inflation Fighters Set to Fly" and I published the first part of that set (one pick) on Seeking Alpha, which was our F play that is very well on track for a 32% gain from our $12.93 entry (using options for leverage, of course). The other 4 Trade Ideas remain Member exclusives as these are long-term trades and didn't get cashed in like our 500% short-term plays. DBA has already popped it's 50 dma since we called the bottom on them and our weekend reading included some scary drought information from Scientific American and keep in mind, with DBA, that you are essentially bidding to own the Wheat, Corn, Cattle, Soybeans, Coffee, Sugar and Hogs that ARE sent to market and you benefit from the short supply that can be caused by a drought. It's a good inflation hedge and a good hedge on your own grocery bill!
Unfortunately, if you missed our excellent entry on that one, it's gotten away – but we'll certainly re-configure that trade idea in Member Chat for a new play as we now have an upside catalyst that can give us a short-term boost this summer. The National Oceanic and Atmospheric Administration (NOAA) predicts that drought conditions are likely to remain in the central and western sections of the U.S. while expanding in California, the Southwest, the southern Rockies and Texas. The Florida panhandle is also expected to see drought conditions moving into summer.
I'm not going to get into other reasons I think we should remain cautious here. We had literally 10 pages of news and fundamental review in our Weekend Reading, which is way more than usual but, like many of you, I'm still trying to digest as much as I can and try to get a proper feel for the market direction. My gut tells me lower from here – that last week was just a preview correction but the Media is telling us that I'm crazy and we should be BUYBUYBUYing at these levels.
At the moment, I'm undecided but still leaning bearish and, of course, for that we have our "3 More Option Plays that Make 300% if the Market Falls" to give us a nice cushion if we have another little dip like we had last week.
Either way, let's be careful out there.
