This Week in Barrons – 06_21_09:
Does anything make sense anymore? Last week - credit card delinquencies another all time high. Now that logically isn’t good – if people are defaulting on their credit cards it must mean they are strapped for cash and desperate. You figure that stocks of "consumer discretionary" companies will take a hit because if consumers are so desperate to default on their credit cards, surely they aren't going out and buying up toys, and gadgets. So, if you shorted some discretionary stocks, you saw them soar on the day. So, what changed? Did the fundamental laws of business, supply and demand, cause and effect, simply vanish?
The reason is really simple. As has happened with just about every developed government – ours has decided to spend more money than they takes in. Our government’s initial attempts were amateurish – the Savings & Loan debacle. Their strategies needed some fine-tuning – but they were well on their way. In the late 90’s the NASDAQ learned how to manipulate IPO's via laddering and "spinning". Then they learned how to manipulate media – and hype the ‘new economy’. Meanwhile Goldman made hundreds of billions presenting companies to the public that had no income, no revenue, often not much more than a business plan. And then made billions more – shorting those same companies that they had just ‘hyped’ and poor ‘Average Joe’ got crushed – losing his life savings.
OK – somehow we needed to get money back into the ‘Average Joe’s’ pockets – so then came the housing bubble. Bankers would make trillions in profits by writing loans and paperwork fees. The government loved it because ‘Average Joe’ would feel rich and buy more – and would bring in more tax dollars. So everyone worked together to pull it off – Greenspan slashed rates to Emergency levels, Bankers jettisoned every known banking rule concerning risk, Corporations ramped up production ahead of the demand for everything from carpets to boats, campers, motorcycles, and cars. Even the ‘Average Joe’ got in on the scam, declaring income he didn't have on so called "liars loans". It was the perfect bubble and everyone was very happy.
But, there's only so far you can take a great bubble, no matter how perfectly executed, and they had to plan for the next move. Pull the Plug on the housing bubble - toss any and all losses on the American taxpayer – and here’s the BEST: Staff at Goldman Sachs staff can look forward to the biggest bonus payouts in the firm's 140-year history after a spectacular first half of the year, sparking concern that the big investment banks which survived the credit crunch will derail financial regulation reforms. A lack of competition and a surge in revenues from trading foreign currency, bonds and fixed-income products have sent profits at Goldman Sachs soaring!
In the middle of the single worst economic crisis in 80 years, Goldman's employees will get the biggest bonus payouts in their entire history. At the very moment that some 12.5 trillion dollars has been pledged to bail out banks, all being funded by the ‘Average Joe’ - Goldman is getting filthy rich. Now let me ask you: If these institutions are so amazingly smart that they can create record bonuses during the biggest meltdown of our lifetimes, don’t you think they knew that lending money to people with no way to pay it back was probably bad? Didn't it faze them that they really shouldn't have bundled toxic crap with good mortgages and sold it all over the world as AAA investments? Wasn't it a bit shady to insure all that garbage via AIG, putting them at all the risk, and THEN literally going short the very mortgages they sold to the world? Are you kidding me, it was yet another perfectly executed plan to make trillions.
But what about those “Green Shoots”? On Thursday morning the initial jobless claims spiked higher along with continuing jobless claims. Ben Bernanke was getting grilled by Congress over allegations he "told' Ken Lewis of Bank of America to take their deal or he'd be ruined. In other words the FED was on trial for fraud and corruption. What did the market do – it was up 180 points. For those of you who don’t know about the PPT (Plunge Patrol Team) - Uncle Sam created a "team" just after the 1987 Black Monday crash called "the Presidents working group on Financial markets". This outfit was sold to the ‘Average Joe’ as a way to "really" look into the whole economic scene and make sure we could avoid any major and massive mistakes. Honestly – we don’t even know who’s on this panel except for: Ex Treasury Secretary Hank Paulson, Current Secretary Geithner, Fed chief Ben Bernanke, and the chairmen of the SEC and the Commodity Futures Trading Commission (all with ties to Goldman Sachs – but that’s potentially just coincidental!) What they do is buy huge amounts of futures. Futures allow you leverage on that particular stock / sector – but what it mainly does is trigger stock buying of pre programmed baskets of stocks as the computers are trained to buy on specific rises in the futures market. So, buying tons of futures – causes the market to react higher.
So, when the initial jobless claims spiked higher, continuing claims spiked higher and our Fed Head was being grilled on what amounts to fraud and you see the market soar for 180 points, do you think that was because millions of informed investors thought it was a good idea to buy stocks? Ah – but look at the futures buying at 11:41, 11:42 that day – and you’ll have your answer. Sorry, but that's the way it really works in 2009
The single hottest piece of journalism sweeping the nation right now is "The Great American Bubble Machine" written by Matt Taibbi. This article is a well written piece about Goldman Sachs and how they have "caused" and profited from every bubble in the last 100 years, reaping trillions of dollars of profit at the expense of the "everyday American". Matt has done a remarkable job of cataloging exactly how Goldman has fleeced the sheep of America over the years.
Now that you know how the market really works, it might be easier for you to understand how we arrive at some of our predictions. So, what happens now? There is one school of thought that says we're going to roll over and be weak all summer, and then run up into the fall. Our view is that because so many feel that way, it probably won't happen. The most unlikely scenario is that they make fools of all those who think that way and simply go higher. With so many people on the "sell in May and go away" train, watching the market move up into earnings season simply makes perfect sense. I don't think it will be smooth, and frankly if we did roll over and plunge it wouldn't surprise me. The only thing keeping it up right now is media BS about green shoots, and the "hidden hand" of the PPT. Yet with Obama's popularity decreasing daily, I'm pretty sure the word has gone out to his henchmen "keep this market up at all costs". Fraud and manipulation say "we need to make the ‘Average Joe’ believe the market is really behind us and the economy is mending." Fraud should win.
With that in mind, we've been looking at some long side plays, since we sold most of our positions for profit during the past two weeks. The big sector rotation from materials into tech is still ongoing, we picked up a tech this week that's up 4% in a couple days and should go for more. But we are looking at more in the tech space, and I think you should too.
- we’re holding the GDX (a basket of gold mining stocks) with No Stop
- we’re holding NGD (a gold miner) from $2.59
- we’re holding MOO (agricultural business ETF) – from $32
- we’re hold XLK (a technology (minus healthcare) ETF) – from $17
- we’re holding IPI (a potash hold – again in the agricultural theme – we’re underwater here) – from $32
- we’re thinking about:
o CSCO (Cisco) closing at 18.90, if they were to get up and over 19.20, I think they could have a buck or two in them.
o VMW – needs to get over 30
o STX over 10.35 would be interesting
o QCOM – is looking interesting, after closing at the 46.00 level a few days in a row a while back, they are at 46.19. I wouldn't be against trying some QCOM at the 46.45 level.
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Until next week – be safe.