How did you think it was going to end?
Remember Thursday – it started at 2:20 pm – DOW down 286 – and in a matter of minutes the DOW was down by 986 points. I actually tried covering my DIA short between down 400 and down 900 – but no luck! Well – here’s my version of what happened: The market was weak, and from noon on the wall of worry kept growing about the contagion in Europe. Greece's population is telling the world "we are NOT paying the world back, we are NOT working any more, and we do NOT care". So, if Greece is ultimately going to default (and it will) the rest of Europe is saying: "Why are we going to give them money – because we'll never get back? What about Spain and Portugal? This isn’t good – let’s rethink things". So the markets were sliding and then the ‘machines’ took over. All those high frequency, dark pool algorithms that didn't know how to deal with market forces that were outside the normal parameters, started going firing off. It was a "black swan" event. And once the first big programs fired, dozens of others fired. Computers at the 40 biggest institutions, which can request one million quotes per second, started making trades on their own, and it spiraled out of control. Some stocks, like ACN (which was at $40), printed "one penny" in the span of ten seconds. Tens of thousands of "stop loss" orders had been taken out. Tens of billions of dollars worth of stock had been sold – at very low values – and thousands of retail investors will (once again) lose their money. Consider all the John Q. Public’s that got into the market at 11K and a week later they're staring at DOW 9,800 only to end at 10,500. They listened to Cramer – and once again they’re underwater - Wall Street raped them – again!
70% of a days volume is traded by dark pools and algorithms. Well – what happens when machines see an event that they weren't programmed for? But the real story here is that the world is waking up to the fact that the WORLD is broke. It's a lot like re-arranging the chairs on the deck of the Titanic – sure it looks better, but you're still going to sink.
What else happened last week – that JOBS report – that said we created 290K jobs for the month of April. Let’s dissect that report. 66,000 of the 290K jobs are Census workers – who’s jobs will leave in August. So, that brings us down to 224k jobs. Then there’s the government’s "Birth/Death" that says for X amount of people laid-off, some of them will go out and start businesses and hire people. So in April the government GUESSED that 188,000 jobs were created via the ‘birth/death’ model. Therefore, removing the 188K ‘make believe’ jobs - what you have left is 36K jobs being created. That is NOT a booming economy? Also the unemployment rate ROSE to 9.9% - the workweek FELL – AND the total number of “under employed” ROSE to over 17.6 million.
How about the headline that Wayne brought to my attention this week: Freddie Mac (FRE) asked for an additional $10.6B from the government yesterday, after reporting a first quarter loss of $8B. New accounting rules led to a decrease in total equity of $11.7B, creating a net worth deficit of $10.5B as of March 31. Freddie warned that it will still need billions of dollars in additional federal aid because the housing market remains fragile. Factually, Freddie Mac has lost $82 billion over the last ten quarters.
And – did you happen to notice what happened to Gold this week – it went up considerably. Gold is the only real stability we have. We can't trust our banks – they fail weekly (4 more failed over the weekend – 68 for the year). We can't trust the Sovereign debts - they're insolvent. We can't trust our money - they simply print more of it. Gold has been the best performing asset for 10 years now and will continue to be - as the world melts down.
Jim Cramer said Thursday evening: “This gives us a chance to get in at a better price than we should be able to - on the Dow 12,000 freeway." I wish we had the economy behind us to support these stock levels, and remarks like these. On May 11th – the IMF along with other ‘big wigs’ is going to sit down and discuss the global currency and debt situation. One of the things they will be talking about is the more widespread use of SDRs (special drawing rights) and Gold. It seems that there is a small faction of people now from other governments that are beginning to think that maybe some monetary link to gold makes a whole lot of sense. If we hear anything from this meeting about SDRs being loosely pegged to gold, watch out - gold could gain $200 in a day.
Last week a lot of damage took place – from Monday’s high at 11,177 down to Friday’s close at 10,377. What’s next? Well a few things are going to happen. Someone's going to announce some form of reinforcement bail out for Greece, which just sets up Spain, Italy, Portugal and Ireland.
There are two distinctly different ways this will play out. If The Street really thinks the news is good, they are going to try and rally us big time Monday through Wed – potentially 500+ points. But if they don't come out with something believable, we're going to have a very red Monday, followed by a massive positive bounce Tuesday and Wed.
So whether the bounce comes right at the open, or after we shed another 400 points it is going to come and it will be fast and furious. Are they going to drive us up and onto Jim Cramer's 12K Freeway? I think not – and I would advise selling into this rally. And as soon as I'm convinced the big bounce is over, I'm going to go net-net short all manner of things. The average retail investor should be looking to get out of this market on whatever big bounce we get because I don't think it can stick. It won't take long after they bail out Greece that the next nation blows up. We're going to go through this for a LONG time – so we should start the long enduring "stair step" lower, sometime next week or the following week.
Let’s assess where we are - we dove back into some metals – commodities last week and are currently:
- Long: GG at $43
- IAG at $17
- SLW at $18
- SSRI at $20
- VXX is up over $10 per share
- DIA short is up over $6 per share
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Until next week – be safe.