This week in Barrons - 9-5-2010

This Week in Barons – 9-5-10:

Why Does It Still Go Up?
Considering that the economic reports are dismal at best, and horrid at worst - how and why does the market move up? The FED’s made it quite clear that they will use "every manner possible, both conventional and non conventional" to keep the economy from a deflationary depression. We all need to understand that the money the Fed ‘prints’ – is ‘chasing away’ real investment. This is why after years of bailouts, easing, and Fed maneuvers - we still have unemployment hovering at Great Depression levels. It keeps things afloat, but it's not real growth. The second the money flow stops, the economy stops.

Now – if a rising stock market makes people feel better (and study after study shows that it does) then doesn't it make sense that "Job One" of the current administration would be to make the market either go up, or at least hold steady? It’s interesting to note that most Americans have their stocks in 401K plans, and 97% of all 401K’s have NO PROVISION to go short in the market!

After the market crash of 1987, President Reagan created the "Presidents Working Group on Capital Markets". For the past several years, this group (which we call the Plunge Patrol Team (PPT)), simply buys tens of billions of dollars worth of market futures when ever they want the market to rise. We saw real evidence of this past Tuesday – when 2 minutes ahead of the close they purchased 200,000 S&P contracts. Interestingly, on Wednesday the market opened big and ran for 250 points – and the only real news was a pseudo-good ISM (manufacturing) number.
- FYI - the ISM manufacturing number actually gained 8 TENTHS of a point.
- The same morning the ADP employment report was looking to show 20k new jobs created – it showed 9k jobs lost! That number was ignored.
- We had a terrible jobs report on Friday – loosing 54k jobs – and that included a ‘birth-death’ model showing 115k ‘fictitious’ jobs had been added to the workforce!
- Then the ‘non-manufacturing’ ISM number was released (and remember we’re basically a service society) and it FELL by 2.5 points – and we ran on Friday for another 100 points to the upside!

Now remember 2 years ago when I wrote that the U.S. would be coming for each individual citizen’s 401k – well currently there is a bill in Congress that would require every company that has 10 or more employees to have a mandatory retirement program where 3% of each paycheck goes right into a government IRA – it’s called the Automatic IRA Act of 2010.

Now – if the U.S. ‘taxes’ each employee and forces them to ‘invest in’ / ‘buy into’ a ‘retirement fund’ / ‘Government bond’ won’t that be hundreds of billions of dollars instantly invested into the market – yes! And won’t that drive stock prices higher – yes! As Al Capone once said: “The stock market is more crooked than I am!” I have to think that if Al was alive today – he’d be CEO of Goldman Sachs. The point of all this was to show why and HOW the market can and will perform illogically.

Often I have a pretty good knack for guessing when they'll run the market up and when they'll let it fade – but this week caught me completely off guard. It started on Tuesday right before the close with the Fed pouring on the ‘juice’ and continued on into Friday. Interesting on Friday – we learned that individuals had taken another $5 Billion OUT of mutual funds last WEEK – going into bonds, gold and silver. I’m still waiting for a ‘junior congressman’ to ask the question – “If there are more sellers than buyers – How is the market going up?” So understand Wall Street has the capability of running this market to 12K before it goes to 8K and back to 11K before it falls to 5K. Honestly – Gold isn’t back to $1250 per ounce and Silver back to almost $20 per ounce because people like it’s shine – it’s there because it’s a safe hedge against inflation and against manipulated prices. I continue to buy gold and silver.

The Market
A wild week, and I'm not ashamed to admit I got the direction wrong. I said last Sunday we'd probably end the week lower than it started, and that was working fine on Monday and Tuesday. But then on Wednesday the FED took over and we ran for almost 500 points. So, what happens now – do we run to 11k, 12k, or even 14k? I don’t think so. Potentially the FED wanted to cover a bad jobs number, a bad ISM number, or any one of other conditions.

September is historically the worst month of the year; however, whenever a pattern becomes that exposed, it often changes. What I know is that in 3 days we went from ‘oversold’ to ‘overbought’. I imagine that Tuesday will be filled with weekend cheer – and we’ll go up some more, but I’m having a hard time believing they can pull off any more significant gains. Even for a ‘manipulated’ market, 500 points is a lot in a few days.

My guess is that we open big and fat on Tuesday and by mid-day Wednesday we start seeing some of the shine come off. Then it will be decision time, do they goose it, or roll it over?

I have started to accumulate the VXX. Down here at the 19+ and 20 level, it's showing that no one is afraid of anything – not war, bank failure, or even Europe collapsing. It's often times of complete calm and serenity that something usually pops up, and I just think people are a bit too complacent. It may fall further, that's fine, I'll just buy more. But to think things just go along without something going ‘bang’ in the night just sounds too good to be true to me.

A couple thoughts:
- DE (John Deere) closed at a high on Aug 8 at 69.29. Then it fell off and has rallied back. Friday they ran right up to 69.22 but couldn't bust that high. I'd be inclined to buy it if it got over that 69.25 close, and the market was flat to rising – I’ll put more of these ideas on Twitter this week (I promise!)
- On the flip side - if the market does start to pull back, I wouldn't be against shorting something really liquid like the SPY if it failed 110.00.

Have a wonderful Holiday.

Tips:

Let’s review our holdings:
GDXJ – a basket of gold miners
GG – IAG – NG – individual gold miners
GLD – PHYS – pegged to the price of Gold itself
SLW – SSRI – silver miners and indexes

All are up nicely from our original purchase – but we had to live thru some ‘red’ to get there. We’re in and out of TZA, DXD and SDOW on a daily basis (these are ETF’s that allow you to invest directly in the market going ‘down’ – for those that do not like to ‘short’).

We’re beginning to accumulate a position in the VXX because we see increased volatility coming. The metals we like for a long time – unless something dramatic occurs. The ETF’s we’re in and out of – depending upon the feel of the market.

If you’d like to view my actual stock trades - feel free to sign up as a twitter follower – “taylorpamm” is my nickname on Twitter – fyi.

If you’d like to see me in action – teaching people about investing – please feel free to view the TED talk that I gave a 4 months or so ago now:
http://www.youtube.com/watch?v=K2Z9I_6ciH0&feature=PlayList&p=6F63374ED7A97658&playnext_from=PL&index=5

Remember the Blog http://rfcfinancialnews.blogspot.com/
Until next week – be safe.

R.F. Culbertson
rfc@getabby.com
http://rfcfinancialnews.blogspot.com