Making Giant Dollars on Fraud
This past week we bought and sold NTES for a $6 per share gain, sold the SPY’s for a $20 gain, Silver (SLV) is sitting on a $6 gain, Gold (GLD) is sitting on a $12 gain, and we purchased Amazon (AMZN) for $208.50 on Friday and it ended the day at $217. I am not saying this to pound my chest or to gain more twitter followers – but rather to tell you that the market is NOT running up on fundamentals. The market is running up on the "new paradigm" which is all FRAUD all the time. You really can’t believe that Merkel and Sarkozy just solved all of Europe’s problems. Nothing is solved; it's simply pushed off a few months. Soon we'll hear about Ireland wanting to discharge 50% of its debt, and then we'll hear more horror stories out of Italy. And then the German people (who have created the biggest economy in Europe) are going to revolt against the Merkel régime.
According to a recent survey, about one-third of small business owners polled by Gallup say they are concerned about going “Out Of Business.” And approximately one-third said that they might need to lay off workers. The biggest small business problem is complying with government regulations, followed closely by falling consumer confidence in the economy, and lack of consumer demand.
The market is running up on many "things" but none of them have anything to do with sound fundamentals. Unemployment continues higher – as on Friday Whirlpool announced that they are seeing "recession-like demand" and are closing a plant in Michigan, laying-off 5,000 people. Housing is a massive disaster, and Uncle Sam is working on literally "nationalizing" the whole lot of foreclosed houses. Healthcare has risen by another 8% this year, and projected to rise by at least 6% again next year.
So if nothing has fundamentally changed – then why is the market moving up?
- The European summit absorbed the risk of a Greek default by punting the ball 6 months into the future – which relieved us of the burden of waking to a Greek disaster.
- The fall months of October, November and December are historically the best months of the year for the stock market.
- Almost 40% of all the hedge funds are "behind" the market, and to stave off redemptions, they will have to "get in the game" quickly (by making big bets) or risk losing investors.
- But if a fund loses an investor, the investor usually goes to another fund that has been doing well (normally a fund that has been buying heavily.) As "heavily buying” funds get more and more money, they will continue to buy heavily, and this becomes a viscous circle.
- Then we have the Federal Reserve and the "Plunge Protection Team" – officially known as the "Presidents Working Group on Capital Markets". Their job is to keep the market from plunging – because it instills consumer confidence when markets rise. This "wealth effect" is very real. When the stock market is rising, people feel better and spend more money. One firm recently compiled the data going back 30 years, and found that a rising market (especially around an important holiday) boosts spending by 16% over the same holiday in a sagging or flat market.
So, in total you have:
- 1 - A "Deal" in Europe that solves nothing, but does give them more time to make more plans.
- 2 - Almost half of Wall Street desperate to make some money, so they can get their bonuses.
- 3 - A Government, and a Federal Reserve that desperately want the market higher so that consumers (who should be saving) spend that additional 16%.
- 4 - Beaten down hedge funds, getting redemption calls daily - that "need" to “risk it all” and go for broke.
- 5 - And the very real possibility of another huge stimulus project out of our Fed.
All that has caused a market to run from 10,400 to 12,200 in 3 weeks. The run was not caused by fundamentals or improving economies, but simply by “animal spirits.” Now – does it continue? I think it does.
There is no resistance until 12,400 and then again at 12,724. We've gotten over the 200-day moving average. So, although we won't get there in a straight line (and currently we're tremendously "overbought") all the obstacles have been removed for a gallop higher. What makes sense to me right here is some back-filling. As people pile in because they're afraid that they have now missed the boat, Wall Street will oblige them by taking their money. But after a brief downtrend, I'd imagine the market would turn around and drive us higher again. Because we're carrying 6 long positions in our short-term account, and 5 of them are insanely profitable, I won't be shy about cashing out on a pull back and then re-entering on the way back up.
These desperate funds are going to seek all the “alpha” they can get in a short period of time. That means they'll pile into the LEADERS that should be safe for them and give them a return. Think leaders like: Apple (AAPL), Amazon (AMZN), Caterpillar (CAT), and Deckers (DECK). Currently the market is extended, and is overdue for a pause. But when it perks up again, the leadership stocks will continue to lead. The funds that need the dramatic returns won’t take chances with regular companies – so look at Priceline (PCLN). Also consider the technology ETF the XLK. Although it's not a rocket, the Holiday season is a big tech time and if Apple or Priceline are too expensive, then take a peek at the XLK.
In the short-term holdings account I’m carrying:
- SPY at 108.54 – now at 128.23,
- AMZN at 208.50 – now at 217.20,
- GLD at 157.49 – now at 169.25,
- SLV at 28.00 – now at 34.37,
- CLF at 66.55 – now at 72.83, and
- CMI at 100.06 – now at 102.61.
I did take a lot of profits last week – but there’s still some more there to be taken. I’ll hold them for a bit longer just to see. If things roll over (as I think we’re over-bought right now) I'll cash out and play some short side using HDGE.
Please be safe out there!
To follow me on twitter and get my daily thoughts – my handle is: “taylorpamm”.
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