This Week in Barrons – 9-16-2012
“I Hope this was a Plan that just Came Together.” … Almost A-Team
This week – one by one – the pieces of the puzzle were manipulated into place and the picture emerged. It started with Mario Draghi saying he would do "What ever it takes" to keep the Euro together. Then the German courts stepped up to give their blessing by voting yes to the ESM. Finally The Ben Bernanke exceeded all expectations by saying that he’d print another $40 Billion a month (focusing on the housing market), and will do even more if the economy doesn't improve!
A while back I posted a study showing that 50% of the market’s gains have come within 2 days of an FOMC meeting and announcement. So factually – remove about 20 days a year – and you remove 50% of the market’s gains. With the DOW sitting about 600 points from its all time high – you need to ask yourself – is this a true reflection of the economy? After all:
- jobs stink,
- 47 million people are on food stamps,
- inflation is roaring,
- CD's are paying 3/4 of a percent,
- economic activity is below sluggish (basically in recession),
- and yet we are nearing ALL TIME highs in the stock market.
This shows that the stock market has little to do with the economy, and the market’s movement has nothing to do with fundamentals. For example: on the very same day that 384K people signed up for initial jobless benefits (1st time unemployment), which should have sent the market down – we roared higher for 200+ points due to ‘free money’ from the Fed.
What you saw was the: “We’re All In” roll of the dice. Between the ECB in Europe, the FOMC in the U.S., and the stimulus/infrastructure spending in China, the world is going to be blanketed in cash. And when The Ben Bernanke was asked about inflation he said: “Food is soaring because of the drought, and oil is soaring because of global events and demand.” Sorry, materials are soaring because our Fed is purposefully destroying whatever infinitesimally small value the dollar has. Companies will correspondingly want more dollars for their products because dollars are going to be worth less as the days go on – and the spiral begins.
So what happens now? The answer to that question isn’t as simple as it was a month ago. On one hand you could think that the markets and the economy would continue higher, but since none of this currency printing addresses the structural issues (along with the overwhelming debt) it will all come to a head in the near future when we will crash again. BUT – never in the history of the world have Central Bankers been able to coordinate massive money printing like they can now. That is a game changer. Consider the number of times that you have heard that the “Fed is out of bullets”, and “There’s not much left that the Fed can do”. What do you mean the Fed is out of bullets? The Fed (like Europe and China) has become a gigantic printing press, that can print as much currency as they want, and are therefore NEVER out of bullets. We’ve entered an Economic Twilight Zone where ALL of the old rules are out the window.
In the past (think Weimar Germany and Argentina), if a Country printed money, their currency became worthless on the global stage, and eventually it would implode upon itself and go belly up. But, what happens if the entire globe starts running the printing presses wide open? In the end, the entire world defaults, the currency markets would shut down, and a Global "reset" would be announced, along with a new global currency installed. But until that time, anything and everything is possible. Until then, all any of us can do is continue with our precious metals, work the equity markets to our advantage, and transform as many dollar gains into “material holdings” as we can. We've entered a very strange time for sure, and I can think of no other thing to do.
Over the past days I’ve received many congratulatory e-mails concerning my QE3 prediction – and to that end I say thank you. This week we came into the FOMC meeting with some long side trades, but we surely were not loaded to capacity. There was the uncertainty that The Ben Bernanke could disappoint, so we kept some powder dry for another day.
The Fed then announced their detailed plans, and the Europeans will surely follow. Since markets don't function on fundamentals any more, and banks really don't want to lend money any more, the money has to go somewhere. Will the banks channel these new funds into Bonds? Doubtful – because why buy bonds that pay 1.5% interest, when they can run with the market and make billions? It’s my feeling that a large portion of this money will work its way into the stock market.
I disagree with the Fed’s decision to continue quantitative easing. Quantitative easing is basically printing money to decrease the rate on yield-bearing assets. As the Fed purchases these assets, the yield on these assets decreases which (hopefully) trickles through the economy allowing businesses and individuals to take out credit at favorable rates. The Fed then hopes that businesses and individuals will increase borrowing and consumption. This works if money actually moves within the economy. But, if individuals are not interested in purchasing a home (for example), or can’t get a mortgage (due to stringent lending requirements), or businesses are not seeking to invest – then cheaper money doesn’t matter. A measurement of how money is actually moving in the economy is called the “Velocity” of money. Factually, the ‘Velocity’ has DECREASED by 25% (and is continuing to decrease) since 2008. So no matter how you examine it – money simply isn't moving as quickly as it needs to within the U.S. economy. This decrease in velocity signals that the current QE program is not going to fix the current economic situation.
Now market-wise – the market is not a voting machine in which the masses decide the winners and losers, but rather it is a weighting machine in which the quantity of money is the sole arbiter of price. The market has cheered all of the QE programs announced by the Federal Reserve, despite their failure to significantly generate jobs or promote growth. For this reason, I am long the market as I would rather be upset about the monetary situation of the nation and making money, than upset and losing money.
My guess is that we are going to challenge the 2007 all time highs, and I suspect there's a good chance we actually break above them. The only issue is that markets often inflict the most pain before they allow reward. What would prevent the markets from pulling a fast 5% pull back to confuse people, and then turn around and push toward the upper limit? Nothing at all. In fact, it's the way Wall Street works. Therefore, don't be surprised if we see some weakness, simply because it's designed to confuse you and shake your confidence. Moving ahead we'll be looking to add on dips – instead of chasing things higher. We think the pump is primed, and Bernanke loves a rising market.
As an aside: if the political polls in early October show the President behind Romney in key swing states like Ohio and especially Florida, a desperate President Obama may try to turn things around by doing what only a President can do. He could order an attack on Iran, or co-ordinate an attack with Israel. The election would suddenly then be about the war. The President's spin-artists would try to make the November 6th vote a referendum pitting a businessman and his budget-geek running mate – against the Commander-in-Chief who killed Bin Laden and took out Iran's nukes. So don't be surprised if one morning in the not-too-distant future you see pictures of smoke pouring from (what used to be) Iran's nuclear factories.
In general terms the inflationary areas like oil and materials are the ones that run the best when the printing presses are running. But that old adage could crack some, because the bankers now know that it's really not about fundamentals and inflation any more – so other areas such as technology and financials could also be big winners going forward. In terms of what within each of the sectors do I like:
- GLD (Gold ETF) is an old favorite of mine – I prefer the physical metal – but I like the trade none the less – you will get resistance in the mid 170’s – but if/when it breaks free …
- SLV (Silver ETF) is also a favorite (like the physical metal as well) – resistance will be in the mid to high 30’s – but all time high is near 50 – so room to run there.
- GDX / and GDXJ (Miner and Junior Miner ETF’s) – extremely beaten down sector – but play with caution.
Thanks to DS for other materials selections such as SLX (Steel) and USO (Oil) – both interesting and can easily do well in inflationary times.
Currently I’m holding:
- GDX – in at 42.50 (currently 53.87) – stop at 52.00
- SPY – in at 142.54 (currently 146.97) – stop at 144.50
- SBUX in at 48.88 (currently 50.53) – stop at 50.10
- LOW – in at 28.02 (currently 29.28) – stop at entry
- MRO – in at 28.13 (currently 31.09) – stop at entry
- NTAP – in at 35.13 (currently 35.81) – stop at entry
- IBM – in at 198.34 (currently 206.81) – stop at 203.00
- GLD (ETF for Gold) – in at 158.28, (currently 171.87) – no stop ($1,769.80 per physical ounce), AND
- SLV (ETF for Silver) – in at 28.3 (currently 33.59) – no stop ($34.60 per physical ounce).
To follow me on Twitter and get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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