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.
The
Market...
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.
Tips:
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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