It’s all about the Nikkie and the Fed this week.
I mentioned last week that we had to assume there is a 1,000-point tether between the Dow and the Nikkie and, in general, we can usually count on that relationship holding and we had several day (overnight) trades on EWJ that went well using that logic. Today we should get a proper test of our connection as the two indexes are reaching their maximum gap once again with the Nikkei closing this morning at 9,572, 1,081-points below Friday’s Dow close at 10,653. Europe seems to think it’s the Nikkei that needs to catch up to the Dow as the EU markets jumped 1.5% this morning – pretty much gapping up at the open and holding it through 8am, so far – that will lead us to go back in on EWJ for a catch-up trade if our markets make a similar move (with our target levels as easy indicators of a "real" rally).
Maybe Europe is right as the Yen was jammed all the way up to 85.8 to the dollar in our 3am trade and only fell back to 85.55 before being turned back up. Both China indexes jumped 0.5% this morning as investors were happy with the Central Government’s decision to order 2,087 companies in 18 sectors to shut down obsolete plants in a decision aimed at streamlining industries that were polluting, energy-intensive and had excess capacity.
This kind of makes me laugh at the talking heads on TV, whos think they are being clever when they call GM "Government Motors" as any fool reading the papers can see what real government intervention looks like – and the investors in China LOVE IT! "This is very good news for the steel and cement sectors, as it will foster the development of these industries," said Chen Jinren at Huatai Securities.
Japan will close for a vacation next week and, of course, we have the FOMC rate decision tomorrow. While no one is expecting a rate change, EVERYONE is now expecting some form of quantitative easing to pump more money into the US economy and we moved on and ignored Meredith Whitney on Friday afternoon – on the same day that we ignored some terrible jobs news:
China is not just managing their economy, they are managing ours as they risk their own growth in order to pull up the slack we were beginning to see as Factory Orders tapered off in July. China is lagging behind a target for reducing the amount of energy used relative to gross domestic product, with only months to run in Premier Wen Jiabao’s five-year plan. It must be nice to live in a country that has a plan… “If the government has true resolve, then investors, especially overseas investors, may have not fully comprehended the implications of such policies on China’s heavy industry and demand for commodities,” UBS’ Beijing-based economist Wang Tao said in a note last month.
Never doubt the true resolve of the Chinese government and that means commodities may be getting far ahead of themselves. We’re watching that $3.40 line on copper as what kind of rally do we have if Copper can’t even get back to it’s April highs? Oil also isn’t looking too impressive under $82.50 and we sure aren’t seeing the kind of US demand that supports that level and China wants to consume LESS, not more oil and is taking DRASTIC steps to do so so what makes us think we have enough momentum to get through the roof (Dow 10,700, S&P 1,155, Nas 2,300, NYSE 7,350 and Russell 666) – where we had plenty of trouble last week?
Before we get too excited about Europe’s 1.5% gain at the open, let’s keep in mind they fell about that much on Friday and they are only changing their minds based on our "stick-save" close, as indicated on David Fry’s SPY chart:
That’s all Europe is doing this morning – getting back to where they were before they saw the jobs data we all seem to have decided to ignore as of about 2:30 on Friday. We had been fortunate enough to select a couple of lovely day trades in Member Chat and Mr. Stick closed out our week with a bang but we went neutral into the weekend as we think the ENTIRE rally is based on nothing more than expectations of QE2 and expectations like that are very easy to disappoint – especially if investors think the answer to their prayers will be twitted by the Fed in between their normally tight regular policy statement.
I’ll believe in QE2 when it’s matched by a big-gun stimulus program that creates JOBS FOR THE MIDDLE CLASS – a situation we discussed in detail over the weekend in "The Crisis of Middle-Class America." We are not taking any positive moves in the markets too seriously until we see some improvement in the lot of the bottom 90% of our people. We are bullish – in that we are betting the rich (Big Business) will get richer under current market conditions but the foundation of this country is still crumbling and that makes it kind of hard for us not to take all of these moves with a Lot’s wife-sized grain of salt.
Speaking of how we are greedy, immoral bastards who are dooming ourselves: Saudi Arabia agrees to lift the ban on RIMM’s Blackberry and, as a bonus, they get $30Bn worth of F-15s (84, made by BA) in the biggest arms deal ever! When asked if there were any security threats to the US by giving Saudi Arabia our most advanced fighter jets – an official said: "Of course not, everyone knows that Saudi Pilots are very accurate with jets!"
Let’s all be careful out there!