Wheeeee – this is going to be exciting!
Yesterday we knew that the move up was fake, Fake, FAKE and we acted accordingly in Member Chat. We had a nice QID cover play right in the Morning Alert that was an easy fill as the Nas went higher and higher all day. It was the Aug $16/17 bull call spread at .42, and the $16 puts sold for .29 for net .13 on the $1 spread with a nice 669% upside if the Nasdaq heads sharply down on us. Our stops on the play were a combination of Nas 2,300, Dow 10,700 and Russell 666 and we got the Nasdaq and the Dow over their marks but, once again, 666 proves to be an ominous barrier for the Russell.
We put on our Stock Market Parachutes and went bearish on our Mattress Plays as well. Not so much because we are long-term bearish but because the run-up ahead of the Fed decision seemed very overdone as pretty much EVERYONE is now predicting QE2 so what kind of market mover can it now be – even if the Fed does drop another Trillion or so on us this afternoon? Later in the day we added an SDS spread, similar to the logic of the QID but longer-term (January). As I said in my closing comment to Members: "We haven’t got 666 on the RUT yet so the risk/reward favors rolling up to the Dec $110 puts and staying naked through tomorrow. If we are over on 3 of our levels tomorrow, then we can cover."
When we are near the top of our ranges (see Charts from the Future: 5% Rule Update) we can assume there will be upside resistance so we have less risk shorting the indexes we think are over-extended compared to the potential reward of what happens if the news that had been pumping up the market on rumors turns out to be a big disappointment and causes us to retrace.
This is not contrarian investing nor is it trend following as we make our bets very much against the trend (ALWAYS sell into the initial excitement) – it's simply our attempt to apply logic and statistics to a volatile situation. Also, keep in mind we are still long-term bullish and that's where the bulk of our open trade ideas are aiming so we lean towards shorter-term bearish covers to keep us safe through "events" like today.
Looking at the pre-market - it looks like we lucked out and we're getting a big dip (8am) as we race back to fill the gap we had hoped we were done filling on Friday. As we expected, the overseers have been driving the wage slaves too hard and the wheels are starting to come off the wagon as Q2 productivity dipped 0.9% after putting up a stunning (and unsustainable) 3.9% gain in Q1. Of course, no one was rewarded for their labor although the diminishing productivity raised the otherwise lower Unit Labor Cost by 0.2%, way up from the -3.7% in Q1 – when the whips were really cracking!
I know my Conservative friends will probably say that we are treating our workers far too well and we need to cut wages and benefits further to let them know we are serious about competing with India, China and Africa in the labor market in order to maintain the status quo (that being the status quo where the top 1% get very, very rich while the bottom 99% work themselves to death and are rewarded with lives of constant toil and debt until they finally die of something they can't afford treatment for). Sadly, this is the problem all slave-based societies reach at some time – you eventually get to the point where more whipping and less money spent on the workers just doesn't add to the bottom line anymore and then you are forced to compete with the people who were investing in skilled labor and technology while you were busy squeezing the last drops of blood from a stone.
Supporting Big Business America in their endless quest to cut jobs and lower costs is MADNESS for our Government. We must put people in this country back to work at GOOD jobs that pay GOOD wages. We must reward companies that hire people and spend money on Research and Development that will keep America competitive in the 21st century. Right now our government policy is essentially aimed at keeping the plantations open in the hopes that the slaves will appreciate their efforts – madness!
Mark Thoma has a good article this morning asking "Is the Unemployment Problem Cyclical or Structural?" While the man on the bread line may not care WHY he is unemployed, Mark points out that the fact that there is SOME structural unemployment is no reason not to address the cyclical unemployment and that, CLEARLY, is something the government can and should be doing through stimulus measures. It is not enough to "save" jobs – important though that may be. Those jobs we are saving are paying less real wages and less benefits than they paid 5 years ago. What we need to SAVE is America and the people of America need to wake up to what we need to be saved from!
Add up the earnings (and these do not include Capital Gains – the top 0.01% racked up over $2Tn in capital gains alone) of the top 10% and you get $3Tn. Add up the earnings of the other 133M people and you find 10x more people fighting over the remaining $4Tn and that's not including the 25M unemployed who are earning nothing at all or scraps from part-time work. How can we expect to build a functioning country this way? The bottom 90% are actually LOSING ground every year while the top 0.01% get raises in excess of 20%. Why do they get these raises? For cutting costs! What is the number one cost of American business? Labor!
See how this game is played?
Last quarter we had a market party as Q1 Productivity rose 3.9% while Unit Labor costs declined 3.7% – that is Capitalist Nirvana! Increasing productivity is supposed to INCREASE the living standards of the workers but, as we see in this quarter's record Corporate Earnings and this quarter's Personal Income Report, ALL of that money is dropping to the bottom line. Companies who hire are being punished by Wall Street and companies that outsource their labor to cust costs are rewarded. The system is not just broken – we would be better off it it were broken. The system works perfectly and the way it works is to turn the bottom 90% of American citizens into 3rd World wage slaves while lavishing huge rewards to those at the top who are willing to sell their fellow man down the river to win the great game of Capitalism.
THAT is the structural issue we need to address in this country but it won't happen until the bottom 99% (those making less than $250,000 a year) wake up and see where the political lines are really drawn in this country. We'll get a look later at what, if anything the Fed decides to do to "save" the economy but I'm beginning to wonder if this is an economy worth saving or if we, the people, would ultimately be better off letting it fall and building something better from scratch.
The BOJ left their rates unchanged this morning, maintaining their 20-year status quo. Chinese property prices rose 10.3% in July but that is the slowest increase in 6 months and is not going to be very supportive of runaway copper pricing (copper failing $3.40 was one of our key bearish indicators last week). Also indicative of cool commoditiy demand, the US Refining Cartel did it's best to maintain high gas prices by cutting processing rates down to 90.7% of capacity – about where we usually are AFTER a hurricane. Gasoline stockpiles are still 6.9% above the 5-year average and the 5-year average is pretty high after 3 years of lackluster demand. Oil supplies also are 8.9% above the 5-year average, highlighting how ridiculous the recent run back over $80 has been (we shorted at $82.50). Distillate inventories are 25% over the 5-year average.
This is what happens when you stimulate the top 1% and forget about the other 99% – there's only so much excess consumption 13M people can pull off by themselves! See, you may think these are political rants but they have investing ramifications – that's why we know to short commodities when they have these silly, speculative rallies – there's no base to support them…