The Fed is in all-out attack mode this week with $35Bn scheduled for release in the next 5 days. If that doesn't goose the markets, then I think we are screwed because people, $35Bn is A LOT of money for a week. It's $1.82Tn a year at that pace or 12% of our entire GDP being created by the Fed to give you the illusion that all is well with the markets. So say, thank you Chairman Bernanke, for treating us like children who would rather be lied to than facing reality and making necessary choices.
Speaking of necessary choices, I HIGHLY recommend looking at Barry Ritholtz's "Fix It Yourself" deficit kit. Barry takes the more complex (but also good) NY Times article and presents the very excellent chart that shows us exactly what budget cap needs to be filled and what the available choices are to fill it. It's a great way to think about the budget and also it makes you realize that 5 or 6 reasonable people sitting down with this chart at a table should be able to knock this thing out in a weekend if we were living in a rational world or perhaps one where an out-of-control Central Bank cooperated with a deceitful Treasury Department to maintain a status quo that clearly is not working for the American people.
QE2 is not about "fixing" the economy, it's about FIXING the profits of the Primary Dealers (Gang of 12) who are estimated to reap a $50Bn benefit by simply acting as the conduits through which the Fed distributes our money as if they were the town Santa tossing candy off the back of a fire truck.
POMO spending might keep equities up and that is good for those of us who own them but what is it doing for the great unwashed and unemployed masses? Speaking of unemployed, did you know that 100,000 of Octobers 156,000 jobs created were not actual jobs but a bookkeeping entry as the government changed the "seasonal adjustment" it made to payroll numbers? Our friend, John Maudlin, explained the shenanigans over the weekend:
"According to John Williams at Shadow Government Statistics, the BLS’ fiddling with the figures via what he calls ‘seasonal-factor games’ actually created 200,000 phantom jobs last month. John cites such finagling as the reason his prediction of an October decline and a rise in the jobless rate was wrong. It also explains why seasonally adjusted payrolls were revised upward by 110,000 in September, including 56,000 in August."
Of course, this kind of misrepresentation of the facts is small potatoes compared to what we get from the Mainstream Media but that was the topic of discussion of our Weekend Member Chat so I won't get back into that here. What I will get into, though, is pointing you back to this nifty little cartoon that does such a nice job of explaining Quantitative Easing – in case any of your friends ask you to explain it to them.
We went over the week that was in our Stock World Weekly Newsletter and you can still get your FREE copy this week as we still have a lot of work to do to set up the new billing system so the super-cheap sign-up prices remain, probably through the end of the month at this point. Since it's free, I can reprint the updated Beta 3 overlay chart that we've been using to track the expected market move from the September lows. It's not complicated really, Lloyd is just running the same trade-bot he ran in February but the Fed kicked us up a notch last week and we ALMOST broke the pattern (and we had calculated that this run would hit 11,500 anyway) but, of course, gravity reasserted itself last week as the markets pulled back about 2.3%:
It's not very hard to pick winners when you have the map, is it? That explains why Goldman Sachs had just 2 down trading days in Q3 with 31 days of $75M profits and seven days where the profits exceeded $100M. And that was with just 20% of the money the Fed is giving to them this week! Yes, it's a good time to be a Capitalist and a good time to be in cash as we are likely to have a nice, violent market move to play – one way or the other. We got our bearish satisfaction last week and cashed out, as planned, into the weekend as we watch and wait to see what the effect of $35Bn dumped into the market is. Of course, anything less than a move over our breakout levels will be a huge disappointment. As it is, we're already testing the breakdown lines I drew out last Wednesday in our dollar-adjusted market charts:
Gee Phil, that's amazing – you draw lines on Wednesday and that's exactly where we end up on Friday – how do you do it? As I keep trying to tell you nice people: THE MARKET IS FIXED!!! I used to help design these trading programs – why do you think they spend all this money to make them? Why do you think Goldman Sachs testified, when their precious HFT code was stolen, that "Somebody who knew how to use this program could use it to manipulate markets in unfair ways"? Does someone at Goldman Sachs know how to use this program? Could they manipulate the markets in unfair ways? Are there any "fair" ways you can think of that lead to a year-to-date 98% success rate in Goldman's market bets? (odds are 47,379,232:1 against)
We don't care (from an investor standpoint) IF the game is rigged, as long as we understand HOW it's rigged so we can play along at home. On Monday's post last week, we talked about shorting oil futures off the $87.50 line and that was a huge winner as oil finished the week at $85 on Friday. We also, of course, had some nice USO plays from Member Chat. It's very wrong that I can publish a trade idea like that to 200,000 people AND IT STILL WORKS! In Member Chat, where we can be more aggressive, we went with yet another QID play and that one is detailed in the Newsletter (pg 3) with an 840% gain. Is this "fair" to the 401K crowd, who sit like deer in the headlights while their wealth is transferred to people like GS and us in a game that's rigged to steal their hard-earned wages? Of course not, but the public voted out any hope of reforming the system this month so I'm not going to waste two years pitying their poor choices. They want unfettered Capitalism – they've got it and we're going to party like it's 1999!
On Monday we also sold PCLN Nov $430 calls for $8 and those fell to $2.30 (up 71%) and we went long on BA and VLO (hedged, of course) but it's the FAS play I want to talk about today as we're getting a great new entry opportunity here with XLF beaten down again. Keep in mind we are bearish and very much looking to be mainly in cash but, IF QE2 rallies the market, then we think the Financials make good laggards to play. FAS Jan $20 puts can be sold for $1.50 and that money can be used to fund the purchase of the Jan $20/23.33 bull call spread at $1.80 for net .30 on the $3.33 spread that is starting out, with FAS at $23.50, 100% in the money and on the way to a 1,000% gain.
This is the kind of stuff you can do with 1% of your sidelined cash and, if successful, you end up with a 10% profit on your entire virtual portfolio in less than 3 months – that's how we hedge against QE2 inflation and that buffers our more aggressive bearish plays like shorting PCLN calls or taking QID longs. I remain generally bearish until the technicals prove me wrong as, fundamentally, we are totally screwed and no amount of lipstick is going to dress this pig up for long.
Speaking of pigs, the November Empire State Manufacturing Survey was a 200% miss, coming in at -11.14 vs +13 expected and down from 15.73 in October. Employment was chopped in half, down to 9.09 from 21.67 and new orders were off 300% at -24.38 from 12.9 a month ago. One thing the Fed does seem to be right on is deflation as the TOTAL lack of manufacturing activity in the New York region led to a 2.6 decline in prices, down 500% from 8.33 in the prior month. When new orders are declining faster than you are contracting – it's a good bet next month won't be a good report either!
October Retail Sales, on the other hand, beat expectations of 0.8%, doubling September's 0.6% with a 1.2% gain but that was October and we know October started off well and begin falling apart in the middle of the month. Also, without autos, it was just a 0.4% gain and that was actually a miss of the 0.5% expected. Gas station sales accounted for a huge chunk of the gains, up 17.2% from last year thanks to a massive price increase so let's hear it for those plucky consumers, who can still be forced to dig into their pockets to buy the things they need to survive!
Also speaking of PIGS, the EU crisis did not magically go away over the weekend. In fact, Greece's 2009 deficit was revised up from 13.6% of GDP to 15.4% of GDP and that raises the 2010 estimate to 9.4%, which is 3 times Greece's 2014 goal. Greek officials are braced for 'substantial pressure' from the EU and IMF to adopt additional austerity measures. Ireland continues to insist that it doesn't need a bailout, but Germany is pushing it to ask for one anyway. Goldman economist Erik Nielsen says Germany's efforts are a 'purely political decision' prompted by "an assessment of the broader risk of the spread levels to economic and financial stability."
China has frozen property loans to property developers for the remainder of the year in their continued attempts to halt their runaway real-estate bubble. Goldman Sachs has already told their investors to RUN AWAY from China stocks and now the OECD is warning Australia about mounting inflationary pressures in that country as the US becomes the World's leading exporter of Global inflation. The Chinese Government is taking swift action to fend off the onslaught of "hot money" pouring in from the US but can their relatively puny economy ever hope to withstand Bernanke's "fully armed and operational" POMO assualt?
Jim Chanos says China is on a "treadmill to Hell" with construction now accounting for 60% of their economy – a far worse situation than the US was in 2 years ago – just before the whole thing blew up in our faces. Our man Alan Greenspan warns us that "The United States must move to rein in its massive budget deficits or it faces the risk of a bond market crisis" – Duh! He said the risk is that the deficit, which hit $1.3 trillion this year, could spook the bond market. That would result in long-term interest rates moving up rapidly and could lead to a double-dip recession.
We're back to watching and waiting mode but it only took us about an hour into last Monday's open to begin shorting the market so we'll see what happens during chat today but this week we have that $35Bn capital injection coming and that's going to keep us from committing too much to either side until we see what the effect of POMO, week 1 will be.
[Fraudmuda Triangle Artwork Credit: Special thanks to William Banzai7]