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Thursday, October 6, 2022


50 DMA Friday – S&P Struggles to Stay Technically Positive

Is overbought the right price now?  

Just a week ago, there were literally thousands of articles saying: "Well, of course we had a sell-off, the markets were so overbought it was bound to happen." Yet here we are, a week later and now they are saying what a great buying opportunity this is.  Seriously?  We're now only 5% below the "obviously overbought" market top.  What changed in the past 7 days?

The market has gone nuts since August, rising from S&P 2,400 to 2,872, which is a 20% run in 5 months.  Markets don't go up 20% a year, let alone in 5 months.  Hell, they hardly even go up 20% in two years and, of course, the logic is TAX CUTS – which seems to justify everything but let's consider that very few companies drop more than 20% to the bottom line (14.6% is the average) and that they are taxed on their profits, not their income so, even if the taxes were as much as the profits (they are about 20% of profits on average) and the taxes were eliminated ENTIRELY, then the companies would only make 14.6% more money.  

That is, of course, not the case and there is nothing in Q1's earnings or guidance to give any indication that the new tax law will have a serious effect on forward earnings – mainly because US Corporations never paid 20% taxes in the first place (about 13.5% on average).  So, if they actually paid the new 20% rate, it would be a tax INCREASE for those companies who routinely park their cash overseas or pay tens of millions of Dollars to accounting firms and Investment Banks to avoid paying Billions in taxes (Apple alone is bringing back over $200Bn they had stashed overseas).  

Trump is taking credit for repatriating funds from overseas but what he's really doing is giving companies a tax incentive (15%) for bringing back money they earned under the Obama Administration (because he was mean and would have taxed them) and for not paying their taxes under Obama's budgets.  In fact, Trump is REWARDING the corporations for hiding money from Democrats and letting future CEOs know that any time a Democrat tries to tax them – they are free to flaunt the law until a Republican is back in power to forgive them.   

Trump is also taking credit for the market rally, though the last couple of weeks finally got him to shut up about it.  As you can see from the chart on the left, which has been around for 100 years, there's nothing going on here that hasn't happened before and we had a late-stage parobilic move up, people got really excited and thought it would go on forever and now we had a sharp pullback and people are piling back in and here we are – at the spot labeled "Complacency" – making all the same mistakes we made just two weeks ago! 

As I noted in yesterday's Report, we amped up our hedges into the weekend and, this morning, I put out a note to our Members saying:

/YM is 25,300, that's my favorite short and we have /ES 2,740, /NQ 6,845 and /TF1,545 and my stop-outs are if we get over 2,750, 6,850 or 1,550 but, otherwise, I want to accumulate /YM shorts.  

The reason I'm skeptical of the rally is that we've bounced back on 1/3 the volume at which we sold off and forming a weak base is why we were shorting the market in the first place a few weaks ago.  Apparently, traders have learned nothing at all this month and we're right back to the madness of the Dow moving up 1,500 points on ridiculously low volume.  This is simply a lack of sellers at the moment and God help us all if they come back!  Here's the recent S&P ETF (SPY) volume:

Date Open High Low Close* Adj Close** Volume
Feb 15, 2018 271.57 273.04 268.77 273.03 273.03 103,991,400
Feb 14, 2018 264.31 270.00 264.30 269.59 269.59 120,735,700
Feb 13, 2018 263.97 266.62 263.31 266.00 266.00 81,223,600
Feb 12, 2018 263.83 267.01 261.66 265.34 265.34 143,736,000
Feb 09, 2018 260.80 263.61 252.92 261.50 261.50 283,565,300
Feb 08, 2018 268.01 268.17 257.59 257.63 257.63 246,449,500
Feb 07, 2018 268.50 272.36 267.58 267.67 267.67 167,376,100
Feb 06, 2018 259.94 269.70 258.70 269.13 269.13 355,026,800
Feb 05, 2018 273.45 275.85 263.31 263.93 263.93 294,681,800
Feb 02, 2018 280.08 280.23 275.41 275.45 275.45 173,174,800
Feb 01, 2018 281.07 283.06 280.68 281.58 281.58 90,102,500
Jan 31, 2018 282.73 283.30 280.68 281.90 281.90 108,364,800

Image result for house of cards animated gifThat's 1.5Bn shares on the way down from 275 (the low was put in on the 9th) and 480M on the way up – that's simply not at all good!  If you build a building with 1.5Bn bricks and someone knocks it down and then you rebuild the building with 480M bricks – is the build more or less sturdy now?  Like bricks, inflows form the foundation for price supports and, without them – you are looking at a house of cards.

Don't get me wrong, we were buying stocks right along with you as they went on sale because who knows if we'll see these prices again BUT we also put more money into our hedges so we're now better protected for the next drop and, if we don't get one, then we will do very well in our long positions (see yesterday's review of our Money Talk Portfolio).  

For example, I was reviewing our Options Opportunity Portfolio (OOP) yesterday and, as of 1pm, it was at $97,587 but, thanks to the ridiculous afternoon rally, the same exact positions popped to $103,550 into the close.  That's simply ridiculous, gaining $5,963 (6%) in 3 hours and, as I made many great speeches about earlier this year (and last) – it's logically unsustainable or everyone will be a Billionaire making those kinds of gains – and where would all this money be coming from?

Perhaps we will all be Billionaires if inflation keeps moving up.  Most people in Zimbabwe were Trillionaires when their currency collapsed, as were Germans after World War I and we have just the kind of burgeoning Fascist Regime to pull it off in the US as well!  Import prices were up 0.4% in January, setting a 5% annual pace and, ex-Agriculture, which has been weak, it was 0.9% – very Weimar indeed!  The Germans were brought down by war debts which caused huge deficits and rising interest was the nail in their coffins as the cost of servicing the debt became unbearable – pretty much what I was saying is happening to the US in Tuesday's Report

Also inflationary, Housing starts popped higher to 1.33M and that's good for the broad economy but very inflationary and still nowehere near our normal level of about 1.6M per year (think about how long it takes to replace 110M homes, not to mention population growth).  Overall, it would be a plus but now when you are running up $7Tn in debt to stimulate the economy.  At 3% interest, that's $210Bn a year in interest alone – enough give each home-buyer $150,000.  

So think about that, what would be a smarter stimulus, spending $7Tn to give tax cuts to people who don't need it and stomp all over the World with our armies or tell anyone who wants to buy a new home they can have $150,000 in cash?  You don't even have to give them the cash, just give them low-interest loans that make the mortages more affordable and you'll fuel housing growth.  Perhaps, since we're saving $6.8Tn AND $210Bn per year in interest expenses, we could also mandate that new homes come with solar panels, which will take pressure off the electric grid that needs $2Tn worth of repairs and that too would save the new homeowners money and would lower the demand for energy and reduce the cost for all of us.

Image result for republican clown partyYes, there are sensible ways to govern but you wouldn't know it from the pack of bozos we have in office now.  Do you want to stop Russia from interfering in the election?  Give all registered voters "VoteCoins™", blockchain tokens that they can then send to the candidates of their choice, fully traceable and verifiable and you'd have the added benefit of instant election results with no messy ballot and recount issues.  Give us just $1Bn and my team and I can have the system running in time for the November elections.  

There, what else needs fixing?  

We'll see if the indexes are going to be "fixed" today.  As I'm writing this (9am), we're up about $500 per contract on our /YM shorts already as we cross below the 25,200 line and now that's our stop to lock in $500 and make sure we can afford our Egg McMuffins.  Now we're playing for a sushi lunch!  The critical lines to watch are those 50-day moving averages which, as you can see on our Big Chart, are Dow 25,150, S&P 2,723, Nasdaq 6,612, NYSE 12,955 and Russell 1,547:

As of this morning, the NYSE and Russell (our broadest indexes) are below the lines, Dow and S&P are on the lines and the Nasdaq is off in LaLa Land – as it often is – especially after Apple (AAPL) has a good day.  Now that we're a bit lower in the Futures, we can cash in our gains on the Dow (/YM) at 25,150 (up $750 per contract) and /TF at 1,535 (up $500 per contract) and swtich to the Nasdaq shorts (/NQ) at 6,798.50 with a tight stop over 6,800.  Since they remain the highest over the line, they have the farthers to fall if everyone is giving up their 50 dmas today.

Meanwhile, nothing beats a good hedge but the time to add those was yesterday, when the market was going up – we got great prices yesterday because we took sensible precautions while others were throwing caution to the wind.

That's why we're going to have a great, non-stressful Holiday Weekend – no mattter how far we fall today.

Have a great weekend, 

– Phil

I will be giving a 4-hour "Master Class" on Hedging, Options Trading Strategies, Portfolio Management and Fundamental Analysis at the opening of the New York Traders Expo on Sunday, Feb 25th at 9am at the Marriott Marquis – so register now if you'd like to hear a lot more about these strategies and get our latest trade ideas.



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In their missive Velocity of Money, UCSD Econbrowsers Menzie Chin and James Hamilton pick at Friedman's equation, and go on to make the point as we have many times in the past, in that there is a critical distinction between the FED creating reserves in QE, as opposed to printing money…

The demand for reserves has increased by a trillion dollars since 2008. The demand for currency held by the public has not. The supply of reserves could therefore increase a trillion dollars without causing inflation. The quantity of currency held by the public could not.

They go on to explain why an increase in money supply implies nothing about inflation, and in fact reduces velocity…

Even if there’s no particular relation between the quantity of marbles [money supply] and the stuff we care about (inflation and real GDP), you could still go ahead and use the equation above to define the velocity of marbles. But what you’d find is that when marbles go up, the marble velocity goes down, and it makes no difference for output or inflation. 

And their conclusion?

someone who insists that inflation (P) must go up just because the monetary base (M) has risen may have lost their marbles.

Conclusions therein? Increases in money supply, even from wage growth, and as much as we might want them to, do not necessarily or always correlate with inflation.  Especially when the circumstances are less than normal, QE, ZIRP, NIRP.  Hamilton and Chin see the resultant pattern, but fail to address the underlying causes.

Following up on whose not driving the economic bus, and Hamilton and Chen, another interesting take on "velocity" from Yi Wen and Maria A. Arias at the St. Louis Fed, where they pick at Friedman's equation MV = PQ. 

According to this view [Friedman's equation], inflation in the U.S. should have been about 31% per year between 2008 and 2013, when the money supply grew at an average pace of 33% per year and output grew at an average pace just below 2%

So we know from Hamilton and Chen, and the math above, that increases in money supply do not necessarily correlate with inflation rates, or nominal GDP (output).  So why did the monetary base increase not cause a proportionate increase in either the general price level or GDP?

"The unconventional monetary policy has reinforced the recession by stimulating the private sector’s money demand through pursuing an excessively low interest rate policy (i.e., the zero-interest rate policy)."

Indeed "abnormal" monetary policy or "there is something is this more than natural" QE, ZIRP and NIRP pursued to excess do reinforce constrictive conditions, viz a tightening. But how does this stimulating the private sectors money demand manifest?

"The answer lies in the private sector’s dramatic increase in their willingness to hoard money instead of spend it. Such an unprecedented increase in money demand has slowed down the velocity of money, " 

Hoarding and liquidity preference increased demand for money, and caused velocity to tank?  Sound's Keynesian, but wait remember what Hamilton and Chin wrote in 2010?

The demand for currency held by the public has not [increased].

So who is right? Or has somebody missed something? More important, how might lower velocity or the turnover of money effect the economy?

When there are more transactions being made throughout the economy, velocity increases, and the economy is likely to expand. The opposite is also true: Money velocity decreases when fewer transactions are being made; therefore the economy is likely to shrink.

Wen and Arias briefly touch upon something critical in hoarding, liquidity preferences and then transactions velocity or the turnover of money, but go no further down the path. 

At the end of the day, much like Hamilton and Chin, Wen and Arias see the resultant pattern, but fail to dig farther to make the connection or address the underlying causes.

Alrighty then….

Phil – "I have no interest on nitpicking this issue with you."

Neither do I, as I only offered to assist in the exercise of critical thinking which is essential to analysis. Is this now taboo on PSW, as in the judicial, executive and legislative branches of our government?  Here's an example of a nitpicking comment…

Phil – "You want to disagree and cite a ton of BS that's fine"

Well, there you go again with the nitpicking, another false assertion and attempt at ad hominem. BTW, I don't on either count as I hold myself and those I have truck with to a higher standard.

Bringing attention to the falsity in econometric MSM narrative or kool-aid being served up is what I do. I can only point out WHAT the twisted, omitted and obfuscated facts, being glossed over with lipstick on the pig ARE. 

As presented, if ones sniff test fails to discern BS from a truffle, my somewhat limited powers of seeing the forest for the trees ends right THERE, just below that individuals impervious snout. 

You nor anyone else, such as the tiny fingered, Cheeto faced, ferret wearing shit gibbon, has to agree with alternative views of, or a deciphering of the facts viz. the truth.  I can only attempt to lead one to water. 

At the end of the day, I don't truck well with "disagree and cite a ton of BS", never my MO and I do not attempt to do so. I leave all sleight of hand, red herrings and ad hominem utilized to defend ever shifting positions of the goal posts, to trained professionals on a closed circuit.

If that is ones prerogative they can have at it all they want Ol Chum. As for nitpicking, that's all folks. 

Phil – "You may choose to accept that simple statement or Naybob’s 40-page rebuttal."

My posts are not rebuttal nor 40 pages. Unfortunately, simple statements do not always suffice. Why do we eschew the texted, twittered, 280 character, elevator version which permeates the ADD, sound byte and mood enhancer afflicted society we suffer?  Same as it ever was, the devil is always in the details.

Phil – "after tripling supply of money, rising wages will increase the velocity and, with all that money floating about, a small increase in velocity will cause a large increase in inflation."

Ceteris paribus, more often then not historically correct, under normal circumstances.  However, this old dog knows that these are not normal circumstances, it is "different" this time but not like some dogs THINK.  As in what I have been saying for years about QE, ZIRP, NIRP and now QT, a central bank witches brew with toxic side effects viz. "there is something more than natural in this". 

Why do you think I posted those renowned economists and pundits, some who get the wage angle, and others who can't quite put their finger on the velocity thing? As in, seeing the resultant pattern, but failing to arrive at the underlying cause? Bad doctors, give you pills to mask the symptoms. Good doctors find the cause or what lies beneath. Again, always in the details. 

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Phil – "I see that Naybob is still acting like a very old dog with an even older bone. Certainly far too senile to remember "

Not quite on that ad hominem. Old dog, yes we know many old tricks and new tricks, which can be based on old ones or not.  You betcha on the bone, due diligence requires diggin hard, diggin smart, and definitely not with one's head buried in the sand. Those who assume together = ASS U + ME. 

What I'm trying to teach the discerning dog is a "new" trick, which might surprise some dogs when things don't go the way they THINK it should, then flail around with their hands in the air saying, "How and why did that happen? DOH!!!"  Pay attention to the details next time? If there is one.

Few surprises for this old dog. Why? Always in the details, and because I've seen that movie too.  Praemonitus, praemunitus and Out.

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