Monday's Markets – More Monetary Madness

Monday's Markets – More Monetary Madness

By Phil of Phil's Stock World 

Get ready for a crazy week!

We have data this week, we have the Fed and we have elections and yes, we have a worthless currency that’s worth less and less every day.  This morning, China’s PMI hit 54.7 for October, up from September’s 53.8 and indicating that China’s decision to raise rates had no impact on growth. India found this thrilling and went up 1.4% (as of midnight) but the Nikkei flat-lined because China’s gains are Japan’s losses at the moment as the Dollar failed to maintain an early pop to just 81.2 and fell back more than half a point in Asian trading.  

The yen’s moves have been "excessive" recently, a Japanese government official said Monday, but he declined to comment on whether Tokyo authorities intervened in the foreign exchange market earlier in the day to knock the currency lower. Exporters remained under selling pressure, with Canon off 0.6% and Toyota Motor down 1.1%. Honda Motor lost 3.4% despite reporting solid second-quarter earnings as the automaker cut its fiscal second-half net profit outlook. Sony shares fell 2.2% as news that the electronics giant had returned a net profit in the July-September was offset by concerns over pressure on earnings at its television division.

"The soft U.S. dollar suggests that the market is still gearing up for a sizable QE this week," said Greg Gibbs, currency strategist at RBS in Sydney. In Seoul, the market was modestly higher but investors were cautious ahead of the Fed meeting this week. Net selling by foreigners also tempered demand. "Some investors appear concerned that the Fed’s meeting this week may not take enough quantitative easing measures to satisfy market demands," said Lee Kyoung-min at Woori Investment & Securities in Seoul.

QE2, QE2 and more QE2 – this is the basis for the global rally.  How much QE2 will be enough to satisfy a global market that is now counting on AT LEAST $1Tn to be handed out by the Fed in 2011? It’s not just QE2, of course, the Fed continues to hand out money to Wall Street on an almost daily basis through their Permanent Open Market Operations or "POMO" and that trade has become as reliable as our "3am Trade" on the Yen as we at PSW have now begun to follow the POMO schedule (as Goldman Sachs has been advising their own clients) to give us an advance look at how each day will trade. See Zero Hedge's "Goldman Advises Clients To Front Run The Fed Via POMO." (And there are other ways of giving money to Wall Street, for example read "Treasury Confirms That The Definitive Treasury-AIG-Fed Shell Game Will Proceed As Planned.")

Just like our 3am trade, it is amazing when you can tell all 6Bn people on the planet earth about a trade yet it STILL continues to work like a charm.  How can there be a bet where EVERYONE wins?  There can’t. Someone has to lose but, in this case, the loser is the Federal Reserve Bank of the United States of America – which plays the part of the perennial sucker as they are willing to sit down at the table and be taken for all they have two or three days a week. And why are they willing to be so generous?  BECAUSE IT’S NOT THEIR MONEY!  

Wake up America – the Fed is giving away YOUR money in what seems like "just" Billions but, as I said on Friday, is actually TRILLIONS of your dollars being used to support top 1%’ers on the GS Client Distribution List, who got this note in mid-October:

On the interplay between the FED and STOCKS: Since Sept 1 – when QE was becoming a mainstream focus – if you only owned S&P on days when the Fed conducted Open Market Operations (in US Treasuries), your cumulative return is over 11%.  in addition, 6 of the 7 times when S&P rallied 1% or more, OMO was conducted that day. this compares to a YTD return of 5.8%.  the point: you would have outperformed the market 2x by being long on just the 16 days when – this is the important part – you knew in advance that OMO was to be conducted. The market’s performance on the 19 non-OMO days: +70bps.

Goldman actually understates the situation because, as we have been pointing out over at PSW, the difference between performance on Fed Free Money days vs Non is about 10:1 to the bull side with the S&P up 10.5% since August 27th on 20 POMO days vs up 0.91% on 24 non-POMO days.  Since late September’s Fed meeting, the moves have gotten more extreme and your would think, at first, that GS may have poisoned the well with their October note to clients but, quite the opposite, now the fat-cat money is rolling in and MAGNIFYING the move on POMO days, driving the market into a frothy frenzy:


[chart via James Bianco writing Barry Ritholtz's The Big Picture]

Today, is of course, a POMO day. Sadly, this knowledge does not do you any good unless you knew this on Friday so I will tell you today that Thursday is another one and so is next Monday – we’ll have to wait and see if the pattern holds up post-election but that will depend on the election results and what the Fed does on Wednesday (2pm), when they make their statement.  It would be kind of strange to see the Fed jack the stock market up over 10% in 60 days only to disappoint us at their next meeting, don’t you think?  Still we remain concerned and leaning towards cash until we get through this wild week and THEN we can jump on board for the next 10% move in the markets.

[TENGRAND]For the moment, we are watching our lines of resistance but upside resistance if futile if the dollar continues to head south and it’s already been driven back to the 77 line in early morning trading, down from 78 on Friday morning so your stocks better gain at least 1% today or they are losing ground to Yen and Euros and, of course, gold, which is up 2.5% on the same move.  Gaining 2.5% in a day is one of the reasons owning gold can be such fun.  In fact, pension fund manager Shayne McGuire is running around to conferences telling Global Investors that gold will hit $10,000 and ounce.

McGuire has an interesting logic here – he’s a fund manager who is telling other fund managers that his math shows that if they all put 1% of their holdings into gold, it will go up to $10,000 an ounce – a self-fulfilling prophesy that can be very lucrative, especially for McGuire – whose Texas Capitol PENSION Fund is 100% invested in gold already.  Is this blatant market manipulation with an open request for collusion among fellow fund managers to manipulate global commodities markets or just good Capitalism?  Zombie voters cannot tell the difference and will prove their indifference on Tuesday!  

Of course, I could make the argument that if every fund manager put 1% of their holdings into CROX, that we could get that stock up over $1,000 too.  The total current holdings of GLD is now $50Bn and other gold ETFs have about $30Bn, representing 59M ounces of virtual gold or about 1,850 tons, close to an entire year’s Global gold production although, at current prices, that production is on pace to pass 3,000 tons next year.  This does not, of course, deter gold bugs, who continue to bid up the price of this metal, which becomes less precious as they drive up prices and encourage miners to dig deeper.  

Just like buying $70Bn worth of CROX stock doesn’t actually make the stock "worth" $1,000 a share, neither is gold worth $10,000 if global funds dump another $1Tn into gold ETFs but supply and insane demand will push the price as long as McGuire can keep lining up new suckers.  Just like Bill Gross did with his bonds – talking up the US Bonds while he was actually dumping them as fast as the buyers showed up, McGuire can divest himself with a very nice profit as long as he keeps reeling the suckers in.  Fortunately, there was one born every minute when PT Barnum made the observation in the late 1800′s and the population of the planet was just over 1Bn which means now, there are over 6 suckers born every minute or 8,640 each day!   So kudos to Mr. McGuire for continuing the tradition of the great Barnum, who once said "Every crowd has a silver lining" and both the gold trade and the bull market trade, are getting very crowded indeed!  

Our winning pattern last week was to stay generally in cash and short the markets with hit and run plays. It’s a little tricky playing POMO as you have to wait for the dip and then buy as there is an operation date and a settlement date (the next day) to consider.  As a rule of thumb – take short profits quickly and take long profits quickly and we play the moves in either direction for a turn as we’ve been trapped in a pretty tight range since early October as the S&P creeped up 40 points in 20 days and hasn’t done a think since.  Last Monday I did "Chart Art" and we haven’t moved an inch since then so same everything as we had last week doesn’t need to be repeated other than the fact that the US markets FELL 1% last week when priced in Yen or Euros as US stocks cannot rise fast enough to keep up with the declining Dollar.  Actually, if you want to see something very, very sad, check out the S&P 500 priced in terms of CMG’s stock price:

CMG has outperformed the S&P 500 by 4 to 1 since the 2008 crash – that must be one yummy burrito!  It’s a great example of my CROX theory as CMG has outperformed the Euro, the Yen, gold, oil, wheat, cotton, corn – you name it, they’ve outperformed it as earnings rose from $78M in ’08 to $126M in ’09 and it looks like they are on track for $182M this year – very impressive growth but does that make them worth $6.5Bn?  Even if they add 50% in 2011 ($273M), which no one is predicting (20% is estimated) – that’s still a p/e of 23.8, which is a bit high in the restaurant category.  We are short on CMG at $210, as well as several other ridiculously priced stocks but then there’s are some we still like.  For example, last weekend’s Dividend Plays, as we can’t afford to be in all cash if it’s inflating away from us.  

As we discussed in Member Chat over the weekend and in the weekly newsletter, it’s the worst kind of inflation because the top-down, Quantitative Easing style of inflation is aimed at driving rates lower even as the Fed floods the markets with easy money.  This means that Joe 6-pack can’t even put his cash in the bank to keep up with inflation.  Savings becomes pointless as anything that is saved in cash is, as I’ve been noting for months now, losing 2.5% of it’s value each month.  This is an all-out effort to force US consumers to spend and spend like there is no tomorrow because, if they don’t, there probably won’t be one.  The Fed uses top-down inflation to force the upper middle class to play the markets too and top 1% guys like Shayne McGuire can scare all the top 5%’ers into gold or CROX or CMG or whatever else seems less scary than cash (and we’ve already scared EVERYONE out of real estate, haven’t we?) in what is nothing more than a fear-driven market rally.  

Video here >

That video is from this weekend’s "Rally to Restore Sanity" with Jon Stewart and Stephen Colbert in Washington, that drew over 200,000 people, almost 3 times what Glenn Beck drew a few weeks ago so there is still hope for America – slim though it may seem.  Generally, people are fearful – so fearful that they are afraid of cash – how sick is that when you think about it?  Warren Buffett tells us to "Be greedy when others are fearful" and there is little harm in sitting out this week with the cash no one seems to want, watching and waiting for the results of the election and the reaction to the results and the FOMC statement and the reaction to the FOMC statement and that brings us to Thursday and then we have Non-Farm Payrolls on Friday, which is the Big Kahuna of economic data so we shall see what action we get off this exciting week but my bet is still on the blow-off top between our 10 and 12.5% lines – we’ll have to see what sticks!  


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