Wednesday, November 4, 2009

WOW – How quickly things are going to change

WOW – How quickly things are going to change

Now that the recession is over let the recovery begin?? I don’t what our politicians are looking at but this recovery will be one big mirage. All the stimulus and tax credits for homes and clunkers have hit the economy with little response. Maybe it’s the higher real estate or state taxes? Maybe it’s the 10% unemployment? In the last 10 years our economy has created 2 million jobs of which 1.8 are government jobs. What going to happen with all the legacy costs? Maybe its seniors getting a zero social security increase for 2010? Maybe it’s the zero interest rates hurting the savers and causing them to search for higher and riskier investments? We know how all this is going to end.

Ford had its first profit in two years. Then they come out with a big debt and equity offering. How is Ford going to compete with GM (Government motors)? Ford lost an UAW concession vote and now will be at the mercy of the government in a few years.

Today the FED left the negative rates intact. Goldman Sachs will continue to rake in the cash for a while longer. Last quarter GS made at least 100 million that’s million per day for 36 of the 65 trading days. They ONLY HAD 1 losing day! How did they do it? From the trading pits it’s called free money. GS is selling debt to our government at big mark-ups. Our government is buying debt instruments in various programs that total in the trillions. Our government is almost the only buyer of mortgages. They were big buyers of treasuries until this past week when the program expired. This activity is super dangerous and marks an important factor of “ no one can fail” philosophy which is going to bite us where it hurts during the next 2-3 years.

The FED states there is no inflation. Sure we don’t have oil at $140 but prices have been creeping up even though the demand worldwide has dropped this past year. Our government doesn’t consider surcharges when computing inflation. Companies that deal in steel, airlines and shipping to name a few are raising prices by adding surcharges. This is a joke.

Gold has broken out and is likely to move parabolic just like oil did a few years back. Oil went from $100-$140 in 4 months before crashing. Gold can reach $1500-$2000 in the next 3-5 months before it crashes. Those that are long gold put a stop around $1020. There might be a bit of a pull back but use it to buy. Move your stop up every week and scale both in and out but it should act like oil did in 2008.

One of the carry trades that have been popular since the beginning of the year is shorting of the dollar and take the proceeds and invest in riskier assets like equities, bonds, mortgage securities both here but mainly overseas. Gold and commodities have also benefitted but this is about to change.

The dollar trade is of great concern when it gets unwound. Just like in 1998 when all the computer geeks and professors (L-T Capital) thought they figured out how world markets correlate. They bet big and lost hundreds of millions leaving our government to bail them out. The dollar will rally in the short term because there are too many shorts. Stocks will suffer but gold will rally. Commodities will also fall. This action will begin any day. There will be a lot of confusion in all the computer models.

The yield curve has steepened meaning mortgage rates will go up. The Fed has been buying treasury auctions but that ended last week. Next week’s auctions will be a major concern for the markets next week. The unraveling will begin soon. The dollar will rally because of interest rates are going up leaving the carry trade at risk of a nasty unraveling.

The job market basically is ugly and will take years to return to 7 or 8% unless we believe the so called “jobs saved” scenario. The problem with this is 90% (debatable) of the working population is much greater than the 10% unemployed so jobs “saved” can really jump. Maybe in 6 months if unemployment tops 11-12% our government will come out and state that it could be worse and we “saved” millions of jobs.

As for stocks, all this free money should send the market to 12,000 but too many remember the outcome of 1% rates in 2002 and what happen years later. How about zero rates? That should turbo charge the market but memories of the recent bear can’t trap everyone just like those alive in the 1929 era.

Our government thinks a weaker dollar will help exports. How about producing a quality product? China’s currency is fixed to the dollar so it doesn’t change much when the dollar drops. We are net importers of stuff from Europe, Korea and South America so goods will cost more not to mention the impact of oil which is priced in dollars. Sooner rather than later our credit starved country will suffer from our current policies of using the charge card.

The same mistakes that have hindered growth in Japan for the last 20 years has made its way across the ocean. The FED o.k.’s the use of a banks model to price assets rather than market prices. Take Ambac(ABK) which just reported a profit of over $7 this past quarter. One would think the stock would be trading $50-70 a share. How about $1.50!!(On its way to zero). The company is a mortgage insurer and marked up their assets.

Not until we see bankruptcies and companies losing money will the market make a cyclical bear market low not a fake-out rally which either has ended or is in the process of ending. DOW 10,100 is short term resistance followed by 10,300. Support is 9615 then 9400 then 9100 and 8850. Once the 8850 level is broken the bear will reappear in earnest. DOW 6600 will be retested and probably break the first time.

Too much public debt and government debt leaves our country with a continuation of the re pricing of assets and letting the air out of the bubbles. That will lay a foundation for a solid recovery and new cyclical bull market to emerge in the next 2-3 years. The next few years however will be of great concern. Capitalism as the way we knew it the past 30 years has run its course since 9/11 but more like 2005. More on that at another time.

Just a few ideas-

Remember to keep your stops on both the buy and sells-

Short DIA 98 stop 102 target 9200

Short or buy puts in –

FCX $75-79 stop 85 target 60
FWLT $30-32 stop 35.25 target 22-23
MCD $60-61 stop 64 target 56-57
WHR $75-80 stop 83 target 60-62
TUP $45-46 stop 49 target 34-36
AXP $36-37 stop 39 target 30-31
COF $38-40 stop 42 target 32-34
MS $32-33 stop 35 ½ target 26-27
SHLD $70-72 stop 79 target 48-50
WFC $28 ½-29 ½ stop 31 ½ target 20-22
IP $23-25 stop 27 ½ target 16-18
TIN $16-18 stop 20 target 10-11
LNC $25-26 stop 29 target 16-18
XOM $72-74 stop 76 target 62-64

BUY GLD $102-104 stop 97 target 130-150

Stay away from the double or triple short ETF’s unless you buy puts in the long ETF or puts in the short ETF. Over time with volatility these products melt away. For example, natural gas has rallied from .25 to .45 in a few months but the UNG hasn’t moved. The commodity is up 45% while the ETF’s are up 5-10% when they say they will mirror the commodity movement. This activity will cause a big class action lawsuit next year and the government will start another hoopla investigation.