Sunday, April 24, 2011

More QE ?? But different results.

More QE ?? But different results.



As the market enters the Easter weekend there are many clouds on the horizon that need to play out. With QE2 scheduled to end in June will the market drop as it did after QE1? Will the dollar continue to decline pushing oil to $125 or higher? Will housing and unemployment improve? Will our fiscal policies and large deficits FINALLY be resounded? Will extend and pretend still be the name of the game or will enough be enough? The next 6-9 months will answer some of these questions.

One big concern is what happens after the FED stops buying all the treasuries in June. Interest rates will trend higher giving the stock market some competition. So far the drowning out effect of FED buying has kept real short term bill rates negative forcing yield to take on more risk. When the crowd is on the same side of the trade in the long run it will tip over even with the Bernanke (crazy Eddie) attitude of buying everything and anything. QE3 is a question of when not IF it will happen.

Ever since housing took the plunge the FED has been trying to find a way to re-inflate them. Inflation in housing boosts not only consumer wealth but also confidence and bank balance sheets. Unfortunately the boom and bust in housing has only inflated things that consumers use a lot – food and energy. It’s amazing how the national average for gas is $3.83 while in all the major markets the price is over $4.20. Even though the national average is $3.83 the majority of the US population pays above $4.20. Back in 2008 with oil at $140 gasoline was where it is currently. What will happen if we get back to $140? Five or $6 per gallon is not out of the question. Technically $115 is strong resistance then $125.

The supply of oil in Cushing OK. is almost at capacity. Even the Saudi’s are cutting production because demand is not there. The old economics’ 101 supply and demand vs. price curve is not working. The speculators aren’t totally to blame because they don’t normally take delivery they have to sell or roll their positions. The problem lies deeper and more political between the Middle East and 9/11 and rising oil prices. Our energy policy or I should say lack of a policy has been around since 1973 and will hit a major crossroad in the upcoming year. True the decline of the dollar has led to some of the price increase but the price/demand equation should kick in at some point. Gasoline prices are at a breaking point to the economy. Any further price rise will bring down the economy and consumer.


Eventually housing will rebound but prices won’t keep up with inflation. The supply of housing and the lack of giving anyone a loan without a good down payment will hamper housing from outpacing the inflation rate. On the positive side for existing housing the sharp increase in construction costs will push more buyers into buying existing homes. The number of homes in the foreclosure process is far from over. The banks have just put an “extend and pretend “tag on them.

Another worry that is sweeping across the world is not only higher inflation but world unrest. The riots that were predicted last year are starting to spread across the oceans. It will only get worse with riots occurring in the US by the end of next year. From Chinese truckers complaining about rising costs to Middle East countries trying to overthrow the rich dictatorships to the European countries run against socialistic principles unrest will remain a focal point. Unfortunately the end result will be war. Wars do lower the unemployment rate but at what cost?

Here we are facing mounding budget problems. The road to disaster remains and will come to a crossroad of no return over the next 12-18 months. Promises from the politicians to lower the deficit have failed since our deficit first hit the trillion dollar mark under President Reagan. Now 14 trillion later nothing has changed to address the spiraling budget deficit. The tax code is abused so badly now that any law comes with so many asterisks attached giving tax breaks or exemptions to whoever controls Congress. The tax code is like Swiss cheese. The lobbyists and congress think Americans are na├»ve or just plain stupid. Once the riots in the streets occur they will realize otherwise. The government can’t give special status or exemptions to everyone.

Have a complaint about paying higher health care costs as McDonald's is doing no problem they get an exemption. In General Motors those 50 billion in tax credits which are not available to any bankrupt company picked up an exemption. Ford complained about it and they ended getting some 10 billion in credits. GE pays no tax thanks to their good lobbyists and crafty accounting. Bottom line is the free market system has been compromised. Don’t even get started on the banks marking to model their assets. Their creativity blows away the concept of accounting all together.

Unfortunately it seems that our FED wants to inflate its way out of the deficit just as they did back in the Carter era. Add in the record budget deficit, the ratio of GDP to the deficit and all the special tax breaks and exemptions and that spells out trouble down the road. The consumer not only has to deal with higher taxes and inflation but the decreasing value of the dollar. What will happen when foreigners slow down buying all our paper assets? Currently QE2 is helping squeeze the supply but that ends in June or will it? There is no doubt that government intervention of asset buying will continue until the cleansing process of all the excess that extend and pretend has produced the past 20 years gets rung out. QE3 will likely be announced later in the year or early next year. You can fool someone once or twice but the third time usually doesn’t work as the markets are much too smart. The markets positive reaction to QE1 and QE2 will be different when QE3 is announced.


As the printing machine is in full throttle in an effort to inflate an investment strategy that takes advantage of the situation should be sought. Commodities, precious metals, foreign currencies and dividend (income) stocks work well in this environment. Also rentals would work but don’t expect a big rise in the underlying as housing appreciation will under perform the inflation rate. Of course the former have already have had a big rise and are do for some type of shakeout soon. Always scale into positions.

As for the stock market it has responded well to QE1 and QE2. In the belief we are in the last third of a cyclical bear market which started in 2000, the last flush out should be a dozy. The two declines so far have been sharp declines and with electronic trading things now happen faster the 3rd wipe out should be the worst decline. Short term there is resistance in the DOW at the 12,500 level then around the 13,000- 13,240. The transports have resistance at 5405 then 5500 level. There are many signs of a possible major top occurring in the next couple of weeks but the trend remains higher until the DOW breaks 12,080 and the transports 5110. The SPX has resistance at 1345-50 level then the 1400 level.

The bottom line is the stock market keeps rising, commodity prices keep rising and the dollar keeps falling. There is no doubt the manipulation of the markets will end badly. It’s only a matter of time. Keep the trailing stops for the Cinderella story does have an ending and in this case it won’t be good. With 2012 being an election year all the stops will be pulled out. This election will be one of the most important in US history. The details why will come out in the next blog. Most of the stuff is plain as day.