Archive for August, 2011

Nostra-RON-mus

Currently, the US leadership and dominance of the global economy is being threatened. The US is losing its place at the head of the table mainly due to the latest recession and its subsequent anemic recovery that has lasted for close to four years now. During that time, many countries have been growing at an incredible rate….namely China and India. Those countries are starting to enter an “industrial revolution” phase which could eventually catapult their economies above ours. I am not saying that this will definitely happen nor would it be able to happen soon. However, if it does happen, the US will need to respond swiftly and smartly (probably putting it beyond the ability of our current government leaders) to regain our edge, our place at the head of the table.

The question is how. We are miserably in debt. We have lost our manufacturing advantage. We have some resources but not enough to be selling out to others in size. Enter Nostra-RON-mus! When I look into the future, I do see a way for the US to reclaim its rightful throne. There is an intersection between something that I believe will turn out to be the most valued thing on the planet and the US’s sole ability to totally dominate on a global scale……FOOD!

Everyone has been trying to figure out what the next big investment vehicle will be. Some say oil and they say oil will be the next gold. Some people say it will be gold itself as it will officially become the global currency. But, you can’t eat a gold bar nor can you drink a glass of oil. With growing populations worldwide, described by some experts as a population explosion, estimates show that we are going to have to produce more food in the next 80 years than we have in the last 40,000 years.

This is where the US can turn the tide of global power. Of the major industrialized countries, the US has the most consistent geographical growing season. Further, if the US really wanted to, it has the room and the technology to grow crops and raise animals in large proportions. And don’t forget, the US has access to the largest fresh water supply in the world….the Great Lakes! If the US put all of these advantages to work and pushed serious resources into this area, the US would be far and away the biggest producer and supplier of food and water in the world at a time when there will be gigantic demand and anemic supply!

When you are starving, you’ll do anything to get food. The Middle East wants a dozen eggs, no problem…only costs 12 barrels of oil. Russia wants some wheat, no problem….only costs 10 gold bars. Get the picture?

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The Bernanke Definition of Insanity

Last week our fearless (not to mention mindless) Federal Reserve Bank Chairman Ben Bernanke showed us two things. The first one was that the old saying “if at first you don’t succeed, try, try again” is alive and well in the Federal Reserve’s fantasy land view of the US economy. The second was his confirmation of the definition of insanity….doing the same thing over and over and expecting a different outcome.

 At the outset of the stock market crash a few years ago, the one caused by the sub-prime debt crisis, the economy was in a death spiral and the Fed needed to act. Bernanke’s first move was to take interest rates down to zero (actually 0.25%). The second was to initiate a $600 billion dollar quantitative easing program (QE1). After two years of rates at historic lows, plus at least an additional $600 billion in quantitative easing (QE2), today’s economy is just as bad as it was then. In addition, we now run a gigantic risk of runaway inflation. When the economy finally does turn around and heats back up only the deftest, smoothest hand will be able to raise rates fast enough to keep inflation under control, but, not so fast that the timing of the hikes puts a premature and potentially dangerous halt to a real recovery.

 As bad as this situation sounds, it could get worse. Bernanke’s promise to keep rates at the record low levels for the next two years just got compounded by a statement by Atlanta Fed President Lockhart. He stated(or perhaps warned) that, “If additional actions are required, I can assure you the Federal Reserve is not out of bullets. Expansion of the balance sheet or changes in the composition of the Fed’s asset portfolio are available, in my view.” Is he foretelling QE3??? (QE3 refers to speculation that the Fed may eventually undertake a third round of asset purchases known as “quantitative easing” to boost the economy.) He indicated that there was no worry or concern about overloading the Fed’s balance sheet. He stated that the Fed has not fired its last bullet as many believe. I guess the printing presses still have plenty of ink!

 It seems we have been down this road before. We tried the same procedures before with QE1 and QE2 and they did not work in fixing the economy in the short term and actually seriously complicated and jeopardized the economy in the long term. Now, here we are about to try more of the same thing that didn’t work twice before. I’m sorry…….what was the definition of insanity again, Ben?

Selling us Short

With all the trouble in the overseas markets right now, one of the ideas being bounced around is the idea of banning short selling. When we here in the US decided to try the same thing, we found out two facts about it that we did not know prior. First, individual investors loved the idea.  They thought it would be the answer to the problem of a declining market. The second thing we learned, a vastly more important lesson, is that banning short selling does not work! In addition, it does a disservice to individual investors like you and me by putting us at further risk!

Let me explain mechanically why banning short selling does not work. It does not prevent market sell-offs or crashes! You see, your average, everyday investor is not the one selling stocks short. It is the professional traders and the big institutions. These two groups are the ones who are responsible for almost all the short selling in the market. Now these two groups of professionals know the business pretty well and have found a way around the short selling rule. Instead of selling the stock short, they will just buy puts!

They will buy puts from the market makers on the floor of the exchange. See, what they know that you don’t is that the market makers have a short stock exemption. That means they are allowed to hold short stock positions and they are allowed to short stock on a downtick. This is because they have a fiduciary responsibility to provide liquidity. For instance, say you wanted to buy some puts and the market makers sell them to you. You would become long the puts and the market makers would become short the puts. Now, the market makers would have unlimited downside exposure. The market makers need to hedge their position and often they have to do it by using the stock.

In order to facilitate the customer order, the market makers have to be able to sell the stock short! If they do not have the ability to sell the stock short, the market makers would not be able to provide the type of liquidity that the US markets call for and need. Knowing this, the SEC provided the market makers with an exemption so that they can always provide the type of liquidity that separates the US markets from all the others.

What I am trying to point out is that the institutions have figured out how to side step this rule. Stock is still getting shorted, it is just not the institutions doing it……it is the market makers doing it for the institutions. All the rule has done is to make shorting the stock a two step process instead of one step. Either way, the stock is still getting shorted….the rule has NO effect! But, there is collateral damage. With the institutions and professional traders rushing out to buy puts, the price of puts will go up via an increase in volatility. This makes it much more expensive and a lot more difficult for individual investors like us to purchase protection in worrisome times. In essence, the only effect of the short selling ban is the increase in the price of our insurance. 

 

Today’s Bull (shit) Rally

 The market was schizophrenic to say the least today. Last night the pre-market futures indicated an opening down about 200 DOW points. An early morning jolt spun the pre-market futures around and the stock market opened up 200 DOW points and held that through the day until about 2pm. At that time, the Fed came out with their statement. The first part of the statement was extremely negative.  Bernanke stated that the recovery was now a contraction and that it seemed as if recession was headed our way. The market responded swiftly and violently taking an up 200 day and making it a down 200 day in a matter of minutes. It just so happens that this low of the sell-off coincided with the low from the late night pre-market futures.

However, Bernanke was not through speaking. Although not confirming the rumors (hopes) that QE3 was around the corner, he did make the statement that the Fed would keep US Rates where they are- between 0 and .25 percent. The market took off on this news that rates would remain at record lows for the next 2 years.   The Dow recaptured the 200  lost  points and preceded to run up another 400 points, most of it in the last hour of the day.

This bull (shit) rally was most certainly an orchestrated event. Once Bernanke gave us the bad economic news, the market traded down hard and broke down through the all-important support level of DOW 10,800 which was pretty much the prior night’s close. With the breakdown  underway, the shorts hop in and push the market down hard due to the indicated technical breakdown of the DOW 10,800 support level. Now, with the shorts carrying the day, the DOW traded down to 10,600 which, as I mentioned, coincides with the low from the prior night’s pre-market futures. At that moment, the Fed makes the statement that they will keep interest rates right here where they are at record lows.

 The Fed did not say they would initiate QE3, which was the rumor that made the market bounce this morning in the first place. That is the moment when the PPT stepped in and started buying the hell out of the market. This started a massive short squeeze as the market traded back up above the all important DOW 10,800 support creating a “false breakdown” and the short squeeze really takes hold with the PPT buying the whole way up. Luck has it that the short squeeze aided rally was even able to get back up above a lighter but still there DOW 11,200 resistance.

 This coordinated effort, led by the Bernanke statement, basically eliminated the Treasury market as a wanted and even viable investment alternative for the next two years. The problem is that this move, although short term effective, is the same stupid crap that Bernanke pulled in 2008 to try to boost the stock market and build consumer confidence to help boost the economy. It did not work before and I doubt it will work again as more investors are “onto” the Fed and Bernanke’s games. And the stakes are higher now for the Fed and Bernanke and ultimately the US…….more to come on that!