Wednesday, May 13, 2009

More Cheap Money Is Good For The Soul

Krugman’s Stimulus 2.0
I was told today that over the last few days, Krugman had dinner at the White House. I actually mean that. I was told that Krugman and one other prominent Economist had dinner at the White House.

So Stimulus 2.0 seems highly likely. The playbook is to crash stocks to get Congress political cover for authorizing still more spending. They may do the same thing over the next few weeks.

I saw an article on Drudge the other day that talked about how Congress is already looking for another $90 billion in “Stimulus”.

I think this one will be for real. I think the money will actually be used to get people back to work and get infrastructure built. My thesis remains that you placate the poor with Entitlements, while you under-pay them for their current labor or subsidize their unemployment and you placate the affluent by driving up their asset prices, while taxing the hell out of them.

On November 4, 2008, I wrote a piece entitled “Did I Miss The Bull Market?” Here is some of what I wrote –

“When markets crash, they need time to repair the damage. They don’t just bounce and not look back. The markets were cut in half in a year. Yet everybody is still looking to buy and not miss out on the New Bull Market. Things don’t work that way. I expect at a minimum a retest or two of the October low (848). I would not be surprised to see us undercut the lows to scare the heck out of the remaining Bulls. Can you imagine how sick you would feel if you bought today and the markets put in NEW Bear Market Lows?”

Nothing could scare the CNBC Permabulls (Kudlow, Sleezeman et most others), but for rational people, how sick did it make the fully invested feel when prices fell from 1,007.51 on 11/04/2008 to 667 in March 2009? We closed today at 883 after an 8-week moon shot.

I included this chart in the post. The Black Arrows are Interest Rate Cuts and the Green Arrows are Tax Cuts. Do you see how there was a Rate Cut and a Tax Cut after the markets had bottomed? I consider Quantitative Easing to be new-age Interest Rate Cuts in a ZIRP (Aero Interest Rate Environment) and I consider a “Stimulus” to be the Democrat version of a Tax Cut.

So we are right on track to having Washington flood the system with one last blast of Liquidity, just to make sure that the Economic Expansion gains traction. They won't pull the excess funds out in time, but hey, a little extra cheap money and lax lending standards never hurt anybody. Right?

Look for an extension of Quantitative Easing (the Fed buying another several hundred billion more US Treasuries) and another Tax Cut, er “Stimulus” package, in the very near future.

When you see Bill Gross on TV talking about how much we need both, you will know that the fix is in and it is time to reload massively into Gold, Commodities and Commodity-Based Currencies and Economies.

Rally Monkey on Morphine Drip

A pullback was due at some point, and I want to show you the clues that gave some early warning to today’s action

The NASDAQ is normally a leader on the way up and the way down. I mentioned a few days ago that it was 12% above its 50-day (Black Line) and that it had not been that extended since the Market top in late 2007. Moreover, the NASDAQ was at the 200-day (Blue Line) and that is a normal place for a pause in a rally – it is also the line that capped the first real rally in 2002 (all of these notes and charts are archived).

Note that XLE (Energy), OIH (Oil Service), XME (Metals), SMH (Semiconductors) also hit their 200-day averages.

The clue for being nervous was the large volume selling 5 days ago (Red Arrow). The NASDAQ was being distributed and this served as an early warning.

The NASDAQ is now down about 6.8% in 5 days.

Before the NASDAQ topped, Netflix (NFLX) started to underperform the market. Every pullback into the 50-day (Black Line) since December had been bought aggressively. However, 5 days ago, NFLX broke below the 50-day – Big Money wasn’t willing to defend the stock for the first time in nearly six months.

When the leaders start acting differently than they had during the rally, your antennae should alert you that something may be changing.

Over Extended Leaders
I mentioned last week that the likes of AAPL, RIMM, BIDU, GOOG were very extended and due to pull back or at least sit around for a few weeks. The problem with these types of companies, these IBD Top 100 type names, is that they get a ton of momentum money and then when the music stops, everybody tries to sell at the same time. That leads to a violent plunge.

Apple (AAPL) is down about 11% in six days. The last two days have been brutal, on heavy volume. There is a lot of support at $112 and then major support at about $100.

Semiconductors (SMH) have been a leader on this move off the March lows. However, five days ago, SMH opened the day at a new high and then got blasted, closing near the lows on massive volume (Red Arrow).

This was another red flag for this rally. (note, my SMH did not get stopped out today. I bought it low enough yesterday that the Stop Loss has not triggered, yet…).

Retail (XRT) has been another leader on this rally. But it also broke to a new high six days ago and then got hammered, on heavy volume for two days (Red Arrows).

Leaders failing to break out and then getting sold off hard on heavy volume is about as bad as it gets. Remember, this all was going on while the S&P 500 and Dow Jones were holding up relatively well the last few days. Today, the real sellers showed up and took most everything down, hard.

Potential Breakouts Update

Agilent (A)
I noted the other day that there are now potentially bullish setups forming and if Big Money showed up to break them out, then I would be buying. Agilent was an ideal setup, a seven-day, tight trading range after a nice move up. The setup failed today as Agilent broke down and ended the day down about -4.5%.

Commodities look overdone and due to pullback. I noted some Fertilizer names the other day, but did nothing with them, because I was afraid that Commodities were too extended.

Mosaic (MOS) tried to break out today and failed on big volume. Maybe this one isn’t ready yet.

Pan American Silver (PAAS)
I want to own this name, but was reluctant to put in a stop Buy Order at $20. I was reluctant because Silver and the Gold Stock ETF (GDX) had moved so far, so fast, that I thought the prospects of a pullback were high. PAAS rallied up to $20.10 early today and then spent the rest of the day selling off on decent volume.

Gold ETF (GLD)
Again, Gold Stocks have rallied pretty sharply the last few weeks. The looked extended and at a place of obvious resistance. So I held off of buying Gold stocks. Most clients now own Gold via the Gold Metal ETF (GLD). I see less volatility there, but enormous potential.

Metals (XME)
Metals were one of those sectors that I mentioned was at its 200-day, a natural place for a rally to stall. XME was trashed the last five days (-16%) and was down -8.84% today on gigantic volume. Last week I noted that $30 would offer strong support.

I will go through the charts tomorrow morning and see what is holding up and what is pulling back into support in a controlled manner. I will also go through the Sector Bullish Percent Readings to see where the real selling is occurring.

Social Security and Medicare More Broke Than Last Year

You have no doubt read by now that Social Security and Medicare are going to go broke before we all run out of acutarial Life Expectancy.

First, the "Social Security Trust Fund" is an accounting trick. There is not some gigantic Al Gore "Lock Box" stuffed full of cash for future retiree payouts. There is a bank account stuffed full of IOUs. All of the money you and I have paid each month our working lives into the "Trust Fund" (Trust...*#$@^$!) has been taken to fund other programs.

Together, Social Security and Medicare will cost this country over $51 Trillion.
We will not be able to afford to pay it. We never could. They were promises meant to placate the worker so that he wouldn't demand higher current wages and lower taxes (so he could save some of his money). The Unions did the same thing - how has that been working for GM, Ford, Chrysler, Delphi, United Airlines, USAir...

Medicare will be broke by 2017 and will then be a $13.4 trillion Black Hole.
Social Security spending will exceed Social Security revenue in 2016 and be a large drain of wealth.
Corporate Pensions are at least 30% underfunded.

They will ALL be cutting their future payouts. They have to - or they will be broke. Do you really think that your kid will be okay with paying the first 22% of his or her income to you so that you can retire at 65 and get a free hip replacemnet at 70? They will revolt and vote to decrease your benefits - and they will have the votes.

If you have not figured out by now that you are on your own for financing your retirement. Your goal should be to work as long ass you need to, in order to self-finance your retirement.

Don't kill the messenger...

Krugman Wants Another "Stimulus"

The first wasted $850 billion wasn't enough to jump start the economy, so let's take another huge pile of money we don't have and try and put Humpty Dumpty back together again.

In case you missed Mr Krugman's interview in Asia from the other day, he said the following -

"A second stimulus is becoming clearly urgent. They need a very, very strong stimulus."

I guess I am no longer one of Paul's "Liberals". What we need is to purge the system of excess over-capacity and massive debt and start incentivizing Savings and domestic Capital Investments.

A Liberal thinks that Public Capital is infinite, where as a conservative thinks that Public Natural Resources are infinite. I am sure that the truth lies somewhere in the middle, but we are now on a path to make all Capital creation a public exercise, while locking up the Natural Resources into a "lock box". Both seems ridiculous because they are - and so is Krugman.

On a side note, a few months ago I did a chart that showed how there was a Tax Cut long after the Stock Market had bottomed. It was clear that the economic news must have been horrible, even though the market had started to price in recovery. A second "Stimulus" would be the Liberal version of a Tax Cut and would seem to be late to the economic recovery - or in English, the "Bottom" is probably in for stock prices, but the "news" may still be nasty for a few more months.

Add another "Stimulus" to a second round of Quantitative Easing funding, and you see why Gold and Commodity stocks have gone vertical. I just want to buy pullbacks in these areas...

Tuesday, May 12, 2009

Semiconductors (SMH)

I bought some SMH in aggressive accounts today. I want to show you the setup.
SMH retraced 38% of the recent rally, or -11.2% in 4 days.
Price got extremely oversold today, with Stochastics on the Hourly Chart falling to a reading of 9. This indicator had only been this low on five other occasions during the move off the March lows. The other five saw decent rallies in a very short period of time.

Remember, that $19 is also highs of January and February 2009, as well as the breakout point in March 2009.
$19.06 is the 50-day moving average.

So you had a very oversold chart, at critical support. It was worth an aggressive position, with a close stop.

With announcements out of Intel and earnings from Applied Materials due after the market today, I was not willing to buy large positions. Cisco got creamed last weak on supposedly good numbers.

The NASDAQ continues to lag badly. The NASDAQ normally leads, both up and down. We’ll see how things trade tomorrow.

Monday, May 11, 2009

Microsoft Bonds

Why is Microsoft issuing bonds?

Is it because they believe that the Credit Markets will freeze up again and $27 billion of cash isn't enough for them?

Maybe it is because they want to borrow money cheap, before it gets more expensive as Inflation shows up and Interest Rates spike higher...

Point and Figure Charts on Interest Rates
30-Year US Treasury ($TYX) is targeting 6.2%

10-Year US Treasury ($TNX)is targeting 5.0%

What I really worry about is that over 93% of all of the $220 trllion of deverivatives are bets on Interest Rates. You know that if rates rise several percentage points from here that a lot of people who have bet the wrong way on Interest Rates will blow up and come begging for still more taxpayer money to save them (TARP 3.0)...

Sunday, May 10, 2009

US Dollar Pounded

The Wall Street Journal finally came out and called the “Stress Test” a sham. They detail how in the last few weeks, banks have been lobbying the government to lower the amount of “Losses” they have and how much “Equity” they must raise. Apparently, Citigroup was originally supposed to raise $35 billion, but the final verdict was that they needed to raise $5.5 billion. You know my thoughts...

We had a choice to do the hard thing and Nationalize the banks to purge the system of their bad debt, but instead our Government continues to try and Inflate the problem away.

So what does the market think of the “Stress Test” and hyper-inflation?

The Dollar Crashed Today
A crashing Dollar is what is going to be required to prop up asset prices via the printing of money – instead of working, then saving, then investing to build up prices via real equity.

Foreigners know this, so they sold off the Dollar hard and bought Real Assets with abandon. Virtually anything related to Real Assets went vertical Friday and made back the losses of Thursday. On Friday, the Dollar broke below its 200-day Moving Average for the first time since August 2008!

I have big positions in The Euro (FXE) and will add to it on pullbacks into the 20-day.
I also have a ton of money in CDs linked to the CPI. I will buy as many of these as I can get going forward.
I am starting to buy Gold and will buy Gold and Silver stocks on pullbacks into the 20-day.
I will also continue to build holdings in Commodity stocks as they pull back. This rally is not about “Growth”, it is about the devaluation of Paper Money and the race to buy Real Assets before the real Inflation wave hits. THE BOTTOM appears to be in for Commodities - therefore, errors should be bailed out, instead of pounded. But massive price volatility can still lead to substantial short-term pain.

I expect the Fed to announce an additional commitment to the purchasing of US Treasuries in the very near future and when they do, that could light up Gold light a Christmas Tree (unless it gets built in before hand and it becomes a “sell the news” event – I will keep you posted).

Sector Rotation?
The question for the markets is will money rotate out of Commodities and Financials and into other sectors or will it just go to cash? Money now appears to be rotating out of Retail, Technology and Consumer Staples into Commodities and Financials. When the rallies in Commods and Financials run out of steam, will the money flow back into other areas?

If money does not get put back into Technology, then the areas that are now set up best are Fertilizers, Gold and REITs (Commercial Real Estate).

If they rally any or all of these groups, then once price breaks above resistance, action is Bullish and I need to be buying. That is the lesson of this rally – pullbacks into the 10-day and 20-day are being bought with abandon. It is very reminiscent of Technology in 1998 – 2000 (the rally).

Secondary Bases
This is what I am looking for when I start to commit money. I want to see something that has pulled back in an orderly manner and is now sitting at either critical support or at a level where I can put in a Stop Buy and have a close Stop Loss if the breakout fails.

Agilent (A) has now been sitting in a tight trading range for 5 days. If buyers show up, it will break out. If they do not, then it will pull back toward the rising 20-day at $18 or the now rising 50-day at $16.

Sohu (SOHU) has pulled back about 10% this week to set up another leg higher. Its breakout point was $55, so there is potentially another 10% of risk in this name, but the potential is there if buyers show up.

AsiaInfo Holdings (ASIA) is set up in a high-level, 1-month base. A breakout takes ASIA to multi-year new highs! Internet Security has been doing very well, and ASIA has been a leader and has not seen the ugly breakdown of a leader like Netflix (NFLX). ASIA stays at the top of my list, with stops in place to buy it.

Cisco Systems (CSCO) had an ugly reversal on earnings and is now pulling back into its breakout point at $18. Cisco has pulled back 7.5% in two days (get used to that type of volatility).

MEMC Electronics Materials (WFR) is sitting at the top of its 7-month base. It has failed on the last two breakout attempts, but WFR makes glass – the kind of glass that goes into Solar Panels. Therefore, WFR is my way of participating in Solar.

Monsanto (MON) broke out of a 7-month base and has now pulled back to the breakout point ($85). The pullback was -9% in about one day (ugh). Potash (POT), CF Industries (CF) and Agruim (AGU) have similar patterns above the breakout levels.

Mosaic (MOS) is similar, but has not yet broken out of its trading range.

When you get most of the leaders in a sector all setting up in the same patterns, you know that something big is coming. The setup is there for Big Money to launch or tank this group. I have stops in to buy if buyers show up. Don’t be surprised to see some knucklehead analyst upgrade the group before the markets open tomorrow and ramp prices up +5 or 10% before the open (I would be pissed)…

Precious Metals
You have already seen my charts on Gold (GLD) and know the potential in this Asset Class for a significant move out of a multi-year base.

Pan American Silver (PAAS) has broken out of its base and is now sitting around. It is high on my list.

My shopping list is long and potentially huge, as long as the Market doesn’t come unglued under heavy selling. At some point the heavy selling will come in and this rally will fail, but until then I am looking for charts exactly like the ones I have listed. For me it is all about price and volume.