Wednesday, May 12, 2010

Will Today Be A Follow-Through Day?

I wrote the following on Monday –

“I wanted to see how today traded before committing all of my money. I took a large position in a US Index proxy (I bought QQQQ) at the open today and will scale into stuff as it breaks out.”

I took another large position (SPY) on the pullback yesterday afternoon. I didn’t sleep well last night, because overnight, the S&P Futures (SPX) kept testing the breakdown point at 1,140. However, when I walked in this morning, SPX was trading at 1,158 and it now trades at 1,170. So I am feeling much better (only tired).

Prices are now back to the 20-day and 50-day averages. These may offer some short term resistance. Also, 1,160 has been a key price level for SPX. The cycle date is May 15, so there could be a pull back or pauseinto Friday or early next week.

I may have jumped the gun by a few days, but this market has not paid you to wait for all of the confirmations you normally want to see. I now have some decent cushion in the QQQQ position and that gives me some flexibility. My biggest fear was that the 4% gap up on Monday would be followed by another one on Wednesday and I would be left in the dust, with no way to make money without taking huge risk, so I took a 20% position in QQQQ at the open on Monday.

Financials (XLF)
This looks like the pullback in January / February – the last Euro Panic. I am not saying that this will rally exactly the same way, but the setup is there if the big boys want to break Financials out and ramp them higher again. The new Euro Bailout was designed to save the banks, so that should bode well for Financials.

Retail (RTH)
Has the same pattern as Financials. That is one incredible chart though. It shows you how volatile price swings are when governments get involved with policies designed to inflate stock prices.

QQQQ has a very similar chart. Let’s see if they can break it out on this move.

Here is the leveraged Gold and Silver Miners CEF (GGN). It has a pretty constructive chart and pays a pretty fat yield. It might file a K-1 (I am not sure) and that may irritate some, but if it makes money while managing risk, then I am willing to put up with a little paperwork…

Gold (GLD) is the talk of the town right now. It is a store of value during inflation and a panic trade haven. The panic trade now is that Germany will leave The Euro… I traded Gold a week ago. Gold is in a buying panic. Here is a chart of Gold versus The Euro. You can see that Gold has broken above the top of the uptrend line from 2008. This is one of my favorite sell signals. Gold may overshoot for a few days or weeks, but the last two corrections were pretty nasty.

Here is the daily chart of Silver (SLV). I have highlighted the expanding price volatility pattern. It looks like a cone. This tells you there is significant indecision in the Institutional Investor camp. Again, this is one of the best reversal entry patterns there are. I would like to see Silver reverse lower from here and give me an entry point near $17.75. It is show up I may take. If it doesn’t then I will buy pullbacks from higher levels.

Finally, here is what my consultant sent me last night –

“The socialist countries will be kept on life support for a while, but there is no intention that they will pay back the debt, so the EU and IMF are really bailing out the banks, which means we are too because the US is a significant part of the IMF funding. This is exactly what our Fed did in 1998 when it got criticized for bailing out the LTCM hedge fund, but it was in reality bailing out the banks without mentioning them by name.

By bailing out LTCM, it was no different than what just happened with AIG, which is not a bank, but it owed the banks big time, so a bailout of AIG was really a back-door bailout of the banks like GS and C etc.

The US is also on a fast track to a debt collapse because our Government [Democrats or Republicans] continue to borrow to cover the exploding deficit and growing entitlements, which end up unfunded, and it has no intention or plan right now to change this death spiral.

A current example of this is the so called financial reform bill which I think will do more harm then good. I mean, how can you not make reforming Fannie Mae and Freddie Mac, and getting it out of the hands of Congress a top priority? Or how about the simple step of restoring the Glass-Steagel Act, repealed at the urging of Bob Rubin, which has proved to be a disaster.

It is all political, and not about what is right for the country. The civil unrest has already started.”

So, my educated guess is that Short Term trends probably favor US Stocks, European Banks, Technology and risk in general, Intermediate Term trends favor Gold, Silver the US Dollar and US Treasuries and Long Term trends favor Gold and Silver.

Monday, May 10, 2010

What A Day

It was obvious that the European Banks who were loaded up on Greek Debt would be the ones to most benefit from the European Bailout. The only variables were when and how low would share prices fall before it happened?

Here is a list of which country’s banks own how much of the outstanding Greek Debt -

France 25%
Switzerland 20%
Germany 15%
US 5%

The CAC (the French version of the S&P 500) was up over 9% today. We were on the brink of the market imploding. To give you an idea of how bad last week was, the CAC is now trading slightly above last Tuesday’ close.

The European Bailout is effectively a mechanism by which the EU and the IMF will print money and use that money to buy the debt of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) owned by European Banks. This is the same game played in the US last year, where the FRBNY created money and used it to buy mortgages from US Banks.

Now the European Taxpayer will be left holding the bag. Make no mistake that this was a monumental crisis. I have to believe that if the EU hadn’t stepped up over the weekend, then next weekend we would be waiting to see which European Banks would end up getting nationalized. The markets are telling you that we were that close to falling into the abyss.

Now if any of the PIIGS default, then the Banking System will not feel a thing. I can’t wait to see how big the bonuses will be next quarter at the European Banks…

I wanted to see how today traded before committing all of my money. I took a large position in a US Index proxy at the open today and will scale into stuff as it breaks out.

I really think that this decision by The EU is a game changer. They will buy $1 trillion of this debt. If you figure that the average bank is leveraged 20 to 1 on assets, then you can see just how much buying power $1 trillion creates. The question now is does the US underperform, as money leaves the safe haven in search of risk? Does Gold underperform with diminished fear, or outperform on increasing Inflation expectations?

I wrote the following last Thursday –

“Everybody knows that the banks of the US and Europe are insolvent and that the only thing keeping them propped up is bs accounting and Government support via the taxpayers purchasing of bad loans. They also know that the only reason asset prices are going up is because of Government-funded leverage and Government-sponsored manipulation of asset prices. It is simply a matter of when, not if asset prices collapse again.

So the EU is left with a couple options, if it does not want a full scale collapse of the Euro Zone Economy –

Start Quantitative Easing. This is when the EU will ultimately print about $2.5 trillion in money to buy these bad loans off the books of the European Banks.”

Here are some performance numbers today for some European Banks. They gapped up to these levels (or higher) overnight, so I was unable to buy them. Don’t get upset that you were not in them on Friday, because if the EU doesn’t blink, then these banks gap DOWN the same percentages this morning.

Some of these I may end up owning.

ING +23%
STD +23%
BBVA +19%
BCS +18%
DB +11%
CS +7%

More to come later today.

What Can You Do...

Credit Suiss (CS) is currently up +10%
Deutsche Bank (DB) is currently up +13.5% pre-market
EAFE (EFA) is up +7% pre-market

I knew what to buy and there isn't a thing I can do about it.

Sunday, May 9, 2010

EU and IMF Go QE in Europe

Europe blinked and did what I figured they would. The EU and the IMF are now promising to make loans and buy almost $1 trillion in sovereign European debt.

That is the EU starting the process of moving the crappy debt on the balance sheets of European banks onto the balance sheets of the European Taxpayer. That is a potential huge win for the shareholders of these banks. Without the bailout, they are out of business - with the bailout, they sell a bunch of worthless Greek debt for Par (100 cents on the Dollar).

Stock Market Futures are up a little over 2% around the World. I will not look a gift horse in the mouth. It used to be that you would buy strength on dips, but now it seems that the crappier the fundamentals and technicals of your holdings, the higher they bounce.

European Banks move to the top of my list - Credit Suisse (CS) and Deutsche Bank (DB)seem to be closest to obvious support.

I am assuming that they bid will come back quickly to Commodities, as $1 trillion is a huge sum of money and it will need to get levered up 5 or 6 to 1 in the near term by these banks, as they start to trade their own accounts with taxpayer money (sound familiar).