Watch the Dollar

Last week I speculated that Obama would have to go back and do a second “Stimulus”, because the economy is broken – too much capacity, both in facilities and employees. But I forgot how Team Obama deals with the creation of money – they don’t go to Congress and have it appropriated via a vote, they go to the NY Fed and have it printed by leveraging the TARP.

The rally yesterday was led by Financials, and now we know why. Today, the Fed released the revisions to the TALF program – the one that buys Toxic Waste off of the books of the Banks are ridiculously high prices and enriched Banks Shareholders (BAC, C, WFC et al) and Bondholders (think PIMCO) at the expense of the US Taxpayer (you, me, our kids, their kids…).

http://newyorkfed.org/markets/talf_cmbs_terms_050109.html

When originally constructed, TALF was supposed to only buy newly created Securitized Loan Portfolios (those created after 7/01/2008). This was designed to protect the Taxpayer from having to buy older portfolios of Toxic Waste (the 2003 – 2006 vintage mortgages where the homeowners are 30% to 50% under water and the mortgages are worthless). TALF has proven to be a complete failure, because nobody is borrowing and insolvent banks aren’t lending – they can’t.

Mortgage Pools purchased had to be Senior claims on 1st Mortgages that were being paid on time and were not Interest Only loans. I guess there went too many of these for sale…

TALF 2.0
The new TALF rules (effective 5/19/2009) make no mention of limiting purchases based on origination date and imply in roundabout language gymnastics that purchases will include Junior debt. I feel my wallet getting lighter and lighter…

http://newyorkfed.org/markets/talf_cmbs_terms.html

US Dollar
As the Stock and Commodity Markets ramped higher yesterday, the Dollar got smoked again, taking out more short-term support.

The Dollar ($USD) and the S&P 500 ($SPX) have been virtual mirror images of one another. The charts show times of greed (Dollar falling, SPX rising) and fear (Dollar rising, SPX falling).

SPX is now in the range of pretty significant resistance, and the Dollar is approaching some decent support, so maybe these trends will take a breather soon. We’ll see.

The Euro ($XEU)
The Euro is the anti-Dollar for Central Banks. If you need a reserve currency other than the Dollar, the Euro is your most likely choice – the Dollar falls, the Euro rises and vice versa. Therefore, the Euro can also be considered a risk trade.

On this chart, I want to show you how the Euro has been moving in lock step with Silver and Gold. They all bottomed in October / November 2008, then rallied, then sat around for about seven weeks and have been trying to work their way higher the last few weeks. The Euro, Silver and Gold are clearly places where money wants to hide as the Fed embarks upon their Quantitative Easing experiment. So your stocks are up, but your purchasing power is falling. As I have said from the beginning, there is no free lunch…

SPX Versus Gold
Gold appears to be in the process of breaking out of a 14-month base. Taking out $1,000 could be incredibly profitable for Gold and Gold Stocks. I bought the pullback in Gold and am looking to add to any breakout.

Unlike the stuff that has been rallying off of the lows, I like the fundamentals of Gold and have no problem holding onto it. The only potential issue for Gold is that the IMF is threatening to sell all of their Gold to finance their SDR “currency”. The IMF has a huge supply of Gold, but any break in price caused by IMF selling will be one of the best buys of your lifetime. Make no mistake that when the IMF sells its gold, it is no longer relevant – so they may be reluctant to sell it.

Look at how Gold topped as the SPX bottomed in March. I would not be surprised to see a pullback in SPX coincide with a rally in Gold, which tests the $1,000 range. That is not a prediction, I am just eyeballing the chart and giving you my opinion.

Gold
For those who think that if you miss THE LOW, you can’t make money, take a look at how Gold has had many rallies since it bottomed in 2001.

This is a classic Bull Market, where price rallies, gets stretched above key moving averages and then spends months sitting around or pulling back into these moving averages, before rallying again. Look at how many times the 12-month average was touched and held (Blue Arrows). It broke down in late 2008, but then rallied sharply to recapture the Blue Line. I bought Gold (via GLD) on the latest pullback. I want to add on a breakout above $1,000. A failure in price below $836 would concern me.

The Euro
Here is a long term chart of The Euro. Like Gold, The Euro had a great move off of the 2001 low – a low created when the Fed made money super cheap, smoking the Dollar and setting up the Housing Credit Bubble.

The Euro broke out in Mid 2007 and ran for another year or so. It then topped and retraced about half of the 2001 – 2008 rally. That is normal. Now the Euro is battling to recapture the 2007 breakout point at about 135. I get really bullish on the Euro above 136.29 (Blue Line) and 137.72 (Red Line).

The British Pound(ed)
On a side note, look at the British Pound. Yikes!
Britain rivals the US in its desire to fix things via the printing of money. Maybe now is the time to take a trip to England…

The bottom line is that Dollar strength may lead to or result from a weakened risk appetite. That would be bad in the short run for stocks, commodities and commodity-based economies and currencies.

Dollar support lies at 81.46, 81.40, 80.50, 80 and 78.34
Those will be the areas where I would look for a reversal. Price may overshoot for a few days and then recover quickly. We’ll see how it plays out.

Euro resistance lies at 137.72, 137.76, 138.38 and 142.50

There is a significant band of resistance on SPX from 902 – 954

A retracement of the March rally may shortly be in the cards.

What I am Looking For
I want to buy strong sectors breaking out of big bases on heavy volume, or I want to buy strength pulling back into moving averages.

Here is the diagram of the Bull Market / Bear Market cycle for a stock from Stan Weinstein. If you have not read his book, then it is a must for your summer reading list (http://www.amazon.com/Stan-Weinsteins-Secrets-Profiting-Markets/dp/1556236832)

From the diagram, you can see that stocks top, then trend down strongly (Bear Market), they then sit around for many months, before breaking out and trending strongly higher (Bull Market).

Do any of these remind you of Weinstein’s diagram?


These are all Commodities and Materials. They are most likely economic recovery plays, as well as real asset hiding places as the Fed prints money.

I had to wait to see where money would be focusing in this new Bull Market. I had the luxury to not have to chase, because I did not get creamed in 2008.

Now I will be looking to buy pullbacks into the 50-day (Black Line) and expect mistakes to get bailed out. The goal now is to own the leaders who are dragging the markets higher, and not the laggards that are getting pulled upward by an ascending market.

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

NASDAQ (QQQQ)
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
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.

Fertilizers
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

http://www.bloomberg.com/apps/news?pid=20601103&sid=aqLTt.TroGcM&refer=us

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."

http://uk.reuters.com/article/governmentFilingsNews/idUKPEK5258120090511?sp=true

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...

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.

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)...