Thursday, November 10, 2011

11/10/11 Market Comment

There are some mornings when I awake and look at the news headlines and dream about the failure of Goldman Sachs and JP Morgan. But we know this would be a bad thing for society, at least for a while (but we humans would bounce back). Money is a big part of life and mega institutional failure (as bad as they are) would result a quite a period of chaos. But entities with tentacles in all things financial do get what they deserve, eventually/sometimes. Jefferson County, Alabama has filed the largest Muni bond bankruptcy in US history and JPM may take big loss. No wonder JPM sold down 7% yesterday. JPM also has exposure in the Mann Financial mess. By all the accounts I've read, JPMs role in the Jefferson county debacle amounted to a sort of raping and pillaging (in a financial sense) that would make the Huns, or the Vandals blush. The model of replacing old debt with new debt is totally corrupt and flawed. But it's going on around the world. Jefferson county, AL is only the tip of the iceberg. This is the essence of the the so called BIG solution in Europe: to replace old bad debt with new and bad debt.
Yet hope always springs eternal in the market. U.S. Stock futures have firmed up. In the face of a European financial chess game where the king (the euro) faces certain checkmate, we get the same old dose of 'stocks are going up today because there was too much selling the day before' – never mind what else is going on. Yes, technical rebound behavior in the market is a self fulling prophesy, but in the face of sovereign default scenarios, it's an exercise that doesn't benefit investors, only the speculators. Admittedly, you can make plenty of money gaming the market roller coaster, especially with nifty instruments like $SPY calls and puts (and there's nothing wrong with that per se), however it's not real investing, it's short term speculation at best and at worst, equal to what goes on in a casino. This is not the way markets were meant to be. Yes, I know my market history well and speculation has always been a factor, but without going into a long diatribe, what is going on now in the markets is unprecedented. The wheel has literally been reinvented in the markets, but it's a wheel that includes weapons of financial mass destruction that just weren't around even 25 years ago. Self destruction at some point is assured. The wheel may have been reinvented, but the road is still the same.
I'll let you guess what happens to the market when the euro collapses (a certainty). Sure, the D-mark can be resurrected, a new meme that's entering into the market dialogue, but relief from that option would also prove to be temporary in nature. The Germans alone can't save the day in Europe and there is quite a bit of doubt that they would want to play that expensive role by themselves. We're also dealing with one of the greatest forces on earth and in nature: the problem of compounding costs from failed social problems and the HUGE problem of ever compounding interest from debt that takes money away from funding the ever increasing social programs. The outcome is already ugly and will only get uglier. Fred Sanford's ugly aunt Esther looks like a hot dish compared to the state of financial affairs in Europe. This is a sort of market physics – a law that can't be broken.It's a law the U.S. will eventually learn as well.
Helping out the U.S. Stock market today is relief that the Italian auction of 3 bln euros in 1 year bills that priced just above 6% in the primary market. The auction wreaks of illegal ECB intervention since 1yrs in the so called gray market were yielding 7.7% just before the auction. But, hey, even if the ECB has come up with some sort of dubious mechanism to intervene through intermediaries in the primary market – the Wall Street bulls will take the illusion that things went fairly well in the Italian bond market and run with it. You can't make this stuff up! Lol.
The market is not completely delusional. Smart money players will continue to keep a close eye on the widening spreads involving Spain and French paper. That could be a real show stopper, but thus far this morning things are bit calmer (at least there haven't been any 10 sigma moves in spreads somewhere today).
Another headline that's warming the hearts of the bulls: Lucas Papademos (L-Pap) has been named Greek's interim Prime Minister.
Without knowing the rest of the story these headlines are much like Shakespearean comic relief in another wise serious and tragic story line.

As I have said in the past: the market is going up for the wrong reasons these days, but you must embrace the insanity, or have your head handed to you. Down 389 yesterday, up 100 or more today? That's the present paradigm. Some day we;ll look back on this and wonder how in the world could we have let this happen. But for now, it's a common routine.
Gold – I will go along with the mainstream boilerplate reporting of consolidation after recent gains. I can't say it enough. The master money printer – the Fed – will eventually wade deeper into Europe's cesspool and do the rescuing from utter destruction until the Fed itself goes under. This will only be good for gold in the long run. This morning at $1772 not too shabby given the forced liquidations that will come in tandem with growing euro risk.
Crude – approaching $100. Now at 97. “Hopes” the economies of the world will stoke demand. Middle east sabre rattling as well which is why short crude position is a bad idea. Too much upside risk due to Israel/Iran.
Jobless Claims Down 10K to 390,000 – just more claptrap noise. The U.S. trade deficit shrank to its narrowest level since December. Nothing to see here move along. Job market still in intensive care. Trade deficit numbers are unreliable, put together back in the 30s? Lol it's a different world now.
Oct. Import Price Index: Down 0.6%, vs. Cons. 0.0%, Up 11% YoY It's the year over Year (YOY) that counts. Inflation is out there in certain areas and with import prices rising, this is not a good thing. 11% is a big number. Though one of my real people inflation gauges – Chef BoyarDee - has dropped in price to 86-cents a can at some locations (eg Target). The stuff is usually $1 a can. The ingredients list is keyed to a variety of futures contracts. There are no walnut futures, but a pound bag for about $10 bucks ahead of the baking season? Crazy.
For those who took a gamble on Green Mountain Coffee PUTS, everyone is a happy camper, with the stock down 30% on worse than expect results. GMRC is a good example of recent market leaders that have broken down. In hind sight, the failure of the stock to hold above $100 was a glaring red flag. Green Mountain is no Netflix, but I suspect now downside into the 30s is possible. There was a huge gap up in this stock in March, from 41 to the low 50's in a day. That has almost been completely filled, a classic technical move. But be warned. There is a unfilled gap area in the low 30s. There are accounting issues with this company, and it looks as though they are now fixing things through quarter by quarter maneuvers that are going to be painful for shareholders. What it does have going for it, is that is has not done a Netflix by raising prices and curtailing services. Unless there is a sudden reason to believe that coffee business is going away, Green Mountain will weather the storm (provided the cloud of pesky accounting issues doesn't become an F5 tornado). For now, though, GMCR is a broken stock and has been relegated to the land of misfit toys. Keep an eye on Pete's, Dunkin, Starbucks, etc.
The XRT index gauging retail had a barn burner of an October. I'm watching it. It's been weak thus far this month. Already anticipating a tepid holiday season? I was at Wal Mart last evening. I seriously considered putting a gallon of Sunny D and a 15 pound bucket of Scoop Away on layaway just to see what would happen.
Rare political statement: Given the seriousness of the issues this country is grappling with, I can only dispassionately ask why this man is even included in the republican debates? Rick Perry forgets key policy: We have all been in embarrassing situations, but this is show time for the candidates where true convictions are exposed, unless one lacks true convictions and can't speak from the heart in a extemporaneous manner. This is why another certain individual must rely on cue cards... err.. the teleprompter. The best and brightest of the public speakers believe in what they believe and can speak in an unguarded fashion. Perry's little tax card return idea is nice. It would effectively put the IRS out of business. His ideas on the Fed, while a bit extreme, are spot on as well. The Fed is a bank owned mechanism. There is nothing Federal about it. It is an extra constitutional body parading as an arm of the government. I wonder if Perry really knows how the Fed came to be and why? That the subject for another post at another time.But even with a few good ideas, it looks like curtains for Rick. Intrade says his chanced of winning the rep nomination have gone from 10% down to 3%. Next... 
My neighbor across the street has the roofers over replacing the roof. Just 11 years old. Our houses are the same age. I'm glad i had someone come over to replace and re-staple all sort of shingles after a storm a while back. This points to the lousy job the builder of our houses did. Everything seems like a scam anymore.

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