Is This a Fairy God-Mother Rally?
Stephen Tetreault
October 16, 2006
As I stated have stated many times....Greed and Fear are tremendously strong market drivers and as such funds and especially hedge-funds have been found to almost always over-leverage and over-extend their positions bullish positions and with the FED still stepping strongly on the accelerator of their so called easy money printing presses (global central banks are doing so as well), we could (key-word is could) have some more upside left to this tremendous bullish move....maybe the bulls will attempt to push this rally into the election...into the first part of November, (but I doubt is).The Stock Market Fairy Godmother (better know as Helicopter Bernanke) continues to visit and wave his magic liquidity wand over the markets and she has certainly contributed to orchestrate continued short squeezes and a subsequent breakouts over prior overhead resistance on the Nasdog, Russell-2000 and SPX and she has been very fond of the Dow as her constant manipulated streams of liquidity (to replace what the street has been stealthily withdrawing). Year-to-date, the Fed while stating that they are fighting inflation have thrown in almost 32-billion dollars into the permanent money reserves...we have also seen an increase in the M2 money supply as well (the Fed has stopped reporting on M3) so we have to speculate that it too has risen congruently.
Its worth noting that the Federal Reserve defines inflation as: Inflation is sustained and caused by excess money and credit in the economy. Money refers to cash in circulation, plus the amounts that people and businesses have in bank accounts. Credit refers to amounts that banks and other lenders can lend. Inflation will result if money and credit rise too rapidly compared with the ability of the economy to produce goods and services. And it will enable sellers to raise prices. However, the growth of money and credit should not be too slow, or people and businesses will not be able to get loans they need for major purchases that stimulate the economy. The Fed mandate is to maintain an appropriate pace for the growth of money and credit, one that will produce sustainable economic growth and price stability. "Monetary inflation" is basically the fed cranking up the printing presses and increasing the money supply. In the old days that was how inflation was primarily created. The fed would actually print more dollars. But today the fed has much more advanced methods of increasing the real money supply.
So if you have been reading any my other writings of late you would know that inflation and the money supply are very tightly integrated, and as such an increase in the overall money supply is the primary cause of inflation. With all its so-called efforts at tracking and combating inflation, you would think that the Federal Reserve would want to show what they have been doing...well think again as the last thing the manipulative fed-heads want is for the general public to know how much they are stealing out of your pockets through their inflationary practices. Inflation is what I call "the hidden tax and un recognized tax" as when our government "prints" extra money what do you think it does with it (give it to the poor, , provide cleaner breathing air) hell no they spend it of course...and they use it in manners that artificially pump-up the markets...they create bubbles, that eventually implode from their sheer unsustainably. Just imagine folks what would happen if you or I started writing checks (creating so called money out of thin air) from an account that was empty...our asses would end-up in jail. But that is exactly what the federal reserve is doing when they creates money out of thin air and continue to pump it into the financial system through their primary dealers (most of wall-street's major banks and brokerage houses).
Again I ask why would Helicopter Ben and his band or merry warriors fed be printing so darn much money, well one theory/premise is that our trade deficit is running at an annual rate of about $825+/- billion.
We saw this week that the gap between what the U.S. exports and what it imports rose 2.7% to a whopping $69.9-billion marking the second successive month it has set a new record...this widening trade gap occurred even though U.S. exports of goods and services set a record, rising by 2.3% to $122.4 billion, aided by strong increases in sales of commercial jetliners, drilling equipment and computers. The increase in exports was offset by a 2.4% rise in imports, which also set a record at $192.3 billion, reflecting a big rise in America's foreign oil bill (how can this be as prices were falling during the month) nevertheless the trade deficit, running at an annual rate of $825-850 billion through August, is on track to set a fifth consecutive annual record, as it will easily top last year's mark of $716.7 billion.
That means basically, the Chinese/Japanese are loaning us the money to buy their stuff. And the Federal Reserve is printing the money at a breakneck pace to aid the disparity. So one theory is that in order to hide all the money that is being created and sent to China the fed stopped tracking M3....it is no coincidence that the M3 went up an annualized 9.9% in the first three months of the year before they stopped tracking it for the public's eyes. Why bother addressing a problem of this magnitude when you can just bury it by hyper-printing (inflating) it away, while hiding the evidence of your collusion. Hell they are way to smart to want to leave a proverbial "smoking gun" laying around? A 9.9% increase in money supply should translate into an extremely HOT inflation rate 8-10% in real terms...if this trend continues; inflation is going to return in a tsunami type magnitude. We will see inflation similar to that of the 70's all over again. Let's just do the simple math folks Bush's mega-expensive war is Iraq and the billions in Hurricane damage a year ago, and the huge budget increases have to be paid for somehow and this proverbial "hidden tax" is the easy way out for the fed, and the current administration, as it will basically be felt hardest amongst the people they care the least about the middle class and the poor.
Last Friday -
The Bank of Japan left its overnight repo rate unchanged at 0.25%. However, BOJ Governor Fukui said that he "cannot rule out the possibility" of another rate hike later this year. Market expectations for a rate hike by year-end have dropped to about 25%. Mr. Fukui said the BOJ's forecast for slowing rising prices is "highly likely." The BOJ has forecasted that core inflation (excluding fresh food) will rise +0.6% this year and +0.8% in 2007, thus ending Japan's 15-year bout with deflation. The BOJ is forecasting Japanese GDP growth at +2.4% in the current 2006/07 fiscal year (ending March 31, 2007) and at +2% in the 2007/08 fiscal year.
China reported that their current reserves surged to near a trillion dollars (a record $988 billion) at the end of September, up a whopping 28.5% year over year. The reserve accumulation is being primarily caused by China's consistent action to keep their currency fixed at an artificially depressed low level. The Chinese central bank is therefore forced to absorb the greenbacks being acquired through their huge trade Imbalance with us, since selling those dollars back on the Markey and buying yuan in the marketplace would have the affect of causing the yuan to rise sharply, thus making Chinese exports far less attractive or competitive.
Folks, simply put as long as the Chinese central bank places those dollar reserves in dollar-denominated assets such as Treasury securities, the dollar will not decline (and our treasury markets will remain artificially low, meaning they are supporting the low 10-year-benchmark notes for now). However, the Chinese central bank has started to distinctly expressed interest in diversifying their reserves into other currencies such as the yen and euro (probably due to out hyper-inflation policies).
Will we have a liquidity drain.....on Monday, the Treasury will auction $16 billion of 13-week and $15 billion of 26-week T-bills t0taling $31,000 billion to refund an estimated $29 billion of publicly held 13-week and 26-week Treasury bills maturing 10/19, and to raise new cash of approximately $2 billion. Also maturing is an estimated $8,-billion of publicly held 4-week Treasury bills, the disposition of which will be announced 10/16.
I watch money flows, folks and I'm still seeing weak participation, and that this market could be just some manipulation ahead of the election. I'm still watching some large block selling in individual stocks. And what has been propelling the markets upward has been easy money from the fed (see my analysis within this report) and infusions into very liquid ETF's and some blue chip stocks.
We saw a report this week from www.amgdata.com that is showing that equity funds showed the first inflows $5.8-billion in over 4-weeks, however when we strip away ETF activity we see equity fund outflows of 163-million, this proves my theory that its just hot-money that flowed out of commodities and bonds that was parked into liquid instruments.
According to www.trimtabs.com this week; that investors added an estimated $1.4 billion to stock mutual-funds in the five trading days through Wednesday, reversing outflow of $653 million the previous week, U.S. stock funds saw inflow of $761 million, vs. $895 million in withdrawals last week (seems strange that with a draw dow the markets rose). International stock funds saw additions of $637 million, building on the previous week's $242 million inflow. Hybrid funds, which invest in stocks and bonds, added $329 million, about equal to inflow of $318 million a week ago. Separately, TrimTabs reported that U.S. exchange-traded stock funds took in $5.2 billion vs. outflow of $2 billion a week earlier. Global-stock ETF flows added $608 million vs. $85 million in new money a week earlier.
The demise of the Greenback was over-subscribed to during the past several weeks, and the big hedge fund players have been squeezed to death....The dollar rallied on Friday to a new 10-month high against the yen and 3-month high versus the euro, as speculative traders who are leveraged to a complete FOMC pause and a reversal (rate cuts) were forced into covering their positions after some renewed bullish consumer data caused them to rethink their positions that the FOMC will cut interest rates any time soon. *****U.S. retail sales, (excluding autos and gasoline), posted their strongest gains since January, while consumer sentiment rose to a 15-month high in October*** (see reports highlighted below). The currency market are realizing that pricing in a rate cut was premature and that it's now looking like the U.S. economy was actually quite resilient, (now why has not the stock market realized this?) a question that we need to ponder as we encroach into the heart of this next earnings season.
We saw on Friday that the recent huge unusual drop in prices at the gas pumps drove the overall values of retail sales down by 0.4% in September. Now for the bullish tone, excluding motor vehicles, retail sales fell 0.5%....however when we strip away gasoline sales as well retail sales rose 0.6%....then as the talking butt-head so eloquently did on bubble vision lets excluded both autos and gas....when we do that we find that retail sales rose 0.8%, the biggest increase since January. The jump retail sales was in sporting goods, general merchandise, and clothing; and so far thanks in part to increased credit levels (the average American has experienced an increase, thanks to the generosity of the credit card issuer's, of between $2000-$8,000 on the available credit lines on their credit cards) and according to the talking butt-heads the stats suggest that the U.S. consumer is still spending, but being more careful about their big ticket purchases.
Are these the statements of a FOMC on a path to cut rates soon? I seriously doubt it !! Risks of inflation increasing is greater than a recession according to Michael Moskow, the president of the Chicago Federal Reserve Bank, this past week, as he stated "The risk of inflation remaining too high is greater than the risk of growth being too low," Moskow. As a result, some additional rate hikes may be necessary to bring inflation back into a range of stable prices, he went on to state. He stated that he expects inflation to gradually come down, but said there remain substantial risks to this forecast. "By my standards, inflation has been too high." He said his comfort zone for core personal consumption inflation is a range of 1%-2%, and the core PCE has been above 2% for almost 30 months now. The recent declines in oil prices will be a positive factor, and the expected moderation in growth might help reduce price pressures, he added. Moskow said a key factor for him is inflation expectations. "If firms and workers expect inflation to be high, they will want to compensate by raising prices and wages or building in plans for automatic increases," he said. So if expectations start to pick up, then the Fed must hike rates further, he said. In remarks to reporters after his recent speech, Moskow said there was a risk that expectations could pick up even if inflation remains at current high level, he said. "If people ... don't see an improvement, they may change their expectations," he stated. Moskow said also stated that there "is not perfect measure" for inflation expectations. Moskow will be a voting member of the FOMC next year. He has been consistent this year in worrying about the risks of inflation. He attempted to downplay fears that the housing slump would pull the entire economy into a prolonged downturn as he stated that "We do not see the slowing in housing markets spilling over into a more prolonged period of weakness in the overall economy."
Stock Market Crash-Possibility
One of the greatest myths especially amongst the talking-butt-head community is that stock market crashes are random unpredictable events, and as such there is no way that anyone can forecast nor predict when they will occur. The events that so often lead up to a market crash are often many months and some times many in the making. However as I have written about before there as always "tells" certain warning signs and signals that exist and are available to be seen, for those not wearing rose colored glasses, which more often than not characterize the end of a proverbial bull market and the start of the resurgence of a new bear market. And it is by culturing the wisdom to recognize these warning signs, you can protect and/or liquidate your investments to protect your valuable portfolios and you can even add to your wealth by taking a short-position in the markets (stocks) with the greatest possibilities of dropping the most.
The stock market can sometimes be characterized as a study in human psychology as human emotion is one of the most powerful drivers in the market place. It is my opinion, from my many years of research that the stock market is only 20% technical, 20% fundamental/financial and 60% psychological.
I have found that no matter how savvy or experienced a trader or investor is (I even succumb to these affects) they will eventually let their bias, overconfidence, and emotion cloud their judgment and unfortunately these influences will misguide their trading/investing actions, and I have found that most financial decision-making models that I have researched almost always fail to factor in these fundamentals....of human nature, as you are aware I call them greed and fear, the most trustworthy guide to what really influences the ultimate decision-making process with the markets.
Normally people in general are cautious and skeptical, but also realistically optimistic. I have found that throughout the early stages of a bull market, investors and fund managers tend to be cautious and skeptical, it is this cautionary state that signifies the health of a bull market; and then as we encroach near the end of a bull market, the market psychology becomes manic, excessively euphoric and giddy. And we all know allowing oneself to become manic is a form of a mental illness....extreme forms of euphoria isn't rational. As an example, a manic person may feel so overly fantastic that they may not sleep for days its like they are high; then as they come off their high they reverse states they are no longer overly euphoric they then start to creep into a depressive state until depression sets in. The stock market my friends basically follows same exact manic then depressive patterns. This realization of the market being manic-depressive was first discovered by the brilliant Benjamin Graham. For those of you not familiar with Benjamin Graham he was the mentor of what I believe to be one the greatest investor of all time **Warren Buffett**. From my research I have found that at the top of a bull market, words can't describe how euphoric investors can be, they disregard any and all negative news, economic news and irrational valuations, and that is exactly what we have been seeing. Another major sign of a coming stock market crash is overly euphoric and hyping bubblevision news media. The talking buttheads on the various hyping bubblevision media channels have an extremely poor track record at forecasting market direction however as the bull market starts to crest the public starts to believe that they are markets gods. Their past records are so horrible, that doing the direct opposite is highly profitable (I have taken the opposite position many times). A warning sign that the market is topping is when a multitude of financial media and especially the newspapers have bold headlines that are exalting the recent stock market performance and as such they help to induce the next herd of what I refer to as bag-holders to jump aboard the bullish-train, however that train is just about to peak the mountain-top, and so often the herd is blinded to the imminent plunge....to me it this is always signal that a major correction is just around the corner and it flags a major SELL- signal....I just cringe folks every time that I hear the words, one of the most deadly phrases to be iterated by so-called market experts and gurus that "this time it will different", it ranks up there with the phrase that "we are in a new economy" as both these phrases and their many variations have been around since the dawn of the financial markets; and from my extensive research folks I have found that the markets have never change, because human psychology is a constant that never changes. When phrases like these are used, it's because the users are in complete denial of reality; and in some cases they are acting deliberately. The proverbial "herd/bag-holder" investors who is sucked into buying the tops wants to jump aboard the bull market; while the professional "smart money players" who are intelligent non-emotional money managers (many play the euphoric bulls to entice others into the fray, so that they can pass the hot-potato to another) realize that bull markets are always temporary, and unlike the herd smart money players will profit in both a bull market and a bear market crash.
Another situation that occurs right before disaster strikes the markets is that inflation (real inflation not the pro forma governmental hype-fuzzy math reports) becomes rampant. Inflation is the rising cost of living, which decreases the buying power of our greenback. Once higher inflation sets in, the Fed-heads attempt to cool down the economy, and they always tries to engineer the proverbial "soft landing." When inflation and stock speculation (not to mention speculation in other bubbles) becomes euphoric and speculation abounds, hot money moves about like candy on Halloween.
Please remember folks that no matter what stock or fund you own there is one important factor that is causing them to move. It is the mass thinking of all the people who own equities them. As the stock market is a reflection of this mass psychological thinking and as such it causes changes in human behavior; and this mass thinking does not necessarily reflect what the economy or the fundamentals of the is doing at any specific moment. Most of you should be able to remember euphoria of stock buyers at the end of 1999 and the beginning of 2000 stock market cycle as mass psychology was extremely bullish (reminds me of what we are seeing in today's market) and everyone knew the market were going to always go higher; but when reality set in stocks headed down. The market at that time was a reflection of extreme bullishness as the bulls were turning a blind eye toward the weakening economic data, peaking earnings, , pro forma accounting, and one time abnormalities that contributed to the excessive bullishness as they refused to see any type of negative reality that would affect their mania.
Please ask yourself is the herd mentality becoming a blinding frenzy....(please remember that most investors react to market conditions like lemmings)....they blindly are coerced into stampeding up the mountain side, and they willfully follow the herd, not seeing the top or the dangerous drop-off looming just overhead. This type of "herd" mentality can be extremely dangerous to your portfolio. As most investors get into the market too late and get out too early; I have made a very good living out turning the crowd's fear and greed to my advantage, as I attempt to exploit the market's psychology, I have found it easy to act in a contrarian fashion, taking the contrary course when the crowd falls prey to their euphoric and hopeless emotions. Extreme optimism almost always coincides with market tops, and when most traders and investors think the sky's the limit and they send stock prices flying upward the savvier investors sell into this frenzy, and the markets fall soon afterward, The reverse also happens as when extreme pessimism enters the picture and quality stocks are being thrown away (like the proverbial baby with the bath water) these actions can be bullish. Toward the end of a big decline, the last bullish investors throws in the proverbial towel and they sell with a vengeance, and folks like me look at this action as a proverbial fire sale for quality stocks, and we enter and buy with both hands and form the bottom for the next bullish rally.
I have read so many studies by economists and psychologists over the past years that have found that investors are most influenced by fresh events such as market news, political events, earnings, and so on, and they and ignore long-term investment and economic fundamentals...in other words they fail to see the forest through the trees...I have been researching the nuances and impact of this lemming-like behavior, and I have found that it has become worse in recent years because financial, economic, and other news affecting investor psychology travels significantly faster than ever before. Capital can also flow now between nations with surprising ease, so that international markets respond more quickly to sudden changes with a domino effect in the direction of investor buying and selling.
Please, folks, and I know I must sound like a broken record....but please keep in mind that protection of your hard earned capital, especially your retirement money, is a prime concern to me and should always be your first consideration.
© 2006 Stephen Tetreault
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Stephen Tetreault
T-Waves
Southern Maine, USA
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