Stocks Spanked, QE2 Backfiring

by Addison Wiggin

  • Bond vigilantes awaken, stocks taken to the woodshed…

  • Dan Amoss on the Fed “risking ultimate disaster”

  • The overprotective directive from Chicago that sent gold tumbling overnight

  • Congress back in session… the one sensible thing it might do soon, maybe… nah forget it

  • Auto dealership devises semi-automatic stimulus… cross border concerns in the great Pacific Frontier… a market immune to “high frequency trading” programs… and more!

The good ship QE2 was supposed to lower interest rates. Ben Bernanke promised. He and the Fed even made sure to concentrate most of their Treasury purchases on notes of medium-term duration.

Lower rates, the theory goes, would inspire businesses and consumers to go deeper in debt… and stimulate “aggregate demand”… and goose economic recovery.

Much to Mr. Bernanke’s chagrin, it’s not working.

Here’s what happened instead. Since the announcement of quantitative easing on Nov. 3:

In fact, all the gains in Treasury prices that took place since Bernanke started talking up QE2 in late August have now vaporized.

We dare say this might be an early sign of vindication for our New Trade of the Decade – the sell side of which is “sell U.S. Treasuries.” This latest move could simply be a round of profit taking after a steady run-up since last spring.

The trend is also working out nicely for readers of Options Hotline. In mid-September, Steve Sarnoff recommended put options on TLT – the ETF that tracks the 30-year Treasury bond. The play is now up 77% in just over two months.

"Bonds continue to look terrible,” Steve wrote his subscribers on Sunday. “Many market participants aren’t prepared for a rise in yields”… but Options Hotline readers were.

In addition, they’ve had a chance to bag gains up to 108%… 125%… and 180%… all within the last three weeks. Steve’s next recommendation comes out on Sunday… and you can grab an Options Hotline membership right now for half the regular fee – but only through this weekend.

At least the rise in interest rates is bringing some sanity back to the mortgage market. Mortgage rates tend to track the ten-year Treasury note, so this morning a 30-year fixed rate mortgage can be had for 4.51%. The 30-year Treasury bond yields 4.33% as we write.

So at the very least, the market is once again demanding a higher rate from a mortgage borrower than from Uncle Sam.

Stocks are taking a beating this morning. The Dow and the S&P are both down 1% after a dreary, flat day yesterday. Even news that Apple’s iTunes has finally secured rights to the Beatles catalog can’t get traders jazzed this morning.

Hmmn… QE2 was supposed to goose stocks, as well as lower interest rates. How’s that been working out?

“Central banks cannot manipulate stock prices upward for very long,” says our resident Fed watcher Dan Amoss. “The harder they press, the more they risk ultimate disaster. Unless the Fed want to risk confidence in the U.S. dollar spiraling out of control, its future policy will fall short of its most aggressive rhetoric.”

”With the QE2 decision and his op-ed in the Washington Post, Ben Bernanke took an aggressive stance because he knows that next year's Fed Board of Governors will consist of more QE critics.”

“He's certainly been getting an earful of criticism from foreign creditors. This factor will probably dominate the direction of individual stocks and sectors in the coming months. Some sectors of the stock market will likely benefit from QE2, but most will suffer.”

[Ed Note: Not to beat a dead horse, but with the S&P 500's big fall today, followers of Abe Cofnas and Strategic Currency Trader bagged a 175% gain in a little over 24 hours, using a one-of-a-kind index option.

Similar plays since Oct. 25 have delivered gains of 88%… 138%…153%… and 180%. If you want to learn more about these trades (Abe's is the first advisory service to cover them), call my friend John Wilkinson at (866) 361-7662.]

 Ireland may be getting a bailout, whether it wants one or not. European Union ministers are huddling in Brussels. By the time you read this, they’re likely to have crouched at the line of scrimmage…

EU quarterback Herman Van Rompuy said both the euro and the EU face a “survival crisis.” But then a few hours later, the EU’s defensive end said Europe must “resist alarmism” and that Irish debt is well funded through the rest of this year.


As the tension builds, yields on Irish 10-year bonds – which retreated from the 8.9% level late last week – are up again as we write to nearly 8.25%.

In the meantime and for the moment, Euro-jitters have pushed the dollar index to just shy of 79.

Likewise, gold has tumbled to $1342. The plunge comes in part because the Chicago Mercantile Exchange just jacked up its margin requirements, effective tomorrow. Traders who want to take out a futures position on 100 ounces of gold now have to pony up $6,075 – a 5.9% increase.

The CME also raised silver margins – again. It comes on top of the increase imposed last week, when silver hit a 30-year high of $29.34. Now an ounce can be had on the spot market for $25.26.

Time to survey what the hedge-fund movers and shakers are doing with gold, as revealed by their latest 13-F filings with the Securities and Exchange Commission…

  • George Soros has trimmed his stake in GLD, the big gold ETF, by close to 10% — 501,300 shares. But he’s also bought call options 705,000 GLD shares

  • John Paulson is maintaining most of his gold holdings, although he’s lightened up on AngloGold Ashanti

  • Goldman Sachs alum Eric Mindich’s Eton Park fund bought $69 million in gold mining shares, including Yamana and IAMGOLD for the first time. He unloaded $59 million of Agnico-Eagle and Goldcorp.

This week, Byron King is putting the finishing touches on a brand new presentation detailing his own favorite gold picks. It’s called “Nine Ways You Can STILL Get Rich on Gold.” We’ll let you know as soon as it’s ready.

Uh-oh, the nation is in danger again. Congress is back in session in Washington this week.

Among the issues the lame-duck assemblage may or may not tackle in the weeks ahead…

  • Extending the Bush-era tax cuts. The latest buzz is that they may be extended for everyone, no matter their income, for another two years – when of course, we have another election cycle and everyone can grandstand about this till the last minute once again. Just swell.

  • Washington may be retreating from one front in the War on Small Business that we’ve chronicled. A serious move is afoot to repeal the requirement, buried in the health care bill, that businesses issue an IRS Form 1099 to every vendor from which they buy $600 or more in goods and services each year.

With at least one weepy jaundiced eye, we’ll be watching this one. And in fact, may take the Amtrak down for a closer look.

As of this moment we’re scheduled to meet at Rep. Ron Paul’s office on December 2nd for a luncheon he calls the Liberty Caucus. Depending how lame the lame duck session is… the date may get pushed back to some time in the New Year. Either way, we’ll keep you posted…

We mentioned yesterday how auto sales boosted the October retail sales report. If the November report looks bad, don’t blame it on Nations Trucks in Sanford, Fla.

“Business has tripled in the last few days,” says Nick Ginetta, general sales manager at Nations Trucks. The promotion started last week on Veterans Day, a venture undertaken despite the dealership’s slogan, “We sell trucks, not gimmicks!”

Among the “restrictions” that apply: The rifles are not distributed on the spot. Buyers get a $400 voucher to use at a local gun shop. And of course, they have to pass the usual background check.

"I knew the anti-gun crowd would be appalled," Ginetta says. We like a businessman who knows what his customers like.

“Do you have a direct link to the Options Hotline offer?” a reader inquires. “I don’t have time to listen to sales audios.”

The 5: Indeed we do. Here you go.

“Just read the comments about Family Guy,” another writes about the clip we shared Friday, “which is the only good thing that has come out of America in the last decade.”

“If you can't laugh at yourselves, forget it. Just keep on exporting democracy at the point of a gun and printing money to pay for it.”

“Some of your readers must be nuts,” writes another, “to complain about the Family Guy sketch you posted in The 5. But to each his own I suppose. It was pretty funny to me.

”I have to say though that the XtraNormal post [the one yesterday explaining quantitative easing] takes the biscuit. Bloody hilarious! A truly idiot-proof explanation of the whole deal. Well done for finding it and thanks for sharing. I'll be passing it along.”

“This is the first time I have ever bothered to write you,” writes a third, “but I just wanted to say that the quantitative easing video you posted in Monday’s 5 was "right on!" Its message was upsetting and humorous… in a sick, twisted, end of the world kind of way.

“However it was very informative, and shed a light on gross corruption that may well lead to a Civil War if the American People ever grow a pair and stand up for their families and future.

“I never believed the French would outshine us when it came to fighting spirit. It must be the sleeping pills in the tap water…”

“With the U.S. targeting Nicaragua and Ortega,” a reader inquires, “engaging in incursions from Costa Rica and its meddling in Honduras, shouldn't you advise against your subscribers investing in the area, as you would regarding a stock whose company has impending problems that would make it a dicey investment, or one in which you, your company, or its employees have an investment and profit potential even if the investor loses?

”Seems to me that as an investment advisory the same policies you say you have about ownership of stocks being recommended should apply to real estate you/your company's owners own.”

The 5: In fact, Rancho Santana represents the physical embodiment of much of what Agora’s IP is all about… and fully consistent with the investment philosophy espoused by most of our writers and analysts.

“The time is ripe for the picking,” says one of our men on the scene at the Ranch, “it's classical Warren Buffet sentiment of ‘buy on fear, sell on greed’ which, in fact, is really an old Nathaniel Rothschild comment a couple centuries ago, ‘buy on the sounds of canons, sell on the sounds of trumpets.’

“Costa Rica,” he continues, “is border baloney rights and likely Ortega just creating a ‘national’ issue to keep the people looking away from the economy and at the "side show."

“Anyone see ‘Wag the Dog’? You get the picture.”

If you’d really like to know what’s going on at the Ranch, including the myriad of benefits to owning property there, we urge you to watch this short video interview with Marc Brown, our resident surfer-turned-property director at Rancho Santana.


Addison Wiggin

The 5 Min. Forecast

P.S.: So called “high-frequency trading” now accounts for 70% of stock market volume. With the big banks’ computers spending all day war-gaming each other at lightning speed… how do you stand a chance of eking out any gains at all?

The answer lies in a market where the big banks don’t have any access. One of our up-and-coming analysts knows this market first-hand. He’s spent most of this year experimenting with a proprietary five-step system to play it.

Result: An average gain of 9.1%… in just 18 days. Piled up across 20 plays, and you can see how just how lucrative this system can be.

We’re pronouncing the experiment a success… and we’re taking the wraps off next Monday. Watch this space for details.


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