Wrong-Way Bicycles and Spoiled Children

September 23, 2013

  • Riding a bicycle on the wrong side of the freeway: Elmerraji’s colorful analogy comes at the perfect time for his new Trading Challenge…
  • The Fed must taper… but it can’t! Mayer, King, Amoss all weigh in on the central bankers and their “spoiled children” on Wall Street
  • The Venezuelan Toilet Paper Crisis of 2013… profiting from zombies… Congress separates “real journalists” from “17-year-old bloggers”… and more!

  “Notice how the bears in the financial media have shut up in the last week?” says one of our resident technicians, Jonas Elmerraji.

What’s made them quiet is not the Federal Reserve’s no-taper call last Wednesday — heck, whatever the S&P gained that afternoon was gone by Friday’s close — but rather a longer-term chart going back to the start of the index’s rally more than 10 months ago…

“That’s a classic uptrend if I’ve ever seen one,” says Jonas. “Betting against that chart is kind of like riding a bike the wrong way on the highway: The trend is clearly against you, and you’re probably going to get hurt.

“Given the benefit of hindsight, a lot of bears are going to take for granted how bullish the technicals have been just long enough to publish some more bearish market commentaries the next time the S&P touches trendline support. Count on it.

“As technical traders,” he wrote his readers yesterday, “we’re reactionary. We don’t make predictions, and we don’t guess. Instead, we’re focused on the here and now for stocks. We’re in an uptrend in the S&P 500, and we’re seeing breakouts trigger in individual stocks.”

That means a slew of new trades. Which also means it’s a prime time to open what we’re calling our 100-100-100 trading challenge.

As of today, 100 calendar days remain in 2013. And Jonas is looking for…

  • 100 hardy souls…
  • to pull in an extra $100 in trading income…
  • every day for the next 100 days.

No previous trading experience is required. In fact, the less you know, the better off you might be — you won’t have preconceived notions cluttering your mind. To get you started, Jonas has put together a trading quiz. Once you sign up and take the quiz, you’ll begin to receive trading tutorials he’s sure will goose your know-how in plenty of time to pull in an average $100 a day for the next 100 days.

Participation is absolutely free, and no-obligation. If you’re game, here’s where to go.

  The major indexes are all in the red this morning, but not by much. The S&P rests two points above 1,700. Among the developments in view today…

  • The global “flash PMI” manufacturing numbers for September are out: China’s reading is at a six-month high, the eurozone is its perkiest since June 2011. But U.S. manufacturing growth is slowing
  • Germany’s elections handed 42% of seats in the Bundestag to Chancellor Angela Merkel’s Christian Democrats, but she has no obvious coalition partner with whom to form a majority. Call it a wash as far as “eurozone stability” is concerned
  • No fewer than three Federal Reserve governors are delivering speeches today, providing ample grist for the legion of armchair Kremlinologists hoping to deduce the Fed’s next moves…

 “At some point, the Fed will have to taper,” says our Chris Mayer. Buzzkill.

“And when it does,” he adds, “the Fed-suppressed interest rates will go higher. The stock market, propped up by low rates, ought to come down.”

Chris spoke last week at the autumn Value Investing Congress in New York. He offered two anecdotes that illustrate the state of play.

“First,” he says, “I pointed out that Baupost Group, led by super-investor Seth Klarman, will give money back to clients at the end of the year for only the second time in its 31-year history. The reason is simple: lack of opportunities.

“And my friend Ryan O’Connor, who is a member of the highly respected Value Investors Club, sent an email to me pointing out that the club’s bargain meter is at an all-time low, with 70% of club members saying bargains are ‘few.’ The other options are ‘average’ (29%) and ‘many’ (2%).

“If you care about downside risk (and if you care about getting value for what you pay), then these are two meaningful anecdotes. They are caution flags.”

“Having said that,” Chris hastens to add, “there are always things to do. The Value Investing Congress was evidence of that, as speakers turned up several good ideas.”

Chris remains keen on the “Chaffee royalty” plays that in the past have been known to transform a single dollar into $50 before all’s said and done. The best of these plays have been closed off to new investors for years — but the window of opportunity has just reopened.

  “Politically, it’s risky to scale back on QE,” says our Byron King with a shorter-term outlook on those ugly buzzwords of “quantitative easing” and “tapering.”

“Or to paraphrase that old line about cancer, there are more people living off it than dying from it.

“Evidently, big shots within the Obama administration and the Senate noticed that our grand U.S. economy is less robust than they would like. Plus, we have looming budget battles and political dogfights over taxes and spending. Add in the approaching storm of Obamacare.”

Thus, Byron surmises, “policy honchos within the Obama administration told Bernanke to keep the Fed’s signature easy-money programs in place for a while longer. How much longer? Well… through this fall, at least. Then we move into 2014, when the U.S. will hold elections for the entire House and one-third of the Senate.”

“What’s the takeaway here? QE, QE and more QE. The Fed is propping up Wall Street, so to speak, while the ‘real’ economy languishes. It’s investable for stock pickers. And buy physical gold. Buy physical silver. Hold oil. The dollar will live through another time of troubles. That’s where this is heading.”

  Gold added to its Friday losses overnight, but has since recovered. At last check, the bid is $1,328. Silver’s now within a dime of $22 again.

Elsewhere in the commodity complex, crude is off more than 1%, to $103.37 — as low as it’s been since the end of July.

The dollar index is firming a bit, approaching 80.5.

  “The Fed may finally have realized the economy is addicted to QE,” adds our macro strategist Dan Amoss with his own reflections from last week. “Like a parent that’s spoiled a child, the Fed has lost its ability to discipline Wall Street.

“Bernanke cited ‘tightening financial conditions’ as a key reason to not slow the pace of money printing. Those tighter financial conditions (higher Treasury yields and mortgage rates) were the result of Bernanke’s talk all through the summer. So which is it?

“If this is how the Fed now operates, then it has trapped itself into never tapering or even hinting at tapering again. If nonstop QE is a permanent condition, then the Fed will have made the ultimate crash of bonds and stocks back to nonmanipulated prices that much bigger. As each month passes with an extra $85 billion added to the base money supply, capital markets move further from realistic, sustainable conditions.

“Several months from now, when the next Fed chair (probably Janet Yellen) starts hinting at tapering, the tightening of financial conditions will be even stronger — a more spectacular temper tantrum, in other words. This, in turn, will result in yet another round of promises to not slow the money printing.”

The addict analogy never gets old: “The market is building up a tolerance to QE,” Dan concludes. “Ever-higher doses of QE will be required to prop up stocks and bond prices.”

  It’s nice to know there are certain things in this world you can count on — like bumbling by the Venezuelan government even though Hugo Chavez has departed the here-and-now.

“A Venezuelan state agency on Friday ordered the temporary takeover of a factory that produces toilet paper,” Reuters reports, “in what it called an effort to ensure consistent supplies after embarrassing shortages earlier this year.”

Market failure!

Couldn’t be President Nicolas Maduro’s price controls causing shortages, could it? Or the exchange controls that make for a shortage of hard currency? Naw…

Chavez’s successor: Now we know what Burt Reynolds would have looked like if he’d let himself go in his prime.

“The action in the producer of toilet paper, sanitary napkins and disposable diapers responds to the state’s obligation to ensure a steady supply of basic goods for the people,” says a statement from Sundecop — the bureaucracy that enforces price controls.

National guard troops, we’re told, will “safeguard” the factory. We’re not sure what they’ll do if there’s not enough wood pulp to keep the factory supplied…

  “Truth be told, you do feed off zombies,” a reader writes after we took offense on Friday at being called zombies ourselves.

“Without zombies, you would have far less to write about and far fewer readers.”

The 5: Hmmm… We’d write about different things, for sure. We’d love to have nothing else to write about but the merits of companies and balance sheets and technologies.

“You might indeed strive,” the reader then pivots to our assertion that when we engage in satire, we go all out. “However, reality is not constrained by logic or believability.

“Sometimes you will fall short — in the U.S., foreign journalists do require licenses (visas).”

The 5: And soon, domestic ones too, God help us. Earlier this month, Senate Judiciary Committee approved a “shield law” written by Sen. Dianne Feinstein.

In theory, it would protect journalists from having to divulge their sources in court cases, lest they be threatened with jail time. In practice, it gives the feds the authority to define who’s a journalist and who’s not. “Feinstein insisted on limiting the legal protection to ‘real reporters’ and not, she said, a 17-year-old with his own website,” reports the Los Angeles Times.

Your editor — who labored in conventional broadcast news for 20 years before entering the colorful world of financial publishing — cannot begin to convey the dangers in this bill.

It’s a short road from a shield law to the kind of royal licenses that prompted rebellion by Colonial pamphleteers, suggests Charles Pierce at Esquire: “If you accept the Congress’ right to define what a journalist is,” he addresses his fellow journalists, “you are a miserable traitor to the profession you presume to practice. You have, quite simply, become something less worthy than an informer, something lower than a jailhouse snitch.”

  “No money — no honey!” an MD writes after we mentioned in passing on Friday that government software still can’t spit out accurate prices for the health insurance “exchanges” that are supposed to be up and running Oct. 1. (Uh, that’s a week from tomorrow.)

“No payment rates for exchange patients have been published,” the reader elaborates.

“These cutthroat insurances will pay (maybe), after four-five months of stalls, delays, requests for more information , medical records — electronic only — ad nauseam , some pittance below Medicaid rates — so that no self-respecting Doctor will even see them in his practice.

“I predict ‘exchange’ patients will be met with the same opprobrium as HMO patients trying to weasel their way into a real doctor’s office. ‘Exchange’ will be the latest dirty word at the doctors’ scrub sink!”

The 5: From your lips to the Gray Lady’s ears: “To hold down costs, insurers say, they have created smaller networks of doctors and hospitals than are typically found in commercial insurance,” says this morning’s New York Times. “And those health care providers will, in many cases, be paid less than what they have been receiving from commercial insurers.

“Some consumer advocates and health care providers are increasingly concerned. Decades of experience with Medicaid, the program for low-income people, show that having an insurance card does not guarantee access to specialists or other providers.”

Yikes. And even more changes are on the way come Jan. 1. Are you ready? Even if you think you are, you might want to run down the checklist included at this link.

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. We’re down to only 159 remaining seats for our aggressive retirement catch-up strategy, seizing up on a subniche of the market that flies under Wall Street’s radar.

We have every expectation these seats will be full up by Wednesday. So we urge you to examine the strategy and decide whether it’s for you while there’s still time.


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