And The Fraud Rolls on 1 Year Later

Hello Friends!

I am not sure who is still following me since I haven't posted in about a year, but I felt compelled to share my thoughts around the markets. 

It's quite amazing to me to see where stocks are 4 years from the lows that were set in 2009.  The amount of corruption/money printing that it took for us to get here is something I never could have expected.  My hope and expectations as I wrote this blog back in 2008/2009 was that we would take our medicine and write down the losses from the housing boom.  This turned out to be a silly mistake considering the astounding amounts of Wall St money that flowed into Washington DC following the crisis.

So where are we now after a 4 year boom in stocks?  That's a great question.  History is always a great barometer of what's to come and it's told us in the past that most bull markets last around 4 years.  I suspect we are nearing the euphoria stage of this current run up in stocks.

However, thanks to the Fed, the game has changed.  Bonds IMO are no longer a "safe haven" anymore thanks to the Fed buying 80% of the longer end of the bond market..  I mean let's get real here:  Does a 2% yield on the 10 year represent real RISK from an inflationary standpoint?  I think not.

So what have here are investors that are desperate for yield done in response to this new dynamic.  They have taken on much greater risk in order to maintain their 5% yields by buying high yield junk bonds and high dividend stocks.  Savers are getting screwed with a capital S thanks to the Fed's 0% interest policy.

I can honestly can say that I don't blame them for chasing yield.  I mean you gotta pay the bills right?.  However, do I think this is a good long term strategy?  Of course not.  IMO the sheep are being led to slaughter.  Risky assets have been bid up to ridiculous prices.  Historically junk bonds do not pay 5%.  These are treasury type yields  .  Investors need to realize that junk bonds are called JUNK for a reason.  They are highly risky and could very well blow up in your face.  I would suggest that high yield investors take a good hard look at their portfolios and perhaps pare down these holdings.

That being said, I have different feelings around strong dividend stocks that have strong balance sheets.  I think the next crisis will be around solvency, and I am curious to see how this dynamic plays out between stocks with strong balance shets and bonds.

The key question for me is this:  Would you prefer to own treasuries that are essentially bankrupt as we continue to run up our deficits or own stocks like Microsoft, Intel , and Cisco and others that have $30-$60 billion in cash on their balance sheets and continue to pay strong dividends..

This IMO is the million dollar question moving forward. 

$4.00 Gas Should Make the Bulls Nervous

Before I begin let me apologize for going "GALT" over the past several months.  Life has been chaotic between work and my family so I have had zero time to write as a result.  Let me just say that I have greatly missed posting my musings around the financial markets on here on a daily basis.  I have also missed the intelligent insights that many of you share in the comments section.  I am thinking things might quiet down here in a couple months so I hope to be posting on a more regular basis in the near future.

Anyways, I just wanted to hop on and share my thoughts around the massive rally in both the stock and bond markets.

My first thought is both stocks and bonds shouldn't be rallying at the same time.  Money usually moves out of bonds and into stocks or visa versa.   This is just one of the disconnects out there right now that just doesn't make sense.  That being said, the rally has been quite impressive.

In my view, the main reason both stocks and bonds are rallying at the same time is because the central bankers of the world are throwing money out of helicopters at an unprecedented rate.  In fact, I bet if you stuck your arm out the window of your house right now you could probably snag yourself a $20 spot.

Europe has joined the QE party with it's LTRO(Long-Term Refinancing Operation).  Different name same game(money printing).

As a result, the credit markets/speculators are now front running the ECB's LTRO and gobbling worthless PIIGS bonds that offer nice yields knowing that the ECB has their back.  Does this game sound familiar????  Treasuries and QE ring a bell?

This has temporarily forced the PIIGS bond yields to collapse which has for the time being taken European Financial Armageddon off the table.  

A Warning for the Bulls:

It's now "risk on" in the equity markets now that the CB's have put the pedal to the metal on the money printing parade.  Low rates in the US have further fueled the markets as investors are forced into stocks in a desperate attempt to find yield.  As a result, it's been a great time to be a bull.  However, as we saw last year and in 2008 there is a problem when you drop money out of helicopters.

The problem of course is inflation.  Oil is a perfect example and I wanted to take a look at a few charts to help explain my point.:

Lets first take a look at Oil over the last 12 months:

Now let's compare it to the S&P 500 during the same period:

My Take:
 
As you can see above, oil has soared as a result of the "CB double whammy" of the The Fed coming out and promising zero rates until 2014(ridiculous) combined with Europe joining the printing parade via the LTRO.   To be fair, let me also add that Iran has also helped juice the oil markets.  However, in the end does it really matter?  The cause can be debated but the result is the same.

Consider this a warning to those long equities.  We are now nearing the highs that we saw late last spring when we peaked at around $114.00.  Oil closed at around $109 yesterday.

The economy basically came to a screeching halt once oil got up to these levels.  Consumers were able to hang in there for a few months with $4.00 gas but in the end it was too much.  Stocks plunged over 20% in July and August as the consumer retrenched.

The Bottom Line

Is it different time?  I highly doubt it.  Our economic recovery is still a fallacy.  Unemployment is down but it's only because the numbers have been fudged.  You no longer "count" anymore when you run out of unemployment benefits.  You just roll out of the system and you are considered "forgotten" by our government.  How can anyone take the employment rate seriously when they are pulling these stunts?

Some people have been able to find jobs but they aren't as well paying as the ones they had before.  Wages are still down from over a decade ago.  As a result $4.00 gas HURTS and HURTS bad.

Remember folks:  Our debt ridden consumers can no longer gobble up their new I-phones when it costs $80 to fill up the tank.  High oil costs also kills corporations because their input costs go through the roof.  This will do wonders for earnings(scarcasm off).

We'll see how this plays out but you can thank the ECB and the Federal Reserve for these high oil prices.  Bernanke always thinks he can have his cake and eat it too by printing more money.  The reality is the markets always punish you when you go too far. 

There are lots of other things that I would love to discuss but I am out of time for today.  Greece is still obviously not fixed but I'll save that one for another post.  

Will the Greeks Agree to Austerity? Sure, When PIIGS Fly!!!

Sometimes I just have to chuckle when I read about our financial markets.  Somehow/Someway the markets  always find a way to get even more ridiculous than I thought they ever could.

Stocks soared today as word got out that the Greeks were cancelling their referendum on the bailout/austerity package that they had accepted from the Eurozone.

Germany and France happily breathed a HUGE sigh of relief on the news.   I am impressed with the worlds central bankers on this one.  They somehow frantically pressured Greece into cancelling their planned referendum vote.  I'm not buying that it came down to Greek politics.  My guess is the Greeks had a gun pointed at their head by the European bankers.

You might ask:  Why would France, Germany, and the rest of the EU absolutely freak when they heard this plan was going to be voted on by the people?

Ummmm.....Maybe because the plan completely pillages the people of Greece??

As I like to say, the devil is in the details and here are the details of the austerity plan. 

Let me ask all of you a question before you read the summarization of the plan:   If you lived in Greece would you vote for this???:

"Income tax threshold would be lowered from €12,000 (£10,300) to €5,000 (£4,300)

Retirement age would be raised from 61 to 65

VAT would rise from 19 to 23 per cent

Higher property taxes

Monthly pensions above €1,000 (£860) would be cut by 20 per cent

Excise on fuel, cigarettes and alcohol would rise by a third

To qualify for a full pension people would be required to complete 40 years work

Retirees aged under 55 would lose 40 per cent of their pensions over €1,000 (£860)

Public sector wages would be cut by 20 per cent

Employees of state-owned enterprises would have their wages cut by 30 per cent

A cap would be introduced on wages and bonuses

30,000 civil servants would be suspended on partial pay

All temporary contracts for public sector workers would be terminated.

Just one in 10 civil servants retiring this year would be replaced

New levies on household incomes of between one and five per cent."

My Take:

I highlighted some of the details that were the most harsh.  Folks, let's just cut to the chase, this just isn't gonna happen.  I spoke to "The Credit Trader" about this today and he explained it best: 

"Jeff, Greece will fail because the WILL to implement such evil/harsh measures on the people in Greece simply isn't there".

I asked him how he thinks this plays out and this was his answer:

"I see it going one of two ways.  Greece will reject the austerity plan and head back to the Drachma.

OR

Greece will "play the game" and agree to the terms of the the austerity plan and then just never implement them."

He finished with this:

"Either scenario will end up with Greece collapsing.  The politicians are either going to take their medicine now and head to the Drachma or they will try and play "kick the can" until the EU stops funding them when they refuse to comply to the terms of the bailout.

I couldn't agree with his assesment more.

Of course the stock market loved the news.  The bulltards took stocks to the moon the last two days on the hopes that Greece is now "fixed".  What they don't realize is Greece can't be fixed.  Greece is broken!  Greece has about as good a chance of being fixed as Kim Kardashian's Marriage.

Just think about it for a minute.  Who in the hell would agree to the terms above without revolting in the streets.  Citizens in third world nations are treated better than this!!!

The idea that the market is buying this Greece BS is simply amazing to me.  I'll say it now and I'll say it again:

Greece is Toast with a capital T.

The Bottom Line

Stocks look very extended to me here.  Keep in mind we had about a 20% rally in October before getting pounded early this week.  This last move reminds me a lot of the Bear Stearns rally in 2008 right before stocks collapsed.

Remmber all:  HOPIUM only can last for so long before the effect of the drug begins to wear off.  Reality and the fundamentals ALWAYS matter in the end folks, and it's no different this time.

So what happens next? 

The bond markets already understand that Greece is toast so they will immediately begin focusing on Italy and the rest of the PIIGS.  In fact, it's already happening when you look at the Italian 10 year bond:

As you can see above, we are once again nearing the recent all time highs when it comes to 10 year yields.  Italy cannot afford to finance itself with 10 year yields sitting over 6%. 

Watch European bonds like a hawk in the coming days.  The market knows that the EU/ECB cannot afford to bailout Italy because the size of the bond market is close to $2 trillion Euros.  As a result, the bond traders went right to Italy from Greece because the markets love to go for the jugular.  I mean why screw with some irrelevant country like Portugal when you can go right for the throat in Italy?

That being said, I do expect to see the yields in the other PIIGS to follow suit as the fears of contagion settle in. 

Let me repeat again what I said up above:  As this crisis intensifies focus your intentions on the credit markets instead the stock markets.  Bond traders are a much more sophisticated crew of investors. They almost always get it right whereas the stock market often gets it wrong...2008 ring a bell?
So what am I doing to prepare?

Buying gold and miners again because I expect a printfest by the ECB as they try and stave off a massive bond contagion.  I also remain in some high divvy energy/tech stocks.  EXC, D, and Microsoft are my largest holdings but let me stress that they pale in comparison to my cash holdings.

The volatility in stocks has made them difficult to short so I am mainly on the sidelines except for a few short hedges.  Recently, I have increased the size of my short holdings after the October run up via some longer term option plays on the SPY that I scaled into that expire in March. 

I also currently hold some SDS, QID, and TWM because I am expecting a sharp pullback thanks to Europe.  I will sell these 3 positions on any large move down.  I am willing to take some pain on these if I'm wrong because it's impossible to time the markets.  If I eat some decay on these short ETF's due to the volatility then so be it.   Like my gold holdings, these short positions are very small in relation to my cash holdings.

All in all be careful out there folks.  These trading robots are wicked fast and they trade the news faster than the speed of light.   Trying to compete with them via day trading is a losing battle unless you own a quant yourself.

If the jobs number beats tomorrow we could see another meltup if Greece behaves. 

In the longer run buyer beware and own some hard assets.

Disclosure:  No new positions were taken in any of the names above at the time of publication.