Friday, May 29, 2009


Just some Commentary tonight folks.

I just wanted to discuss the total chaos that we are witnessing in equities today. Each day the market makes less and less sense than the day before. I highly advise people to stick on the sidelines in a market like this unless you have been trading for awhile.

Jeff Macke from CNBC's Fast Money said it best yesterday:

"The bottom line: Professional traders are confused and afraid of this market. Even the guys making money this year are grousing and moping. What you have left are sharks fighting each other and going into collective feeding frenzies selling moves like the in-one-week GM double. The unknowing in the pits are chum for the sharks. (As in bait, not pals.)"

If the best of the best can't make sense of this market, how can the little guy have a clue as to what to do? Today was a perfect example. We see sawed all day in and out of positive territory on light volume until we saw a parabolic move to the upside in the last 5 minutes of the day. The DOW literally moved higher 60 points in last minute or so of trading.

This type of instability is not healthy and its almost impossible to trade. An interesting trading note: We literally closed right at the 200 day moving average. Early next week should be interesting to watch and trader's are now asking themselves the following questions:

If we firmly break through the 200 day MA of S&P 925 do we then see another move higher? If we fail to break the 200 day, do we then roll over and start free falling back to the downside?

Only time will tell.

What I do know is this. Play small and stay diversified. Watch for confirmation in either direction around the 200 day MA if you want to make a quick trade.

The Fed's Vietnam

I wanted to talk a little more about the Fed and its quantitative easing policy. The Fed IMO is fighting a war that it can't win(see below). It appears that the Fed went on a spending binge in the credit markets today as bond yields collapsed. We saw massive buying in the MBS and the treasury market today.

The problem the Fed has here is all of this government buying comes at a price. The victim of this spending spree is the US dollar. The dollar collapsed today as the markets reacted to watching the USA digging itself even deeper into debt via QE.

The problem that this creates for the FED is the weak dollar suffocates the consumer with higher prices.

Take a look at an Oil ETF USO and gold(via ETF GLD) respectively today:


Bottom Line:

As you can see, there was a price to pay after spending money that we don't have. The Fed can't have its cake and eat it too. Prices on commodities soared as the dollar weakened.

We have seen both sides of the QE dilemma this week folks. The Fed is now facing their own financial version of the Vietnam War. I say this because its I war that I don't think the Fed can win because either way the economy crumbles.

Here is why:

If the Fed QE's and starts buying up the bond market the dollar gets killed as the world continues to lose confidence in the USA and our currency. The falling currency then results in huge spikes in prices which then suffocates the consumer with higher prices.

We all saw what happened to the consumer when we had $4 gas last year. They basically rolled over as the cost of everything skyrocketed. Hybrids and motorcycles popped up out of nowhere and SUV's were nowhere to be found.

Oil is now back up to around $66 dollars a barrel after bottoming in the 20's. This is a direct result of the weaker dollar. I say this because demand is NOT driving this. There are supertankers of oil that have nowhere to go because the world economies have collapsed thus killing demand. However, since oil is priced in US dollars, oil has spiked up as the dollar dropped.

The same thing goes for gold and many other commodities. Folk, if the Fed continues to spend like drunken sailors, no one is going to be able to afford to live let alone go out and consume as a result of crippling inflation. The economy will then collapse because the consumer drives 70% of our economy.

If the Fed decides not to QE:

Well, last week we saw a little of what will happen if the Fed stops their QE policy and the FCB's stops buying bonds. Yields will soar and our government will be forced to stop spending as their ability to finance their debt via selling treasuries will disappear.

This then decimates the housing market which then destroys the trillions of $$$ in assets on the bank's balance sheet. As these banks start to collapse again following further deterioration on their balance sheets, the Fed will not have the money to save them as a result of the treasury market blowing up.

Without the ability to continue the bailouts, the corporations that have survived only by sucking off the government tit would then implode and the Fed would be pretty much powerless to stop it. We would then see an unprecedented wave of corporate bankruptcies as their financial wells run dry.

The end result is pretty similar to scenario #1: Economic Collapse.

The best thing the Fed could do at this point is get the hell out of the bond market and stop all of the bailout spending.

I mean jeez: If they reduced the deficits by increased taxes and reduced spending there would be no need for QE! Would this be an extremely painful scenario ala the 1930's? Hell yes, but at least the economic system and our government would be kept in tact.

The game the Fed is playing is unsustainable and guaranteed to fail.

Its time to take our medicine before we lose the economic system that has allowed us to become the most powerful country on earth.

What's it gonna Ben? A depression followed by a recovery or Zimbabwe and social chaos?


CT-Hilltopper said...

Isn't it ghastly, Jeff.

It's like the old "looking at a traffic accident thing". You really want to look away, but your eyes just keep getting drawn back into the middle of the carnage.

Don't believe everything you hear in the news.

They say everything in the "Gold Coast" of Connecticut is moving just fine in real estate, right?

I own a duplex near Danbury, CT. I had to evict tenants from both sides at the same time for non-payment of rent. This is in a nice suburban part of Danbury, where rents are high. I have continually offered my rentals for a little less than neighboring properties, not wanting to make a killing, but wanting families in the properties that would take care of them.

Even at a price of $500 a month less than surrounding rentals, my apartments have been sitting empty for over four months. Either people can't pass the credit check, or they want to haggle over the price. There is no haggling. It is what it is. If they have to haggle, i know they can't afford it, and I don't want to go through the eviction process again ever.

I'm not seeing the green shoots here.

Jeff said...


Sorry to hear that!

I have a family member in rhode island that ia part owner in 15 rental units. Last year he lost eleven tenants and the rest didn't want to sign another one year lease.

He is scared and horrified as to what is going on.

I hope you find some tenants!

BAM said...

Today's market action was interesting to say the least. I couldn't figure out why there was big surge in the last 15 minutes until I read "The Market Ticker" by Karl Denninger. I am sure you know him. Either way, I think next week will be very interesting. It will be a start of another push uphill or the beginning of the greatest fall the market has ever seen....

Have a great weekend!

Jeff said...


Karl D. is awesome. I read his post.

I still don't think anyone really understands what happened at the close.

There are lots of theories but the market is simply too insane right now in terms of trying to understand what happened.

IMO the big surge makes zero sense. I am happy the metals are working this week after buying a bunch of silver and gold last week.