It's Wednesday - Will We Hold It?

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Includes: DAX-OLD, DIA, EWJ, FXI, GS, IWM, LDN, QQQ, SPY, TBT
by: Philip Davis

We’re back!

On Monday, Jan 25th, I set our 5% Rule bounce levels at Dow 10,300, S&P 1,105, Nasdaq 2,225, NYSE 7,100 and Russell 625, and watching those levels kept us out of trouble as we stayed bearish on the first bounce in early February. Now it’s the 17th of February and we are so close, but yet so far, from finally getting back over the line which indicates a resumption of the bullish trend. Of course, we called the bottom at the 10% line (also noted in that post) as some of our 8% bounces held and did some aggressive bottom fishing but NOW it’s decision time. Do we take our quick profits and cut and run or do we get set for a bigger rally?

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Fallondpicks shows us in the chart above that we have clearly broken out of our downtrending channel and happy days are here again as we forget all about Greece and those other STUPID countries, as well as the fact that no one bought our T-Bills last week or inflation in Europe or the 5%, single-day pop in commodity prices here or our debt or the collapse of the EU - that was all so last week, I feel embarrassed to even bring it up, but it’s a slow news day and we need some filler...

As I said in yesterday’s post, I’m done with Greece and I’m done with worrying about the GDP. Like the Chinese, we need to embrace the New Year and look forward, not backwards. Sure those concerns are still with us and still unresolved, but that doesn’t mean we can’t go back to ignoring them. Isn’t it funny how, as soon as Goldman Sachs (NYSE:GS) is implicated in manipulating the Greek crisis, the crisis eases off and we have a huge rally that takes everyone’s mind off it? Just a coincidence, I’m sure. After all, GS doesn’t control the markets... Remember - they said that the program they use to manipulate the markets was stolen in July - so it can’t be them!

BernankeClick to enlargeOf course much of this rally is being fueled by a sharp 1% pullback in the dollar at the top of a 5% run - after all, who could have possibly expected that? Perhaps boss-man Ben may have missed the signs, but KC Governor Hoenig just put out a paper called "Knocking on the Central Bank’s Door" for the Commission on Budget Reform Policy, in which he says:

In managing our nation’s debt going forward, it strikes me that we have only three options. First, the worst choice for our long-term stability, but perhaps the easiest option in the face of short-term political pressures: We can knock on the central bank’s door and request or demand that it “print” money to buy the swelling amounts of government debt. Second, perhaps more tolerable politically, although damaging to our economy: We can do nothing so long as domestic and foreign markets are willing to fund our borrowing needs at inevitably higher interest rates. Or third, the most difficult and probably the least palatable politically: We can act now to implement programs that reduce spending and increase revenues to a more sustainable level…

As we learned in public speaking class, always lead with a good joke - and #3 had them rolling on the floor at the very thought of Americans tightening their belts but Hoenig, like all people from Kansas, is known as quite the funny guy in economic circles. As we saw last week, suddenly not too many people do seem interested in funding our debt, so Tom could have saved a lot of trouble and simply discussed how fast they can print that money. Have I mentioned I like TBT lately?

As noted by Jesse’s Cafe Americain, JP Morgan (NYSE:JPM) was bombed for the second time in less than 100 years, this time in their Athens office - hopefully not shades of things to come but I have been warning the top 10% that the bottom 90% are getting restless. You can have talking heads on TV day and night "debating" who is responsible for a global financial crisis that has halved the retirement savings of a majority of the population and thrown tens of millions of people out of work and is now approaching 20M global foreclosures, but all the people on the unemployment line hear is bankers, bankers, bankers - the same guys who send them angry letters every day to pay their bills or else...

Speaking of blown retirements - Mish points out that the Illinois Pension Fund is $61Bn underwater, making California’s $20Bn gap look pretty good! Illinois (with 4 out of the last 8 Governors in jail) is paying a tax-free 3.84% for people willing to buy their pension bonds and they sold $3.5Bn of them last month, on the way to $89Bn in debt at the end of 2010. "What happens in five years when those bonds must be repaid?" asks Terry Savage, "Where will the state find $3.4 billion — plus the interest that must be paid along the way? Will investors be willing to lend to them at any yield? Will the next governor return to Blagojevich’s plan to lease out the state lottery and sell the toll roads? Or will this "Ponzi scheme" finally be exposed?"

So, we’ll be waiting patiently to see if our bounce levels are ALL broken and ALL hold, but I’m thinking we can ignore all the bad news and keep the barbarians at the gates for at least another few days - at least until option expiration day on Friday as we (my top 10% pals and I) sell all our calls to the bottom 90% who "don’t want to miss out" on this new rally. You may as well go for it, your pension funds are, as they plow YOUR retirement money into gold speculation, hoping to catch up on their losses from oil speculation last year - what can go wrong?

The Hang Seng opened back up today (Shanghai still closed) and jumped a nice 265 points (1.3%), which is great for yesterday’s FXI play from the morning post but we’re out of that one if the Dow can’t hold 10,300, as I’m not all that confident this is going to be anything more than a double top today - if not here, then up around 10,400 I would get very nervous. If we can keep going today, the Hang Seng should be good for another nice move up so we’ll be watching the lines closely here and see how much news the market can really ignore. The Nikkei was also very good to us with a 272-point gain (2.7%) and the same goes for taking quick profits on our EWJs. India was also up 1.2%, so a pretty good day in Asia overall.

Europe is in a happy mood and the FTSE made our 5,250 target and we’re waiting for the DAX to confirm it’s a party at 5,750. At 9am they are up another 1.5% this morning, completely ignoring a surge in UK jobless claims and what is looking like a $441Bn estimate for the 2010 bill to bail out Greece and the other STUPID EU members. As I said over the weekend, putting a price on your fears puts things into perspective, and $441Bn is a lot of money but absorbable in the greater EU economy. Spain is offering a higher yield on their Bonds but Greece’s Bonds are coming down a bit, so things are balancing out but, notably, at higher levels than where we started (I may have mentioned liking TBT at some point).

We got some data this morning, with 591,000 Housing Starts vs 575,000 in December, well over estimates. Building Permits were down, however, from 653,000 in December to 621,000 in January. "Buyers aren’t exactly beating down their doors," Weiss Research analyst Mike Larson said in reaction to the NAHB report on builders. "Indeed, traffic through models and sales offices is nowhere near what builders would like to see." Commodity prices sent our import prices flying in January, up 1.4% from December, when we had a tame 0.2% increase. Of course we hate to extrapolate data, but 1.4% times 12 is 16.8% annualized, so go for it, oil bulls - this is what the path to $90 oil looks like - UNSUSTAINABLE!!!

By the way, I’m not being alarmist with 16.8% - despite December’s 0.2% increase, import prices were up a total of 11.5% for the 12 months of last year but the government says not to worry, as there is no inflation so let’s all be good little citizens and get back to work. Speaking of getting back to work, FEAR continues to be a powerful economic stimulant as Industrial Production gains another 0.9% - who needs robots when you have terrified workers? That’s even better than last month’s 0.6% increase and bodes well for Q1 profits. Of course the bad news is that Capacity Utilization is still just 72.6%, but we are squeezing a lot out of a little - proving that we never did need those lazy-assed unemployed people in the first place as we can accomplish just as much with less factory space, less people, less wages, less benefits, less vacations and more upaid overtime. Ah Capitalism - I stand in awe of the ruthless efficiency!

So I’m a little dubious of the move up. We shorted oil yesterday at $77 and so far, so wrong on that one, and we shorted gold at $1,020, and we’ll be shorting the Dow at the 10,300 line, using that as a stop. We hope we make it over, really we do but, if not, we have plenty of long plays to get out of and the shorts are just protecting our gains while we drift back to cash after a nice run.