Fundamentals don’t matter so let’s look at the technicals.
As you can see from David Fry’s chart, there’s a good reason that XLF was my Trade of the Year in December 25th’s "Secret Santa’s Inflation Hedges." The full force of the U.S. government is backstopping this play, in which we took the Jan $12/13 bull call spread at .80 and sold the Jan $11 puts for .40 for net .40 on the $1 spread. I said, just 37 days ago, that this could be the easiest 150% you ever make.
Just five weeks later, the bull call spread is .90 and the short puts are .30 for a net .60 – up 50% in five weeks. That SHOULD help keep us ahead of inflation, right? Keep in mind this was a trade, among others, that I published for free to the General Public on both our subscription site as well as Seeking Alpha and then it was syndicated on Yahoo Finance, Google Finance, MarketWatch, AOL, etc. I’m told that about 250,000 people read my free public posts when I make them available, so it’s not like these trades were so secret.
Yet, however many people decided these were good trade ideas and followed them – it didn’t matter because our counter-party wants to lose! Yes, that’s right, we are riding on the coat-tails of the Banksters, who are taking our future tax dollars from the Federal Reserve and betting them on rising commodity prices and monetary inflation. In order for us to bet on that, we need some idiotic counter-party to take the other side of that bet – one that assumes falling commodity prices and no inflation.
Even in under-educated America, who would be foolish enough to take such a bet? Why it’s us, of course! Well, it’s the Federal Reserve Bank of the United States of America which is spending $100Bn a month buying Treasury Bills at the lowest rates (assuming no inflation) while trying to justify their misuse of our money with BS statistics that we’ve stripped away in "How the U.S. Government Manipulates Inflation Data" along with this helpful video:
The Fed is using YOUR money, through debt, taxation and devaluation, to buy notes that a rational investor wouldn’t touch with a 10-foot pole and the ONLY way you can prevent yourself from getting screwed by their action is to join up with the Banksters and bet against them. Yes, it’s totally insane, dangerously inflationary and, ultimately, disastrous but – hey – it’s what we voted for so no use complaining about it now. Now is the time for playing the hand we’re dealt. In case this point is not sinking in, please play with this interactive graphic from Barry’s site:
(To access site with inflation graphic, click here.)
If that doesn’t convince you something is wrong, I don’t know what will. In my year (1963) the average yearly income was $4,848, not even $100 per week but a median new home was $12,650, 2.6 times a year’s salary and about $69 a month paid to cover an $11,500 mortgage payment at 6% over 30 years. Fast forward about half a century and where are we? The median salary is now $26,530 but the homes are now $232,880 – 8.7 times income! Using the same 10% deposit and making a $210,000 mortgage for 30 years we see that it takes $1,259 a month to cover the mortgage – that is 18 TIMES MORE than it cost in 1963 to cover a mortgage and also 1/2 of a person’s total salary.
Now, follow this logic without getting all upset with your political/world view, OK? If your father used to own a home and paid 70% of a single week’s salary for his home but you now have to work 2 full weeks to pay your own mortgage – what happened? As they say in Washington – we follow the money and the money goes to the bank, doesn’t it? Who owns the banks? The top 1%. Who do we work for then? The top 1%. Come on people, this is not that complicated.
Click to enlargeThis is how over 50% of the Middle Class’ wealth has been transferred to the top 1% in the past 30 years. Inflation is the mechanism that allows the banks and other financial speculators to reach into your wallet and remove your wages so, defensively, we need to go along for this ride because it’s very clear which side our government and all of their guns and tanks are on.
Even as I write this, the U.S. dollar is down at 77.45 in the Futures. The dollar was at 81.5 at the beginning of January so that’s a 5% drop in a month, which has allowed the U.S. markets (other than the Russell, which is down 2%) to post 1% and 2% gains for the month of January. Jim Cramer tells us that a strong January means a strong year and we should ignore all the bad news and BUY BUY BUY! Jim Cramer is an idiot.
Does Cramer also mean that a 5% drop in the U.S. dollar in January – the thing we get paid in and the thing we value our assets in – means we can look forward to continued declines this year? The Federal Reserve is buying Treasury Bills (Government Debt) on our behalf at a rate of 2% over 5 years. They buy about $120Bn of these per month. 2% interest per year is less than 0.1% per month so that’s how much the 5% drop in the dollar was offset in that note.
Click to enlargeSo, the Fed lost 4.9% of $120Bn of our money this month or about $6Bn. That’s 1,000 bionic men a month! It’s also an entire Madoff Ponzi scheme every year and the victim is YOU! That is, of course, assuming the dollar "only" declines 5% over the next 5 years and, of course, we’re also assuming the U.S. government does not default on its mounting debts. Even the so-called inflation-fueled recovery is in question. "While the recovery is underway, it is not the recovery we wanted," Strauss-Kahn said in a speech at the Monetary Authority of Singapore. "It is a recovery beset by tensions and strains – which could even sow the seeds of the next crisis."
"We see a worrying development: the pre-crisis pattern of global imbalances is re-emerging. Growth in economies with large external deficits, like the U.S., is still being driven by domestic demand. And growth in economies with large external surpluses, like China and Germany, is still being powered by exports. As the IMF warned in the years leading up to the crisisand as the G-20 has emphasizedthese global imbalances put the sustainability of the recovery at risk," Strauss-Kahn said.
Worrying is right. I see a worrying pattern too. It’s the pattern of MSM BS that tells you how great everything is while ignoring anything that isn’t. Jim Cramer tells you to buy Netflix (NASDAQ:NFLX) but neglects to mention that Amazon (NASDAQ:AMZN) is coming out with a competing service. We went short on NFLX at about $215 yesterday because we read and discussed an article over the weekend in our Member Chat that Amazon would be rolling out a FREE movie service for its Prime Members ($79 a year for free shipping too). We waited all day for CNBC to mention this news but there was nothing. We listened to Cramer, waiting for the NFLX pumper in chief to at least address the issue so he could negate it but no, not a word about it. Do your own homework indeed!
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So – Charts! That’s right, I said I would put up some charts but my brief commentary turned into a rambling essay. Imagine that? Anyway, here’s what our markets look like priced in Yen. The Nasdaq bounced off the 50 dma at what was essentially 2,675 on the index. Now they need to re-take the 2,750 line to get back on track but 2,700 was our breakout level so they are still bullish over that line (until the 50 dma breaks it – then it’s not good enough, of course). The Dow finished bang on the 20 dma at 11,900 but we need 12,000 to believe in that index and the S&P came right to the 1,287 mark our 5% rule predicted but failed to hold that so far – an issue that should be rectified at the open and we go back to testing our old 1,295 this morning but anything less than 1,300 is now disappointing after last week’s pump job.
Not so bad, right? Now let’s see how we look to European investors:
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What??? This can’t be right, can it? Our markets are mighty, our markets are strong, our markets are invincible! All true, when priced in a weak currency. Unfortunately, no one (other than our Federal Reserve) pays money at the box office to see "Superman Versus the Girl Scouts," do they? We are pitting our pitiful stock markets against the weakest currency on Earth (weaker than Egypt, and they are rioting!) and acting like we just beat the World.
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In truth, the only thing we beat by believing this nonsense is ourselves. It’s an illusion, it’s a game – a reflection of someone else’s name. When you wake up in the morning, you’ll find that there’s a hole in there somewhere. Oh, sorry, was channeling Phil Collins there for a moment ... Anyway, so this is like sending your kid to Munchkinland and bragging to your neighbors that she’s the tallest one in her class. Maybe you even believe it’s something to be proud off but, if you put your money on your kid to beat Kobe Bryant Jordan in a game of horse, she’s probably going to lose.
So let’s not get too excited about our "strong" chart until we see it hold up against a strong dollar. As we have a commodities-based rally, that is very unlikely to happen, which is why EDZ is a very good hedge for us as commodity exporting countries would take a double hit from their relative value against a rising dollar as well as the diminishing cost of their dollar-denominated exports.
We’re going to make EDZ the key hedge in our $25,000 Portfolio today – with an option spread of course. We’ll see how it opens up in Member Chat but hopefully we’ll catch it around $21.50 as the pre-market pump job (we always get this on the first of the month) herds the next round of sheep in for the slaughter. Keep in mind, we’re looking for a short-term correction but we also feel it’s far too late to put the inflation genie back in the bottle so our long-term bets remain to the upside. Here’s a great final chart illustrating what over $8Tn worth of stimulus, bailouts and Federal Reserve tinkering has bought us so far – let’s enjoy it while we can!
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Let’s be careful out there!