Just as we knew "something" would rally the markets last week, we knew "something" would take them down this week and, so far, it's Moody's cutting Portuguese debt to junk status (with a still-negative warning!) that sent the dollar back over the 75 line which, of course, sent the indexes and commodities falling (all priced in dollars, as we often discuss). I sent out a 4:44 a.m. alert to members this morning saying the dollar should go over the 75.20 mark (75.18 at the time, now 75.32 at 7:30) and that shorting the Russell Futures (/TF) at 840 was the way to play it. The RUT Futures just hit 837.50, when the dollar topped out at 75.40 for a lovely $250 per contract gain.
Of course I also mentioned, in yesterday morning's post, that our target for shorting oil (/CL) was $97.50 and we hit that line this morning as well but we were satisfied to take $1.50 off the table at our $96 target (the bottom of our upper channel) with a gain of $1,500 per contract for the day. We are now back at $96.25 and our plan remains to short them again below $96 or wait until the inventory run-up tomorrow and let them fake demand again at some ridiculous price - when we can short them AGAIN (isn't this the greatest game?).
Who else can we blame for the market drop on the dollar pop? Who? Yes Hu, that's who. The PBOC unexpectedly raised its benchmark rate by 0.25%, their third increase this year in an attempt to fight the inflation that Bernanke doesn't see. The move comes despite recent fears of an economic slowdown in China, and shows the top priority for authorities remains cooling inflation pressures. "The rate hike suggests the People's Bank of China is showing its determination to tighten monetary policy to rein in the high inflation rate," said HSBC economist Ma Xiaoping.
Another market negative and dollar positive item is the flight of private bondholders from Greek debt. Although they may have SAID they would participate in bond rollovers, private investors are quietly dumping out of all their Greek paper, leaving the EU holding a much bigger bag than they had anticipated. Eurozone officials have described €30 Billion ($44Bn) as their target for private-sector participation in the new bailout. Governments want holders of Greek bonds that mature before the end of 2014 to agree to reinvest some of the money as the bonds mature. But the €30 billion target appears increasingly unrealistic.
You need to keep in mind that Greece, "fixed" though it may be, is just a tiny drop in the Global Debt Bucket - and look what a freakin' mess that caused! That's why we flipped bearish last week - all "fixing" Greece really does is allow us to move on and focus on the next PIIG - so today it's Portugal, tomorrow Ireland and then Italy and no one even wants to THINK about the U.K.'s $1.4Tn debt load, which would immediately turn into a crisis for them if Ireland ($300Bn, half owed to the U.K.) goes into default and look on the chart how much of that U.K. debt is owed to Germany and, amazingly, Spain!
So we teeter, each day on the edge of a very steep precipice and the only way we keep from falling over the edge is by both extending and pretending our problems aren't as big as they are. Is that a reason to tie up your money in the markets? Now is a time to stay flexible - to take advantage of bearish opportunities like shorting overpriced idiocy like Netflix (NASDAQ:NFLX) ($290), Chipotle (NYSE:CMG) ($320), Priceline (NASDAQ:PCLN) ($533), Wynn Resorts (NASDAQ:WYNN) ($150) and other overpriced Momo stocks that are being valued as if NONE of these negatives were impacting the markets.
We'll get a better picture as we move through earnings season, of course - but, for now, it sure is nice to play things cashy and cautious. We can do hit and run trades like our oil plays and yesterday we took a poke at EDZ long and FXI short off my prediction that China was toppy. The Hang Seng already dropped 230 points this morning but, at 22,517 - we'll just call that "a good start" on the way back to testing that critical 22,000 line. Our other indexes have their own tests to get through - on the 2.5% lines, which held up yesterday but today ... Maybe not:
Remember when the indexes used to move independently of each other? Ah, we were so young and naive back then, weren't we? It's not just the indexes that are controlled by day-trading robots, of course - the CTFC just released two new reports looking at volume in various commodity futures and confirming what we already knew - namely that under 10% of daily futures volume in the most popular products comes from Large Trader position changes. The balance or well over 90% in most cases, originates from "daytrading" accounts, or said simply, SPECULATORS dominate price formation on the margin for the bulk of products, which also means that longer-term equilibrium levels, those determined by supply and demand, are largely washed out when all the daytrading, and thus short-term pricing, mania is factored in.
In the oil pits, just 5.5% of trading activity is actual demand - the rest is pure BS! Isn't that funny? Too bad the joke is on the U.S. consumers who, even according to Exxon Mobil's (NYSE:XOM) CEO Rex Tllerson are being screwed out of $30 per barrel by speculators, which, after adding in the 30% refining mark-ups, runs to $1 per gallon or $1,500 per year per U.S. driver or $330Bn stolen out of U.S. consumers pockets (not including another $500Bn in pass-through inflation from other products that use oil down the supply chain) which - as I have often told you - works out globally to over $2.5Tn sucked out of the economy by SPECULATORS.
At $50,000 each that $2.5Tn equals 50 MILLION lost jobs that go up in smoke in your gas tank - and that's not even accounting for the multiplier effect as the money is sucked out of the local economy and deposited on Jaimie Dimon's yacht (along with the percentage that funds global thuggery in countries like Libya, Egypt and Iran). Fifty million people sit on unemployment lines so a few of the top 1% can get just a little bit richer - isn't that sick? What's even sicker is that the American people put up with it - it's a cancer that's destroying our nation, along with the rest of the planet.
While we like to have fun stealing the speculators money with our oil puts - we'd feel a lot better if those speculators were taken out of the equation so we could put our money into real companies that produce real jobs along with goods of lasting value. Unfortunately, our "leaders" have decided to spend the bulk of 2011 arguing over the debt ceiling - which is like watching a patient bleed to death on the operating table while the doctors argue about what kind of lighting they should use for the operation.
Martin Wolf wrote an excellent article in the Financial Times last week in which he said:
To understand modern Republican thinking on fiscal policy, we need to go back to perhaps the most politically brilliant (albeit economically unconvincing) idea in the history of fiscal policy: “supply-side economics." Supply-side economics liberated conservatives from any need to insist on fiscal rectitude and balanced budgets. Supply-side economics said that one could cut taxes and balance budgets, because incentive effects would generate new activity and so higher revenue.
The political genius of this idea is evident. Supply-side economics transformed Republicans from a minority party into a majority party. It allowed them to promise lower taxes, lower deficits and, in effect, unchanged spending. Why should people not like this combination? Who does not like a free lunch?
It's not a free lunch - 50 million people pay for it every day around the world as they are told they can't have jobs while 7Bn people are forced to pay 50% more than they should have to for various commodities in order that a very privileged few can extend the deficits and pretend that they can be paid for by simply shifting more of the burden onto the lower classes, rather than admitting that their take, Take, TAKE attitudes are spiraling the global economy out of control - the lunch most certainly is not free - in fact, there are now 1Bn people in the world who can't even afford lunch - now down to 2 meals or less per day (malnourished) because they can't afford the luxury of a bowl of rice or a piece of fruit in the middle of the day.
When will the madness end?
Disclosure: I am short USO, DIA, IWM.
Additional disclosure: Positions as indicated but subject to change