Has Anything Really Changed in the Last Two Days?

Includes: DIA, QQQ, SPY
by: Philip Davis

What, us worry?

Thank goodness all those silly issues that RELENTLESSLY dropped the market 1,200 points for the first 26 days of November all vanished in a puff of fairy dust at 9:30 yesterday morning! While I do believe in fairies, I do, I do, I also believe in fundamentals and none of them changed in the last 48 hours. Yes I do realize that I just said we were oversold at 12,800 but that doesn’t mean we can’t be overbought at 13,300 - who the heck expects it to happen within 13 hours of trading?

Of course we have the Fed comments but we just had a Fed meeting on Oct 31st, where they DID lower rates a quarter point to 4.5% AND THE MARKET DROPPED 1,200 POINTS. Leading up to that meeting the market ran up from 13,400 to 14,000 in anticipation of that move and now we’ve jumped 500 points already in anticipation of the December 11th meeting. With no new meeting until Jan 30th, this one better be a doozy to undo all the damage to the financial markets as we prepare to say goodbye to 2007.

One definition of insanity is to repeat the same behavior while expecting different results. Investors seem to fall for this all the time and our President is so proud of this tactic that he calls himself "The Decider," like it’s some kind of super hero thing. His Treasury Secretary flies around the world saying "strong dollar" while sneaking home at the end of each trip to print more. Our Fed pursues their own version of madness by lowering rates a bit at a time like some kind of Chinese water torture and the bulls run the market up on every move as if THIS time a rate cut will fix everything.

How will a 0.25% cut, a 0.50% cut or a 1% cut help the 2M people who are ALREADY IN THE PROCESS OF LOSING THEIR HOMES? How will it help the 2M people whose mortgages will reset next year and very likely cost them their homes. A bank bailout is nothing but welfare for the top 1% (and this is you and me my friend if you have $100K or more in the market) in order to salvage the paper profits the financial institutions booked when they ripped off the other 99% in the first place!

On Tuesday morning I was pleased that the markets were dealing with the death of the mortgage market and had worked through Denial, Anger, Bargaining and Grief and we seemed to be in a healthy stage of Acceptance. Now we have relapsed into Denial, if the market was Brittany Spears they’d be taking it right back to rehab after such a sudden relapse…

Didn’t Goldman Sachs just tell us the world was ending? Sure I said to ignore them but there’s a difference between ignoring them and doing the exact opposite. In Europe they are freaking out about inflation and our big solution is to cut interest rates with oil still over $90 and gold at $800??? If Europe is raising rates and Japan can’t lower theirs because they are already at zero after pursuing the same idiotic Fed policy we are running now and the US cuts their rates then what will happen to the dollar? There’s no need to wait for the answer, it’s already happening! The ECB funds are in such high demand (while our notes are not) that $30Bn in short-term notes went off at 4.7% yesterday, 0.7% ABOVE the ECB’s 4% policy rate.

Let’s do the math folks: Euros are tight, people want them and are bidding them up. Dollars are loose, nobody wants them and they are flooding our market. That’s what’s keeping our rates down, everyone is dropping dollars back into the system and they are sloshing around with nowhere to go. Who cares if the Fed is willing to lend dollars for less money, there’s no demand for them. That would be a stagnating economy plus inflation = STAGFLATION. Granted one of the things that exacerbate stagflation is tight money but America is no longer a global leader and the old tricks just aren’t going to work anymore.

I mentioned in comments today that the Durable Goods Report was terrible and we had an additional 1.2% decline in home sales and inventories are now up to 10.8 months of unsold homes, the most in 20 years and the Beige Book didn’t look so hot and none of this seemed to bother anyone but we loaded up on SPY puts into the close to protect some truly outrageous gains. I’ll be thrilled to take a loss on my hedge but I’m very concerned that this rally is nothing more than a lot of hot air, perhaps the last gasp of a dying market...

We’ll continue to watch my 13,000 to 13,300 range. The way this market is moving, we could got to 13,500 and I still wouldn’t be convinced to change my targets but above 13,300 and I will be ready to play the momentum game because, just because a rally irrational - there’s no reason we can’t make money on it!