Gathering bits of news, from coast to coast, returns somber realities of Governors cutting spending across the entire States within the Union. How does austerity actually work? The definition comes with actually feeling affected by change in lifestyle of doing without. The larger question beckons, which individuals will do without the most, when this ship fully comes ashore?
Austerity is Here to Stay
If you read, Monday morning, an article published from Wall Street Journal online, "Governors Chop Spending", written by Conor Dougherty and Amy Merrick. You begin to understand the vast spread of austerity disseminating throughout governmental employee unions. Governors faced with extraordinary tasks to reign in on spending and deficits. Hate the word, "Extraordinary", when Bernanke and Geithner banter it about with combining the word, "measures". Measures like TARP, and other stimulus programs to date.
How are these sweeping budget changes going to affect America? For one, "Case-Schiller Housing Report", will show Bernanke's key fear of the abyss theme playing out. Abyss involving high-risk economic downturns in economies just thinking they were becoming stable.
Countries lapsing into a Double-dip collapse. A second and deeper housing and continued strain of jobless or under-employed folks working part-time jobs to feed their families. These are the high-stake cards on the world's poker table.
You could see what high priced commodities are doing to countries like Egypt. Countries starting to show the stresses within the seams and fibers that make up the spirit of the human unit under the austerity and oppression austerity can bring.
Yes, Greece, Spain, Ireland, Egypt, no longer able to hold down cost, and must pass it along to their citizens, the full affect of inflationary impact of just providing food for their families table. If you read, "Making Money on Food & Energy Inflation: Pros", written by JeeYeon Park published Thursday, 13 Jan 2011.
Ben Bernanke and the US Treasury plans have been given rubber stamp of approvals by the ruling oligarchies; actually setting into motion, a need to collapse the US dollar again, against all the other currencies. Drive down the commodity prices, before they take aim at what would topple the delicate US recovery.
What does Oil have to do With All This Austerity?
The last oil reserve and gas distillates gave a mixed picture. The US Energy Information Administration said that US crude oil stockpiles fell by approximately, 2.2 million barrels last week to 333.1 million barrels, against an expected decline of between 300,000 barrels and 1.4 million barrels, depending on which survey consulted.
At the same time, however, gasoline inventories were up by 5.1 million barrels, against an expected gain of 2.9 million barrels, even though refineries worked at 86.4 percent of capacity, down 1.6 percent from the previous week.
Additionally, distillates in storage were up by 2.7 million barrels to 164.8 million barrels, more than the expected gain of 1.6 million barrels. The Egypt unrest will actually signal a reverse of the noted think tanks. They will figure, the oil producing nations can still drive and support their economies within the $55 - $75 dollar a barrel range. This range also supports the world jobless numbers and pressing austerity budgets demanding governments to accidently kill consumers right when they were just starting to recover.
However, actions out of OPEC had oil prices buoyed by comments made over the weekend by OPEC members. Kuwait said oil prices could exceed $110 a barrel if Egypt's unrest continued and Venezuela said prices could more than double to $200 if the Suez Canal closed as sources reported out of CNBC early Monday morning. Call this a high stakes gamble coming from the oil producing nations of pokers bluff. Do all the countries fold and allow oil to take up the speculative run it did when it saw $150 dollars a barrel?
The short answer is "No" they do not and they must ensure there is also a meaningful retreat in oil prices again. It's time to slowdown speculators driving oil prices higher. To allow oil and other commodities to cool down, and settle lower for a while.
Gold saw a meaningful correction, but it will see an enormous comeback rally, especially if oil and other hot commodities go past measureable supply & demand of each countries future projected consumption ratio. Purely stated, greed this time around, by elite Oil nations and market speculators, will crash the markets, and set in motion, a second deeper recession, and/or depression.
Sometimes, it's ok to have a breath of sanity, with stabilizing corrections. Corrections in the price of precious metals, like gold have retreated. This type of oligarchic move might just save their plan of succeeding in a sustainable recovery along with a retreat with oil and the other hot commodities.
The temporary suspension of oil prices to continue rising, would be the shot in the arm for economies to find room within their spiraling deficits. A way for struggling countries to continue an artificial stimulus, supporting the basic consumers, to still come out and spend their newfound cash reserve on other important commodities they need to provide for their families.
Iran -, which holds the rotating OPEC presidency- said there, would be no need for an emergency OPEC meeting even if oil prices hit $120. The world needs to send a message back to OPEC and state they should be happy for the next two years to maintain the range given between $55 - $75 dollars a barrel.
How do the markets ready and adapt to austerity economics?
Go back to the ship concept, and you can gather how to work these turbulent markets moving full force ahead. When ships tend to lean, due to everyone has moved to one side of the ship. The answer lies in catching the under-market trend, before it becomes fully public knowledge and the retail investor is able to catch the same signals.
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There have been continued calls out by noted economist, a further dip of homes going underwater, with a chilling outcome to more severe jobless economic woes'. It makes sense, if you are changing all the rules for how folks get to stay employed with wages not moving with the increasing commodity prices seen, when going to the supermarket within holding public sector jobs. The challenge is coming from the amount of giveback employee unions have had to make. Givebacks' haunting the largest union within the lands, scrambling to make sense out of how much further austerity will go, until this ship settles into port.
Final Trade Ideas
The best plays near-term, bet your positions into safety. Safety working options strategies within ANAD, BAC, IWM, RUT, SMH, GLD, and the XLF with Puts and shorting.
We suggest starting prudent hedges for the markets wanting to go lower, but still are stubborn to have turned south or become negative. Look for continued pressures for markets to correct, based upon current environment of overbought equities starting to show on several charts.
The pending collapse of State Municipal Bond issues are a serious trigger. These points made stronger by the moves directed by Governor's throughout the US moving into austerity measures. The continued pressure of inflation within interest rates, and commodity prices starting the unrest in other parts of the world add to the negative sentiments.
Trade well and follow the trend, not the so-called "experts", remember what is important in life and investing. Keep all your trades weighted properly. It is wise to have a professional adviser. An adviser who is an active money manager works your portfolio when working within this current market environment.
Additional disclosure: ***DISCLAIMER*** Stock and options trading involves substantial risk. The valuation of stock and options may fluctuate, and as a result, in some cases, clients could lose more than their original investment. In no event should the content of this correspondence be construed as an express or an implied promise, guarantee or implication by or from James Gornick and/or Seeking Alpha and or their affiliates that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance. Information provided in this correspondence is intended solely for informative purposes and is obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.