Monday Market Musings

Includes: DIA, FXI, QQQ, SPY
by: Philip Davis

DIA WEEKLYWelcome to September!

So far, it's not much different than August with Global PMI data coming in so TERRIBLE that it's moving the markets up on hopes of more QE. Last month, on August 3rd, we had PMI readings that were down 6% and the S&P had finished Thursday at 1,365. But Draghi made his promise and QE Fever took us up to 1,391 that day and all the way to 1,422 on the 21st - up 4.2% in just over two weeks. Here we are with the S&P at 1,406 - almost exactly halfway between the August 3rd low and the Aug 21st high.

As you can see from Dave Fry's Dow chart, we're actually losing ground on no volume for the past two weeks - even after Friday's ridiculous rally, which kept us from failing that critical 1,300 level.

A pessimist may see a big "M" pattern forming and it could - to a casual observer - look like the rally from 12,000 to 13,200 (10%) is a bit stretched - to say nothing of the rally from 10,500 to 13,200 (25%) that we've had since last Fall.

Hopefully Mitt Romney can step in and put a stop to this, right? We were just discussing in Member Chat Monday morning the incredible difference between market performance under Democratic or Republican rule. It's interesting how the Republicans keep this myth going that they are somehow good for the markets when nothing could be further from the truth. Only a strong middle class gives you sustainable growth AND sustainable market returns yet, somehow, this incredibly basic economic concept has been washed right out of the Conservative brain.

Of course there's some quick money to be made from strip-mining corporations, Bain-style but, in the not-very long run, you are left with nothing but a wasteland, where companies and jobs that took decades to build are disassembled overnight as jobs and technology subsumed by larger corporations and, as often as not, shipped overseas. In the early Bush years, cheap money led to an M&A boom that consolidated thousands of small, bottom 90% Corporations that were swallowed up by top 10% Corporations who became top 1% Corporations that "cut costs" like factories and workers and materials - pulling them all out of the local economies. As often as not, local means US.

Why then, should it be a surprise when, after a few years of this, jobs begin to disappear and unemployment climbs. And it's not just temporary unemployment - those jobs are gone, permanently - that money is never coming back to our local economy so people lose their homes, tax bases erode, social services are strained and we find ourselves where we are now. Benjamin Wallace-Wells of NY Magazine calls it "The Romney Economy" but it clearly began under Bush - Romney just wants to finish the job.

"The Class War Has Begun," writes Frank Rich, who gives a very nice historical overview on the subject. That was a year ago, before Occupy Wall Street was purged from city after city while the press remained silent. This November, perhaps Rich can write that the class war is over, with the top 1% completing a bloodless revolution that began under Reagan and can finish under Romney, as we wipe away the last of the resistors and cut the rest off out of the Social Safety Net (make sure you spit when you say that).

Speaking of safety nets, Mish points out that China has now reported 10 consecutive months of declining exports and the latest PMI reading was the worst in the past 4 years. This has, of course, been taken as "good news" by the markets who feel that the PBOC now HAS to save us by throwing more stimulus on the fire but, as you can see from this chart by AlsoSpractAnalyst, THEY DON'T HAVE ANY MORE MONEY.


That's 20 trillion RMB ($3.3Tn) of reserves spent since they peaked out in 2005 and 15Tn of it spent since Oct 2007 and the latest data out of China shows them running a deficit, not a surplus - there's no more coming in. There is a persistent myth about China having tons of reserves but that's from back in the early part of last decade, when they did. Since then, China, like the US, has fallen on hard times and has eaten into their debt pile to keep the economy afloat.

Like the US and Europe, trillions of dollars spent stimulating the economy and buying foreign debt is doing nothing at all to fix the problem but, sadly, it is the ECB's "plan" for fixing Europe this week, as expectations are very high that a massive bond-buying program will be announced this Thursday - apparently over the dead body of Jens Weidmann (see Friday's post). What this will do to alleviate Europe's now 11% unemployment rate is anybody's guess.

Look at all those jobs Obama "saved or created" compared to the other side of the Atlantic. Too bad he'll never get the credit for it.

Disclosure: I am short DIA, AMZN, XRT, QQQ, USO, V, PCLN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Positions as indicated but subject to change (see Tuesday's post for upside hedges).