Sunday, October 23, 2011
As this is being written we await news from the European summit on its futile attempts to resolve the financial crisis. Make no mistake that the announcement of some significant plan will spike markets and, depending on the size of the plan and the gullibility of the market participants, drive the market through 1275 and higher. Make no mistake that whatever rally ensues that the horrifying reality of the math involved (a 50% haircut in Italian bonds alone would bankrupt every bank on that continent) will once again take center stage and our target of S&P 850 will be ultimately reached. Then we expect the onset of the fiat crisis and all the paper money being printed to “fix” the current debt problem will inevitably causes the hyperinflation that will wipe clean all debts and drive the S&P, Gold, Crude, and any other asset to unprecedented highs as the purchasing power of funny money vanishes. Those who are hiding in the safeharborofUS Treasuries should be following China’s example and be gracious sellers to the Fed before it’s too late!
Market Behavioral Analysis
The U.S. Bond market is displaying psychotic behavior. No amount of negative news, downgrades, budget deficit explosion, and soaring PPI, has the expected affect on price. Only a buyer, one with no concern of return on his investment or concern of return of his investment could be a buyer under these conditions.
It appears that Chinais using the Fed’s current desire to mark up the S&P to pare back some of its UST holdings as the final out come becomes clear.
Just in case you were unaware of the underlying cause for the recent market schizophrenia we present the following.
Plan on Plan off has been driving the S&P between 1100 and 1220 for the last 4 months. This correlation is also evident with Crude as it bounces between $75 and $90.
The S&P has pushed through the 1225 Pivot at the close of the week. This puts us long with a 1275 target. Any disappointment fromEuropeand we will be on our way to the 1100 range bottom. If you take this trade you must be nimble as a close below 1220 will have us reverse this position. Unfortunately we are beholden to the European workout for now. We expect some European plan and a US Jobs bill or QE# will enable the bulls to rally the market to 1350.
USTreasuries have benefited as the sole financial safe haven. As such we see it as the biggest bubble.
We have been of this opinion for two plus years. We drastically underestimated the extent that theUSwould become a socialist economy. As the chart above shows the largest buyer now is the FED itself. We feel this is the end game. We wish to be short on the next Pivot Top Band of @143. We do not feel that the Band 2 top of @149 will be reachable again as the longevity of the crises has had the effect of already capturing the remaining scared money and giving time for analysis that reach the inevitable conclusion that all fiat is doomed.
The Euro has continued its rally off the 1.3145 Pivot Band Bottom. A Euro plan will spike the E$ to at least 1.4050 Pivot. We will monitor any plan (QE# or Jobs bill) from US at that point to see if a short Euro trade is warranted. We are entering a period of beggar thy neighbor. He who prints the most the fastest will achieve his goal of relative currencies devaluation as things to all will become dearer.
There are many issues, unrest in Middle East,Libya, and fiat printing. A week economy and recent US Dollar strength have muted the affect of fiat printing. In the end we feel that the printing will win out. We are not taking a short position here at the Pivot. Rather, we will wait for the Pivot to be exceed to establish new longs.
We feel that Copper is trade-able from the long side here and will establish a long at 3.2220. While it is the metal with the economics degree and has been indicating sagging worldwide demand, we feel that something will be done in Europe sparking a rally or that the current printing of fiat will drive the price higher.