Wednesday, February 29, 2012

February, Wednesday 29, 2012

DOW – 53 = 12,952
SPX – 6 = 1365
NAS – 19 = 2966
10 YR YLD +.05 = 1.98%
OIL +.32 = 106.87
GOLD -87.20 = 1697.00
SILV – 2.29 = 34.74
PLAT – 40.00 = 1685.00

I really don't know much. I'm not Nostradamus. I can't see into the future. I do not operate a shadow CIA. I just read a lot and try to make sense of what I read, and that is sometimes a fool's errand, and when all else leaves me awash in chaos I just follow the trend. The trend is your friend. And a trend in place is more likely to continue than it is to reverse, until it reverses. Right now, the trend says the US economy is improving.

The US economy grew 3% in the fourth quarter, so says the Commerce Department; that is up from an earlier estimate of 2.8%. There was an increase in commercial construction, higher consumer spending and lower imports, and a large buildup in business inventories. It doesn't sound sustainable but the trend is up.

The Federal Reserve published its Beige Book, in which they proclaimed the  economy continues to expand at a modest pace, and consumer spending is generally positive, and manufacturing is expanding at a steady pace nationwide.

And then, Federal Reserve Chairman Bernanke went to Capitol Hill to ask lawmakers to dust off the old relic known as fiscal policy, and take it for a spin. Also, as part of Bernanke's semiannual testimony he said, “The recovery of the U.S. continues, but the pace of expansion has been uneven and modest by historical standards.” He did not say he would dump free money out of his helicopter. Wall Street loves it when the Fed  tosses out free money. Wall Street is hooked on free money; if they don't get it, they get cranky. Today they got cranky.  The Fed is still buying Mortgage backed securities. The Fed is still injecting massive liquidity, especially into the housing market, but Wall Street was not satisfied.

And in the precious metals market, someone felt they had a good reason to go short, absent an announcement of QE3. And boom, they knocked the floor out from under precious metals prices. And then Ron Paul talked to Ben Bernanke and said the government is lying about inflation and the Fed will self-destruct when the money is gone. And then Ron Paul held up a silver coin, and Bernanke hissed like a vampire confronted with a cross.

So, I can see it makes no sense at all. And I revert to default setting: What is the trend? The trend is that the US economy is showing slight signs of improvement. The stock market has been on a roll, in large part because the Federal Reserve has been dumping trillions of dollars on Wall Street. Precious metals have been in a secular bull market because the Fed is dumping trillions of dollars on Wall Street. There is no way for the Fed to exit its Zero Interest Rate Program. There is no way the Fed will abandon its monetary easing; I mean its not like Congress is going to pick up the slack with fiscal policy. And so the big trend is that the Fed will continue to be accommodating, despite the fears of the market today.

Maybe somebody was hoping Bernanke would announce QE3 and sprinkle magical liquidity dust and flip the switch to “risk on”, but that wasn't going to happen, especially not while the European Central Bank had just opened up its trading window for the second tranche of the Long Term Refinance Operation which racked up more than 530-billion euros in the first few hours, roughly $700 billion-dollars.  Bernanke did say the ECB was well capitalized, which is interesting because the ECB now has more than 3-trillion on its balance sheets and only about 80-billion in reserves. The Euro-crisis has not been resolved and it is soaking up a whole bunch of money.

Which takes us back to Greece. Tomorrow, the Greek parliament is supposed to sign off, for the umpteenth time, on the bailout. The ECB has sprinkled its magic pixie dust on Greek sovereign bonds and said that a default isn't really a default. The International Swaps and Derivatives Association will meet on Thursday to decide whether a certain aspect of the deal will indeed trigger default and make the default payments necessary.  So, today, when the ECB was passing out free money in the form of LTRO, they were really buying the banks compliance regarding the credit default problem on Greek bonds. Don't trigger the credit default and you can have some money on the side.

There is a chance that the quid pro quo might fall apart. For example, in Greece there is the pesky problem of democracy, which was taken from the people and replaced by a technocratic government. The Greek people have not been comfortable with this arrangement. Tomorrow, the Greek parliament will almost certainly endorse the debt plan with bondholders, which must be completed by March 12th, prior to the March 20th deadline when a $20 billion debt payment is due. Part of the debt plan calls for increased taxes, and privatizing certain assets that used to belong to the government, that is to the people. And the thing is that the people aren't happy, and so they are refusing to play the bankers' game. Merchants are refusing to charge and collect and pay the VAT, the value added tax; tollbooths have been shuttered; public facilities refuse to charge fees; there is widespread tax avoidance. All those austerity measures will fall flat if the people refuse to supply the revenues to pay off the bankers. It is an elegant act of civil disobedience.

Now in light of all that, it would have been most unseemly for Fed Chairman Bernanke to announce QE3, and my guess is that somebody figured this out before me; and my guess is that the overall trends haven't changed. Precious metals took a significant hit today but I think it was a trade, not a change of trend. Stocks moved higher again today. I think this is a trend. Apple moved higher today. Apple has market capitalization of more than $500 billion, almost double the market cap of Microsoft, and 25% more than Exxon Mobil. At some point I have to think that trend will change but not today.

Demand for oil has decreased and the inventories have increased, but today, the price of oil moved higher. Why? Because that is the trend. Someday the depression will be over, and someday wars will end. Someday the Federal Reserve will stop passing out free money to bankers but for now, that is the trend, despite what Bernanke says to Congress. In the next few days, the market will probably realize any pause in helicopter flights is just temporary, and the Fed will get back to doing what the Fed does.
Leopards don't change their spots. The sun will come out tomorrow, the moon will wax and wane, the tide will rise and fall. A trend in place is more likely to continue than it is to reverse – so it makes sense to ride the trend. Eventually, the trend will reverse, and when the trends end, I will probably be a little late in getting out. And that's okay.

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