Friday, October 21, 2011

The Bull Market Solution

I am sure that everyone is sick of hearing about the lackluster economy. Unemployment is high, Europe is choking on a debt crisis, and populace demonstrations are popping up all over the globe. But investors only care about one thing - the stock market. They are willing to surrender everything - capitalism, dignity, truth, liberty, autonomy - in exchange for a stock market rally. Luckily, a stock rally is easy to conjure. 
The chart below shows the S&P 500 in gold and the US dollar ETF, the UUP, in green for the past seven weeks. While the Federal Reserve is completely inept in almost everything they do, they are very skillful in one area. They can always stoke a rally in stocks. The problem is that the economy and reality do not necessarily warrant a market rally. The solution is simple. Kill the US currency valuation and inflate the stock market with all other commodities. Inversely, allow the dollar valuation to rise and stocks take a terrible beating. 
The chart below starts with the month of September. The dollar rose and stocks fell. The September plunge of some 8% in the S&P 500 index obviously scared the bejeepers out of the Fed who met the second trading day of October with a blizzard of buying. More accurately, the Plunge Protection Team (PPT) hit the markets at exactly 3:15 PM with a 45-minute barrage of buying that lifted the Dow some 400 points at the end of the day. The ‘bottom’ was in. No further market deterioration would be allowed. Just like that, a rally ensued. How did they do it?
Simple. They killed the dollar. It works every time. Agent Geithner even dashed over to Europe to implore the European central bankers to resolve the Greek debt fiasco as the American central bank had three years ago resolved their own little brush with insolvency. Print money fellows! Create balance sheet credits! Buy up the garbage debt that no one on the planet wants to own! Steal the money from the citizens! Heck, they will never know as long as the stock market rises. That’s all they care about. And please, hurry up and write the check. We need a stock market rally in the US.
And they will. Is there anybody in the entire solar system that doesn’t think the ECB will write a multi-trillion dollar check to backstop the French, German, and US banks that are on the hook for the Greek debt and related derivatives? Come on, fellows. We all know you are bank agents masquerading as benevolent federal monetary guardians who are kind enough to ensure flexibility of monetary supply. Banks can’t fail due to their derivative holdings. We know that. Write the check. Interestingly, when the Greek debt crises first surfaced over a year ago, the central banks insisted that $20 billion would solve the problem. Then it went to $40 billion. $80 billion tops. Maybe $120 billion would eventually be needed. Actually $220 billion but no more. That would clean everything up - okay $440 billion but that would cover any future Italian or Spanish debt problems. Now, the figure is $2 trillion. And that’s probably not enough. Does anybody have a clue about the damage of derivatives when they blow up? Obviously not. 
So why does the ECB need to hurry up and write a $2 trillion dollar check? The result would no doubt be a stronger euro, a weaker dollar, and a stock rally that should put a smile of everyone’s face! The chart below is no doubt reflecting the Fed’s hard work of devaluing the US dollar coupled with the anticipation of Europe surrendering to the central banker mendacious threat of ‘too big to fail banks’ bringing on armageddon. 
While the anticipation builds for Europe’s next banker bailout, the Fed in the US is engaged in the process of manipulating the interest rates lower by selling short-term Treasuries and buying longer-term Treasuries. They do this through their long established practice known as Permanent Open Market Operations (POMO). It is safe to assume that the Fed is also busy buying call options at the same time to produce more of a stock rally than a simple debt instrument offset would produce. The POMO days are generally powerful days for the stock market. Today (Friday) was a POMO day and the Dow rose 200 points. Yesterday (Thursday) was not a POMO day and the Dow rose just 37 points. The month of October has 21 trading days. 11 of them are POMO days. October will be a positive month for investors. Ain’t they smart? The market isn’t rocket science. Intelligence is an unnecessary burden in the investing process. The PPT and the Fed will make all things rise and the POMO days are the strongest. The simple solution to a rising stock market is a devaluing dollar. Just wait until the ECB exerts an even stronger stranglehold around the neck of the poor souls in Europe with a $2 trillion dollar check. US markets will no doubt shoot higher. Inflation. Learn to love it!

SPX in gold, UUP in green - past 7 weeks
Chart courtesy
Disclaimer: The views discussed in this article are solely the opinion of the writer and have been presented for educational purposes. They are not meant to serve as individual investment advice and should not be taken as such. This is not a solicitation to buy or sell anything. Readers should consult their registered financial representative to determine the suitability of any investment strategies undertaken or implemented. BMF Investments, Inc. assumes no liability nor credit for any actions taken based on this article. Advisory services offered through BMF Investments, Inc.

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