Stock Truths

8/24/12

Before I get to stocks, I must admit that I am a bit angry. Since Mr. Obama told us business owners that we weren’t really responsible for building our own businesses and the government was really responsible for our existence, I have been doing some thinking. A toilet handle broke in one of my businesses and I did what any business owner totally indebted to the government for my existence would do. I looked up the White House on the Internet so I could report the breakage of my toilet handle. Surely since government is responsible for my business, it seems they would have a link on their web page so we business owners could get government personnel out to fix things like toilets. But no, there weren’t any links for toilet repair. There weren’t any links for repairs of any kind. There weren’t any marketing tools to help with advertising. There weren’t any links for help with signage. Mr. Obama, if you are going to take credit for my business existence, shouldn’t you also provide services for things like toilet repair? You did say you were responsible, right? Then where are you when I need you? I am now getting more angry that government started my business for me but now I can’t get a little help with toilet repair? This is part of running businesses Mr. O. Nevermind. I’ll stick my hand in the toilet and fix the arm myself. Just like I do, and have done, everyday since the inception of my business. I do it all myself!!!!! Well if I start my business and maintain my business all by myself, is it too much to ask of government types like Obama to say the hell out of my life and my business??? Jerks!

Now for stocks.

Wednesday, US gasoline prices hit an all-time high for August 22. The reason reported was a shortage of product. In truth, the central bankers have injected inflation into the markets my serially proposing further ‘stimulus’ efforts. They have inflated stocks. They have inflated bonds. They have inflated corn prices. 40% of US corn supplies go to make ethanol for gasoline. As corn prices rise, so too do gas prices. In addition, an accepted figure is that some 75% of everything we buy in the grocery store is affected by the price of corn. Prices rise when currencies weaken and fed ‘stimulus’ weakens currencies. The idea of gas prices rising due to ‘shortages’ is just a ploy to divert attention away from the cause and effect of Fed ‘stimulus’. Readers come here for the truth so there it is.

The Dow lost ground everyday this week except Friday because central bankers downplayed the injection of more bond buying. And as we all know, when the Dow drops, Bernanke comes to the rescue. As the Dow threatened to break below 13,000 on Friday morning, news that Bernanke was considering more stimulus hit the tape. Up went the Dow. Sure the pundits all postulated all kinds of reasons for the movement in stocks. With almost all of the economic news continuing to show weakness, and almost all of the corporate news continuing to show weakness, we should all expect stock weakness. But Bernanke cannot tolerate that. Everyone is guessing right now when the next magical injection might occur. Want the truth? The next Fed announcement of action won’t occur until the Dow drops into the mid-12k range. Who cares about trivia like corporate earnings or economic data? The Dow is now the Fed’s to drive. They own it.

On Friday, economic data showed that capital goods orders fell 3.4% - the biggest drop since November. Durable goods rose 4% but that rise was due solely to transportation orders. Ex-transportation, durables fell. Seems bad, right? Well, on this same day, Bernanke released a letter to Congress saying that his stimulus gun was still loaded and he was ready to act if the economy didn’t show some more strength. Guess which story made the Dow rise? Yep, economics no longer matter and neither does a ‘market’. The Fed controls the stock indices and the indices react to every Fed flinch. 

So the question is very simple. When will the Fed announce their new stock manipulation program? Again kids, don’t try this at home. Conspiring to manipulate stock prices is a crime. But not for central bankers. It is their job!

I have enlisted the chart below for some help on the timing of the next Fed intervention. The chart is a picture of the Dow over the passed 7 years on a weekly basis. The wavy blue line is the approximate 200-day moving average. The straight blue line is my interpretation of what I call the ‘quantitative easing bull market’ support line. Of late, central bankers only bluster and threaten intervention. I suspect should the Dow be allowed to fall to the straight blue line, the Fed will spring to life and the next bull run will follow. If the Dow should fall to 12800 (the support line), buyers should step in quickly to beat the Fed to the draw. If there is any risk in stocks, it is the waning power of the bull runs. If we were to draw a line connecting the tops, our line would start to look like an arc. Each bull run seems to exert less power than the previous run. And, the volume continues to wane as well. But that stuff is only for worry-worts. We have the illustrious Mr. Bernanke to protect us from any nasty bear market tendencies that used to be a normal part of stock behavior. But no more. They are not allowed. So ideally, we would like to see the Dow pull back to 12800 at which point Mr. Bernanke would jump out to announce the next bond purchase program. Otherwise, stocks could fail and so too would the ‘recovery’. We all know Mr. Bernanke no longer has a choice. The only question is when. Maybe the chart below is telling us what we need to know.

DJIA - 7 years weekly

Chart courtesy StockCharts.com

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.