Friday, August 6, 2010

08/06/2010 - 'Gap' Trading

The chart below is the past 6 days of intraday, 10-minute bars, trading of DIA. Everyday opens or closes with a gap. In other words, before investors can fire a bullet, the ETF, and the indices, lurch up or down. Friday was a good example. The jobs number that was reported was not as strong as players wanted. The Dow opened trading down some fifty points. It went down as much as 150 or so but you know the drill. The PPT was not going to allow their rally based on nothing to fade. It was just a matter of 'when'. Sure enough, the buying started at 2:30 and the PPT nearly got the Dow back to even for the day. Great job, fellows! Why did the index fall? It appears that the 'recovery' is going to be weak. Why did the index rise? Yes, I know the casino is a joke. Of course we all know why the index rose. 150 down. 150 up. It's only money and the PPT has all the money now. Since there is so much obvious evidence that there is no 'recovery', the Fed wants to convince us otherwise by driving up the Dow. Don't you feel better now?

What we are experiencing is not a 'recovery'. It is a 'transformation'. The economy is not going to 'recover' to what it used to be. Real estate is a bust and will remain so. The credit bubble that the Fed engineered has popped. The Fed stole all of our money and gave it to the big banks. The world economy is a mess. China is even doing a 'stress' test on their banks. First they told the banks to run a scenario of real estate declining by 30%. Then they came back and said go for a 60% reduction. How about this. Europe, China, and the US should run a stress test that allows for real estate to go down like Freddie and Fannie. The whole thing is a clown show. But, we have to keep the casino going. Let's play like the Dow can rise to the sky with a rotting root system.

What can we look to since governments have turned into scam artists? Let's look at the bond market. US Treasury yields have now fallen to lows that were unimaginable just a few years ago. The 10-year Treasury yield ended the week at 2.82%. Given that the currency, the dollar, has lost 16% of its value versus a basket of currencies in the last 10 years, buying the Treasury seems like a losing proposition. Well, it would be if it were bought for investment purposes. But it's not. Like everything today, it is an illusion. Treasuries are like chips in Las Vegas. They are only used to play the game. They have no value nor does the currency. It is all 'assigned' a value by the house. In our case, the Fed. Treasuries are now bought to 1) manipulate interest rates, and 2) to support the credit default swap world. Yes, derivatives are at the heart of everything. Eventually, all yields will be zero because the interest coupon is no longer relevant.

Credit is the new currency and it costs nothing because it is simply a book entry form of money. It doesn't really exist. But it is the currency that governments want to promote. Why? One, it doesn't cost them anything to borrow and two, it is limitless. Consider this. In 2008, the US owed $12 trillion in debt. By 2009, the debt grew to $13 trillion. You know we are talking big numbers when we can round off by hundreds of billions. But even after the increase in debt, the amount of interest the US paid actually dropped. Why? In 2008, the average interest rate on the debt was 3.4%. In 2009 it was 3.1%. Do the math. In 2010, the goal is probably something like 2.5% because by the end of the year, the debt will be around $14 trillion. But so what? The treasury will pay less in interest on the debt because yields are dropping. This is by design and it is planned.

So why would anybody buy the debt? It's derivatives, silly! Sovereign debt is now 'securitized' and sold while derivatives and swaps produce the income as opposed to interest coupons. Now you know why nothing will be done to impair the derivative market. Now you know why interest rates will soon be zero. If you think you are going to generate an income from bonds, you better have a whole lot of money.

This is the transformation of the economy. The casino of stocks now gyrate wildly from day to day and hour to hour and minute to minute. Why? Because there are no longer any fundamental underpinnings to support investing. Institutions now run the show and they are traders, not investors. They react to and impose manipulation. Any guesses as to what will happen Monday morning? No one has a clue when the lever is pulled on the NYSE slot machine Monday morning whether or not we will get 3 oranges or a mix of pictures giving us a loss. Good luck.

DIA last 6 days
Chart courtesy

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