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Actions Speak Louder Than Words

As I wade through analysts newsletters, internet articles and headlines hot off the press, it seems to me the market noise is at a fever pitch. Market fundamentals don’t seem to have any significance, traditional technical indicators are being distorted by insiders “painting the tape,” and Richard Russell comments in all his years watching the markets he has never seen them so confused. I will attempt to go through some of the issues and cut through some of the garbage being spewed forth from the Wall Street spin machine.

I’ll begin with a headline from Bloomberg pointing to a subtle message that energy prices are under control, “New York Natural Gas Slides, Tracking Crude Oil Prices Lower.” The headline sounds promising for lower energy costs ahead but look at the chart and make up your own mind. Everyone thought the big price spike back in 2000 was a big deal, but prices above $5.00 are commonplace today. Natural gas prices have tripled since the double bottom in 2002 at $2.00 per million BTU’s. If we get a hot summer, high use of air conditioners and a weaker dollar should resolve the triangle to the upside to test the resistance just above $8.00. The Energy Department is scheduled to release inventory data tomorrow so let’s watch to see if they can talk the price lower over the near term.

On a similar note, OPEC is meeting tomorrow and it is widely expected they will lift all quotas for member countries. It is a forgone conclusion they are already pumping oil as fast as they can except for Saudi Arabia. As Jim Sinclair has said, the meeting tomorrow is not about OPEC, but more about the future direction of the Saudis. They have had at least four high profile terror attacks in the last month or so sending a strong message to the royal family. The killings targeted at their oil industry suggest they better not go along with U.S. desires for increased production. The Saudi decision will dictate the fate of the royal family and either their alliance with the U.S. or fellow Arab states. The fundamentalists will be watching. My guess is they pump more oil but pretend they aren’t going to.

All Eyes on the Employment Report

Bond traders have been clearing the decks to get out of the way from a bigger than expected jobs report coming on Friday. The anticipated number is for job creation of 200,000 for May, but do you really think the booming number of new jobs is causing inflation? You are led to believe jobs are causing higher interest rates and ramping inflation from the Bloomberg article titled, “U.S. Treasury Notes Decline; Job Growth May Stoke Inflation.” Since they have already booked an inordinate number of part-time jobs and played statistical magic to remove the cliché, “A jobless recovery,” I can only wonder what they will come up with next. Maybe I’m being too cynical, but I still hear a lot more stories from friends and acquaintances in search of a job rather than stories about people jumping on the payroll.

Challenger, Gray & Christmas reported job cut announcement increased 1,184 to 73,368 in May, so we could see a softer number than many investors expect. If the Feds want to push more money into bonds holding interest rates low, we will see a soft number. In any case, the markets will react to the announcement as the spin dictates. From an investment perspective, I had a great conversation with a friend and professional commodities trader, Dan Norcini, who gave some good advice that I thought would be worthy to pass along. Since his trading involves more leverage than the typical investor, he suggested it was a good idea to lighten-up on positions going into any kind of big official announcement. You might as well go to Vegas if you are taking positions to bet on the anticipated job numbers. There’s a big difference between speculating, investing and gambling. My guess is a soft number so the Feds can drag their feet even longer to raise rates. Fed Funds Futures are priced with a 94% probability the Fed will increase rates a quarter of a percent at the end of the month, but I don’t think they want to raise them at all…more on that in a few minutes.

More on Interest Rates and Inflation

Earlier I doubted new job creation was the cause of inflation. Instead, the lack of real jobs and limited wage growth has forced Americans to go deeper into debt to facilitate continued spending, especially on big ticket items. With higher interest rates fewer people are tapping into their home equity to get some extra pocket change. Today the Mortgage Bankers Association said its application index fell 1.2% for its fourth consecutive weekly decline. The purchase index rose 2.2% as home buyers scramble to buy their dream house before rates go any higher, but it’s noteworthy to see the refinance index has fallen by another 6.6% to its lowest level in over two years.

The re-fi boom was some of the primary fuel that kept America spending and pulled stocks out of the bear market decline. It looks like free money is a quickly fading commodity based on the death blow to the refinance index. Consumer sentiment is declining and last week it was reported that personal spending in the U.S. rose 0.3% in April, which was the smallest gain in the last six months. Consumers and the economy are losing momentum, so the Feds are out to fix the problem. They need to jump start the reflation trade, so I’ll get to their solution in a moment.

Economic and Social Conundrums

To highlight my stance of Federal Reserve posturing and the booming inflation facing us, I’ll extract a few quotes from an article that appeared May 28^th on Mineweb.com by Tim Wood called, “Top Trader Sees Accelerating Gold Boom.” “Victor Sperandeo is one of the world’s most successful traders, making money in years gone by for the likes of George Soros and Lee Cooperman. Now he plans to make a good deal more money for himself and his clients playing gold…Sperandeo noted that April was one of the most unusual months on record with every security losing value apart from the dollar and Treasury Bills. He says the market was head-faked by Federal Reserve Chairman, Alan Greenspan, talking about a bias toward higher interest rates…He believes the Fed is creating a purposeful inflation because that is the only way to resolve several economic and social conundrums. Until the Fed stops pumping up the money supply (+14% last quarter) the threatened rate increases are camouflage.” He goes on to say, “We will start to see accelerating inflation that makes the 1970s seem easy…the only way out of this in the short-run is to print money” and “Gold is about to explode because of inflation.” On a final note he also says that the dollar may not fall as mush as many expect because other countries will inflate their currencies in sympathy with the dollar. His recent book is entitled, “Cra$hmaker: A Federal Affaire.”

Mr. Sperandeo talks about the coming inflation as a solution to our “several economic and social conundrums.” I believe the primary dilemma he is talking about is the denial of most Americans about our true condition as a people and a nation. I am not an expert in many things, but I can assure you I am an expert on denial. It almost killed me in my younger years when I was in denial of a problem I had with alcohol. Those life experiences taught me to never be in denial of the truth in any aspect of my life, including investments and financial matters. America is in denial of the fact that there is no free lunch. Cheap and easy credit is no way to gain independent wealth.

Many investors had a taste of easy gains in the stock market through the late nineties, and will stay in the stock market for the duration just to get it all back. It’s not that easy folks. It’s getting close to the time when we have to pay the piper back. Mr. Bush wants to get re-elected and Mr. Greenspan wants to be the legend that breaks the inevitable cycles of boom and bust. You can’t get rich by borrowing money and the stock market doesn’t go up in perpetuity! We are also a country at war. Some analysts suggest we are at the beginning of World War III while most people go blissfully along their way. Think about it…excessive debt, global war, an overvalued stock market, interest rates at five-decade lows, rampant inflation, unemployed people that can’t pay their bills, record personal bankruptcies, global currency debasement, and everyone cheering for the roaring nineties to return. A real estate agent in Southern California (Westlake Village) recently emailed me and said, “I’m scared that America is no longer America. Wake me up when this nightmare is over!” Much of the email I receive is from folks that are not in denial and want to know how they can best protect themselves financially. The quick answer is to reduce debt and move toward tangible assets.

Back to the Markets

The U.S. dollar spent most of the day struggling in the red reaching a low of 88.41 on the U.S. Dollar Index, but crawled its way back to near breakeven with a close of 88.91, down 0.08 for the day. The euro finished flat at 1.222 and the yen gained .44% to 0.9087. Normally when the dollar is down gold and silver tend to shine, but today they were both beaten into submission. June gold closed $3.00 lower at $391.30 and July silver was pounded $.21 lower to $5.83 per ounce. I just went back and looked to see where crude closed and saw that it too was nailed by $2.32 per barrel, a whopping 5.8% loss to close at $39.88. It looks like some of the boys are getting heavy handed in the trading pits! For gold and silver remember we had a decent run from the recent lows and it’s probably time for the metals to catch their breath before the next run northward. As some analysts say, “they need to do some backing and filling to build a stronger base before the next move up.” I also believe the professional traders don’t want to drag along any dead weight, so they inevitably shake the weaker hands loose before any significant gains.

Please remember we are at war and this is precisely what the financial markets are telling us. Higher prices for gold and oil are not politically expedient, just like a falling stock market portends economic weakness. Our enemies have openly stated they intend to attack our financial and economic infrastructure and it looks like the PPT and the ESF came out with their guns blazin’. I also read a report saying the Bank of Japan was joining hands with our guys again to support the dollar. According to Mike Bolser’s interventional analysis, the Fed repo pool is now above $48 billion which works as support for the broad stock indices. I can’t say for sure exactly what is going on, but I sense tensions are mounting in Financial Land.

Yesterday the Dow was rescued in the eleventh hour and today it struggled throughout the morning but got a nice pop in the early afternoon for a final close of 10,262, a gain of 60 points for the day. The NASDAQ Composite closed a point lower at 1,988 and the broader S&P 500 gained three points to close at 1,124. Something to watch with the employment report due out on Friday is the direction of stocks in general. With strong job creation will stocks move higher because of an improving economy or will they go lower because an improving economy will send interest rates higher?

Hindsight Thoughts

I’ve received a few emails from unhappy investors that took short positions on stocks and implied they lost money because I said I bought some short positions. I was very clear with my disclaimer by stating I was not giving investment advise because I couldn’t possibly know the particular financials of each investor and even more specifically that shorting stocks was not for everybody. To refrain from giving any specifics, I’ll use the S&P 500 as my example. I put on the first positions in early May when the index was around 1,120. Based on insider selling, weak internals (mainly breadth) and technical weakness, my second entry came in mid-May after the index fell below 1,100. The SPX remained below 1,100 for eleven days until last Tuesday when the market caught fire for no apparent reason.

Some suggested there was overt intervention, but I would like to suggest that it was nothing more than a brief short-squeeze to get some traders out of their positions. Obviously if an investor had too large a short position using too much leverage, they got hurt in the squeeze…that was the intended outcome. I still believe we are in a topping pattern that screams of institutional distribution. Market makers wanting to short stocks would rather have you out of their way so they can take your positions prior to the decline. Most all of the upside movement in the last month has happened in three or four days, hardly anything to write home about, but enough to give the big boys more time for distribution. These markets are not kind and trading is not for everyone. I still believe the risk reward relationship favors a move down, but timing is tricky at best. It’s probably a good idea to heed Dan’s advice and just get out of the way for whatever we’re going to get on Friday. When probabilities are roughly the same as a coin-toss, sitting on the sidelines is not a bad place. The bigger problem with being on the sidelines is exercising patience until the right opportunity presents itself.

Back to the Title

At the onset of this WrapUp I said, “Actions speak louder than words.” My thought was in direct reference to the Federal Reserve. We are currently experiencing extraordinary times in the markets. Others would simply say things are really weird right now! The Feds still have short-term interest rates pegged at “emergency levels” that we haven’t seen for nearly 50 years. Yesterday, Bill Gross of PIMCO said a Fed Funds rate of 1% was ludicrous in today’s economic environment. On top of the ridiculously low rates, we now have the Fed increasing the money supply more than we have ever seen in the history of our country. So what’s up? If actions speak louder than words, what the heck is on the Feds mind?

Based on the numbers, we haven’t even gotten a taste of the inflation that is to come. I would suggest one answer might be the Fed pulled the trigger on monetary stimulus too soon last year and the momentum they created is running out before they can get Mr. Bush re-elected. It could well be the Fed is attempting to get all assets rising again like they were all of last year. The problem now is the bond market smells big inflation and higher interest rates will jam-up the Feds plans. It looks like they might go ahead and raise rates, but not enough to do anything significant, and at the same time jam the money creation machine into high gear. At war in an election year is a strange environment.

I’ll leave today’s WrapUp with a quote and link to an article written by Robert McHugh posted on SafeHaven.com. “Financial Markets Forecast and Analysis, May 30th” “Let me just say from the outset that the Federal Reserve has confirmed our Stock Market Crash forecast by raising the Money Supply (M-3) by crisis proportions, up another $46.8 billion this past week. What awful calamity do they see? Something is up. This is unprecedented, unheard-of pre-catastrophe M-3 expansion. M-3 is up an amount that we’ve never seen before without a crisis - $155 billion over the past four weeks, a 2.0 trillion annualized pace, a 22.2% annualized rate of growth. There must be a crisis of historic proportions coming, and the Federal Reserve Bank of the United States is making sure there is enough liquidity in place to protect our nation’s fragile financial system. The amazing thing is, the Fed’s actions mean they know what is about to happen.”

If actions do truly speak louder than words, it’s something to consider when making your investment decisions. Is this just election year stuff to re-inflate the system? Do we really have an imminent threat? Do we have a carrier group on the way to Taiwan to send a message to China? I don’t know, but the Fed is taking serious action for some reason. If you click on the link above, Mr. McHugh also goes into great detail describing the topping pattern in the Dow Industrials and its similarities to the topping pattern just before the crash in 2002. He presents a clear chart and plenty of detailed description.

Lots to think about, but I still hope you have a pleasant evening.

Mike Hartman

Chart courtesy of StockCharts.com

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