Posts Tagged ‘Dow’

Another day… another failed rally

Let’s give a warm round of applause to Ben Bernanke for opening his big fat mouth (hey, this reminds me of when he first became Fed chairman!) and killing the market rally today!

In a speech Ben gave today, he told us what we already knew: that the US expansion would be slow and that there were significant headwinds ahead. Why this shocked the market into a decline is anyone’s guess. After all, the market is supposed to be efficient. And it should have priced this in already.

It obviously didn’t (another loss for the efficient market corner).

You can get a transcript of Ben’s talk here: http://www.ritholtz.com/blog/2009/12/chairman-ben-s-bernankes-frequently-asked-questions/

In the meantime, we have to determine what this means to the stock market and most importantly, to our own portfolio.

With Ben saying that inflation will drop, investors got out of risk (commodities, emerging markets, and US stocks) and into treasuries and the dollar. The yield on two-year treasuries alone dropped 7 basis points today (0.07%) and the buck rose 0.3% against the Euro.

This, of course, is the second straight day of dollar gains (Read Friday’s post to see what I said about it then). And if you’ve followed my writing for some time, you know that I’m expecting a dollar rally in the next few months. But whether what we’re seeing today will transpire into the dollar rally I’m looking for isn’t clear.

The Dow, S&P, and Nasdaq are all above the 20-day moving average. If that support line fails, I expect to see support at the 50-day averages. If we see the markets penetrate the 50-day, then i’ll take my ramming bull horns off and put on a stinky bear outfit and go hibernate.

If you’re heavily long, you should probably put on a little hedge by buying an out of the money January call option on the VIX.

Dubai, what Dubai?

Dubai blow up – what Dubai blow up?

That’s certainly how the US markets reacted on Monday after digesting news that Dubai was likely to default on some of its $80 billion in debt. It’s probably what we should have expected. After all, the UAE, which has a half trillion-wealth fund, will likely cover Dubai’s indebted butts.

In response to the news, all three indexes started the day in the red, but eventually swung back to gain about a third of a percent.

It’s a celebration of the bail out. Which in reality is nothing more than a celebration of inflation.

Maybe that’s why the dollar continued to drop overnight and gold hit nearly $1,200 an ounce.

It’s becoming more and more clear that governments around the world are doing what they can to avoid bad debts from going bad. Deflation simply can’t persist in such an environment. Eventually we need debts to be allowed to go bad, or we will likely get some inflation.

Ben Bernanke and crew is already preparing to raise rates. On Monday the Fed announced that they would begin testing their “exit strategy”. Of course, the Fed tried to soothe the market into believing that inflation isn’t a concern. But we know better than to believe what comes out of their mouth.

Making the problem worse is the fact that the Fed may need to monetize debt in order to finance next year’s deficits.

Porter Stansberry reckons that next year the U.S. will need to refinance $2 trillion in debt. And that’s on top of the $1.5 trillion deficit that’s expected. In other words, $3.5 trillion needs to be raised in 12 months.

That’s $291 billion every single month. From Porter…

Where is the money going to come from? From our foreign creditors? Not according to Greenspan-Guidotti. And not according to the Indian or Russian central banks, which have stopped buying Treasury bills and begun to buy enormous amounts of gold. The Indians bought 200 metric tonnes this month. Sources in Russia say the central bank there will double its gold reserves.

So where will the money come from? The printing press. The Federal Reserve has already monetized nearly $2 trillion worth of Treasury debt and mortgage debt. This weakens the value of the dollar and devalues our existing Treasury bonds. Sooner or later, our creditors will face a stark choice: Hold our bonds and continue to see the value diminish slowly, or try to escape to gold and see the value of their U.S. bonds plummet.

One thing they’re not going to do is buy more of our debt. Which central banks will abandon the dollar next? Brazil, Korea, and Chile. These are the three largest central banks that own the least amount of gold. None owns even 1% of its total reserves in gold.

All of this is going to lead to a severe devaluation of the U.S. dollar… Which I expect to happen within 18 months.

At this point, the trend is still up. The Dow is close to breaking its previous 52-week high. If it does so tomorrow then 11,000 is in the cross hairs. After 11,000 i seriously doubt the market will push any higher.

If I were you, i’d avoid getting into any longer-term positions at these prices. I have a feeling we’ll have a 10-20% discount early next year.