January 2008

For a stock market that was supposed to be merely marking time yesterday, the hundred-point gain achieved by the Dow was pretty impressive. We expect stocks to ease moderately this morning ahead of the latest credit loosening, and possibly to fall on the 'news' itself, since there is almost no possibility of a bullish surprise. After all, what would it take to surprise anyone? A 100-basis-point cut in the federal funds rate? Bond traders have priced in a nearly 90 percent chance of a 50 basis-point cut, so the only surprise we could imagine would be if the central bank were to offer up only half that. In the unlikely event this occurs, look for T-shirts with a silkscreen image of Helicopter Ben and the message, 'My banker went to Davos and all I got was this lousy T-shirt.' But the knee-jerk selling of shares is likely to be short-lived in any case, since only those who are long gold or short dollars could be caught fleetingly off guard by an uncharacteristically stingy Fed move. Once the dust has settled, though, we predict that all trends in force before the announcement will resume in earnest: stocks up, Gold up even more, and the dollar down. If so, we are not unskeptically bullish on stocks, only somewhat bullish on them for the near term. Still, we'll be rooting for higher prices like most everyone else, since that could give us the opportunity to short losers like Citigroup at fat premiums. Indeed, financial stocks in general have helped to drive the short-squeeze, and some stocks in particular, such as Merrill Lynch, appear to have considerable room left to rally. Meanwhile, the longer bears remain dubious, the more punitive the finale to this rally is likely to be. To accurately gauge its staying

Could the phony short squeeze that began last week be mutating into a more or less 'real,' albeit doomed, rally? It certainly seems like it. We had warned of this when we wrote as follows, referring to the S&P mini-futures: 'Yesterday's deftly manipulated short-squeeze had 'fraud' written all over it, but that doesn't necessarily mean the rally can't mutate insidiously into the real thing if other bears become as cocksure as we are that stocks aren't going much higher.' The warning was intended to be tongue-in-cheek, calling attention as it did to our dangerous certitude that stocks would not get very far before the reality of a failing U.S. economy slapped them down. But with yesterday's latest, 177-point installment, the Dow Industrial Average bid fair to make us think there may actually be buyers out there other than short-covering bears. The twelve years we spent on the trading floor conditioned us to view all rallies and declines as manipulated to some extent. With respect to yesterday's dog-and-pony show, it was the nature of the manipulation itself that suggested benighted bulls are slowly wresting temporary control of the stock market from enlightened bears. Specifically, the rally occurred in three stages, reflecting a relatively daring and elaborate ruse that probably would have been too risky for DaBoyz to attempt last week, when stocks were reeling in chaos. The crucial stage occurred Sunday night in thin markets, when most traders were sleeping. Our forecast had anticipated a 13.25-point drop, precisely, from Friday's settlement price, and we had even advised night-owl subscribers to try bottom-fishing at the target, 1314.50, with a very tight stop-loss. But when the dust had settled, the futures had made their overnight low fully 3.25 points beneath the target, hinting of further weakness to come. Gamble Paid Off And so it did,

The Dow head-faked its way to an undeserved hundred-point gain Friday morning, but it was all downhill after the opening bar. Our prayerful mantra, 'Baby needs a new pair of shoes,' was trained on the shares of Citigroup, but the karma just wasn't working. All it would have taken to get us massively short at our rally target, a juicy Hidden Pivot at 28.71, was a measly $1.39 gain ' the cost of a bean and cheese burrito at Taco Bell. But Citihoax only teased, poking its doomed little head up to 28.10 with just enough je ne sais quoi to entice and beguile our greedy side. We waited in vain for that final, 61-cent thrust to the target, but it was not to be. In fact, by day's end Citi had fallen hard, dashing our hopes for a big score. Like quite a few other stocks, it settled just above its intraday lows, defying anyone who might wish it ill to place a 'don't pass' bet ahead of the weekend. (Click on picture to enlarge) We let the opportunity slip by, but only because the trading software we use froze up at a crucial moment. Had we initiated a trade, though, it might just as easily have been based on a coin-toss as on our innate distrust of the smoke-and-mirrors game that has made Citigroup the walking disaster that it presently is. Near the end of each trading session, we've been playing a second-guessing game in the Rick's Picks chat room, taking a small long or short position, whichever would seem to make a thinking man's bear more uncomfortable. If you were short at Friday's close, then, especially after being short during the day, you'd probably have been feeling pretty complacent when the bell sounded. That means the canny

Last Friday's promising heart attack on Wall Street has given way to a quasi-vegetative state that holds no particular opportunities for either bulls or bears. What to do? We'll sit on the cost-free put spread that we legged on in the QQQs, but my hunch is that we may be glad we bought some cheapie call options on the side. That's assuming, of course, that the aforesaid vegetative state does not persist until�spring�summer�autumn�? We watched some out-of-the-money January puts expire ingloriously, having purchased them with the rationale that a mere 2 percent decline in the underlying index would yield sufficient gains to pay the mortgage and a few other bills. In retrospect, we now know that a 'mere' 2% was asking for too much. Also, in retrospect, we know that, when we had the chance, we should have shorted some offsetting puts on the 1% decline that actually did occur. Although I agree with those who thinks it's a good idea to always have a few put options in inventory, the sobering fact is that, since the 1987 crash, there have been only a couple of times when buyers of puts felt something akin to exhilaration for more than 2.5 consecutive days. That number is off the top of my head, but can you recall a period lasting any more than a couple of days when it would have been a mistake for a put holder to take some profits? I can't, and that's why I've embraced the strategy of buying puts only in spreads where we have taken in as much in premiums as we've paid out. *** Why I Hate Disney Yesterday I took a swipe here at Disney's announced purchase of Pixar for $7.4 billion. I'm not optimistic that the deal will improve the fortunes of either company

Details of the 'stimulus package' led the evening news last night, providing Katie Couric with an opportunity to sound almost as dim-witted as those who are promoting this fiscal dirty bomb. What will it take before one of our network anchors lights upon the unspeakable truth ' that the government's apparent cure for debt deflation is to go another $150 billion into hock? We know exactly what it would take, actually: an appearance by Rep. Ron Paul on Couric's show instead of the usual cavalcade of bozos the networks have come to rely on for 'expert' economic analysis. Unfortunately, while Paul may be entitled by Congressional protocol to grill the chairman of the Federal Reserve twice a year, Couric's producers are unlikely to give him even sixty seconds of air time unless he becomes the Republican nominee for President. Can you imagine the Congressman ambushing the preternaturally perky, wide-eyed Katie on the six o'clock news: Couric: Will the stimulus package be big enough to work? Paul: Work? For sure, if your goal is to destroy the dollar and cheat savers. Couric: How would that happen? Paul: The $150 billion stimulus is not being financed by taxes or savings, Katie -- the money would be created out of thin air, causing the dollar to weaken even more than it already has. Couric: But even so, wouldn't the spending of that money stimulate the economy enough to avoid a recession? Paul: First of all, we are already in a recession. But even if the economy were healthy, how would borrowing $150 billion to binge on consumer goods help it in the long run? It is capital investment that creates real wealth, not consumption. Couric: But consumers wouldn't have to borrow anything. That's the point of the stimulus ' that it will be

Could that deafening smacking sound be the lips of a million traders waxing ecstatic over the prospect of shorting into this rally? Three words of advice: Be very careful. Like you, we would absolutely love to get short somewhere near these levels, since it seems beyond argument that the rally, powerful as it has been, is a short-squeeze destined to end badly for buyers. But that doesn't necessarily mean the illusion cannot continue for long enough to ravage every last bear before the inevitable downturn comes. We warned of this in our trade analysis yesterday of the E-mini S&P futures, writing as follows: '[Tuesday's] deftly manipulated short-squeeze had 'fraud' written all over it, but that doesn't necessarily mean the rally can't mutate insidiously into the real thing if other bears become as cocksure as we are that stocks aren't going much higher.' (Click to enlarge -- but why?) The sort of mutation we had feared took a Frankenrally turn yesterday when stocks exploded higher in the final hour. They'd been noodling around for most of the day after testing the previous day's abysmal lows around mid-session. But few could have been prepared for what happened next: The clock struck three at the NYSE, and bears evidently freaked at the realization that, with just 60 minutes left in the day, stocks were showing no propensity to give up their ill-gotten gains. The panic hit full-bore within minutes, pushing the Dow Industrials 360 points higher in just under an hour. Measured from the intraday low, the gain was 631 points. Not bad for a stock market staring into the maw of what promises to be the most severe recession since 1973. Citi Is Toast For our part, we were keen to short the shares of Citi as it made its way higher

We've never doubted there's a Plunge Protection Team lurking out there somewhere, ready to do battle with the gravity, but until yesterday we were skeptical The Team would try something so unsubtle as buying stocks hand-over-fist when a selling panic threatened. That's the way most market-watchers seem to think the PPT operates, and their conspiracy theory is not without merit. One reason it seems plausible is that, with the backing of the U.S. Treasury -- and no margin requirements! -- The Team could propagate an overwhelming rally risking relative chump change. But is the government's mere ability to temporarily manipulate the markets higher justification for doing so? Consider the consequences if official meddling were to backfire in some presently unimaginable way. Heads would roll. Cushy jobs would be lost. Performance bonuses would evaporate. More to the point, who needs some shadowy cabal to keep stocks from collapsing when there will always be panic-stricken bears ready and eager to do the job -- to do it far more effectively, we can safely assume, than any dozen of the best and brightest MBAs the government could possibly recruit from the ranks of Wall Street. The bears acted yesterday as though they were out to prove the point, driving one of the most powerful short-squeeze rallies we can recall. Its strength was deceptive because probably half of the move was hidden when the Dow fell 400 points in the opening minutes of the session. In a more rational world, the blue chip average would have opened down 1,000 points, keeping pace with plummeting stocks in Europe and Asia; instead, when U.S. stocks began to trade, they held like a rock near the overnight lows. This is shown in the S&P futures chart above -- as compelling a picture as you will ever see

Gold at $10,000 an ounce? Gurus and hard-money advocates have been predicting it for decades, ever since currencies began to seriously decouple from bullion in the 1930s. I've been skeptical of such forecasts myself, mainly because my deflationist imagination has always envisioned a world in which public and private bankruptcy had become pervasive. With credit unavailable, cash in extremely limited supply, and asset values wiped out by forced liquidations, who, I asked, would supply the bidding power to push bullion quotes into the stratosphere? Arab oil producers? Think again, for they would be energy-rich but cash poor, their financial wealth turned to confetti like everyone else's. Even their ability to accumulate new stores of real wealth in the form of gold would be in doubt, since, if they were to demand ingots in exchange for crude, global consumption of oil would collapse to subsistence levels. Nor will the sovereign governments of the West have the wherewithal to replenish their bullion vaults, since the fiat reserves they would trade for gold ' overwhelmingly in dollars and dollar-denominated assets now -- would have become worthless. And while the U.S., Europe et al. could in theory make official purchases of gold with tax dollars, that would only serve to entrench deflation by institutionalizing the worst Keynesian nightmare imaginable. Fiat Still Not Outed No, there doesn't seem to be an obvious buyer for gold at $10,000 an ounce once you have acknowledged that the impending global economic collapse will reduce paper assets to worthlessness. But that doesn't mean an ounce of gold cannot get bid up in the meantime to $10,000, however fleetingly, before the fiat money that is still accepted in exchange for gold has been exposed as a fraud. How ironic, then, that even as this day of reckoning has become almost

In the bond pits yesterday, there were murmurs and groans of outright despair. 'The bond market has already priced in that nobody will ever be able to sell a house again in his lifetime," said Michael Davis, a CBOT trader. "It's not as if there's more bad news that we could factor in fundamentally,' he told a Wall Street Journal reporter. 'It's just that the market is taking its cue entirely from stocks.' No question, the action on the world's bourses has been bumming out a lot of investors lately. The Dow Industrials, for one, have fallen nearly 15 percent since peaking in mid-October just above 14,000. If they were to fall for just a few more days at yesterday's pace, we'd have an 'official' bear market ' a 20-percenter ' by next Wednesday. The magic number is 11358, for those of you who are keeping vigil. Just why a bear market would rear its ugly head at this time must be a mystery to the board members of the Federal Reserve. After all, it could not have been more than a week ago that the Fed chairman himself said there was no recession in the central bank's forecast, at least not yet. Sure, the banks have been racking up losses that are now pushing toward the trillion dollar threshold. But those are only ledger entries, right? It's not as though anyone but shareholders have lost real money. 'Real' Losses Are Small Actually, there is some truth to this, since the pain and suffering of mortgage bondholders has been mostly due to unrealized losses rather than actual. That's because, although quite a bit of subprime paper has been marked down by 80 percent or more, most of it has yet to mature. And although we read about huge write-offs by