Wednesday, February 10, 2010

In an essay published by Mises Institute, economist Frank Shostak, whose work has been featured here many times, debunks the fiction that last quarter's 5.7% GDP growth was a harbinger of recovery.  In fact, it is savings and investment we should be measuring if we want to predict the strength of a recovery.  GDP statistics, says Shostak, tend to overvalue the kind of Keynesian-type stimulus that ultimately destroys wealth.  Here's an excerpt: "Once the central bank raises the pace of money expansion in order to lift the economy out of a recession, it prevents the demise of various false activities. It also gives rise to new false activities. The outcome of such so-called economic growth is nothing more than the strengthening of wealth consumers and renewed pressure on wealth generators. All this undermines the process of wealth generation and weakens true economic growth."

An exceedingly boring market led us to a fruitless search for trading opportunities in Comex Gold and the E-Mini S&Ps. The session had educational benefits nonetheless, since it shed light on the extremes to which we will sometimes go in order to force a trade. In this case, it got us stopped out of the E-Minis for pocket change. We learned once again that our expectations for a camouflage trade can be no better than what is promised by whatever pattern of larger degree subsumes it.

Hidden Pivot plays for Wednesday looked like slim pickings, but I couldn't resist wading a little deeper into  bear-dom with some judicious buying of QQQQ puts.  There are no price targets associated with this gambit, only the impression that the daily and weekly charts look very heavy.

We've been playing patticake with a single March 44 put that we hold with a cost basis of 0.23.  Let's get more aggressive with some scale-in buying of April 42 puts.  Bid 1.11 for two and 1.03 for five more, good through Thursday. You should also cancel the g-t-c order to short a March 39 put against the put we own. _______ UPDATE:  We bought the puts as planned and now hold seven of them for an average 1.05, plus the March 44 put. Nothing further is advised for now.

The shadow of the decline from a well-advertised Hidden Pivot target at 80.78 continues to lengthen and could reach  79.21  today if f selling persists.  A key test of bears' resolve could come very soon at 79.55, a midpoint support that will remain valid as long as 79.90 has not been exceeded to the upside first.

There's a not very inspiring rally target at 15.620  that is roughly analogous to the one proffered today in gold, but I wouldn' recommend trying to get short there.  If the futures should break loose for unexpected yardage, they could get to as high as 16.055  before encountering the next Hidden Pivot resistance.

The 1091.60 rally target has been slow in coming, but we'll stick with it for now because it's pretty and it's all we've got. This Hidden Pivot sits in the middle of a void, so it can be shorted with a stop-loss as tight as 0.50 points.  Looking at a bigger picture, a 1014.20  downside target is still viable and will remain so unless 1166.70 is exceeded to the upside.

The crucial buying power of shorts was mostly spent by mid-session, leaving the futures to fend for themselves. They gave up relatively little ground thereafter, though, presumably because reality tends to lag wilding sprees such as yesterday's by an exasperating day or two.  There is probably enough uncertainty and confusion in the E-Minis' price action to make nearly any camouflage pattern work, but I'll leave the discovery and exploitation of such opportunities up to you. The question of up or down today looks like a coin toss to me.

The terms of Germany’s proposed bailout of Greece were sketchy at press time, but you can bet that the sums involved will not be covered with hard cash.  Rather, it is “financial guarantees” that will be used to shore up Greece’s finances, much the way the more nebulous “guarantees” of the U.S. Government have come to buttress practically every piece of worthless paper held by an American bank. Not surprisingly, the EU bureaucrats are spinning this fraud exactly the way Tim Geithner would have: "As long as it is very clear that any support only comes with very, very stringent conditions attached, it would not affect the moral-hazard question," said Fabian Zuleeg, chief economist at the European Policy Centre, a Brussels think-tank.  Before Mr. Zuleeg came along, we might have thought it was only Mr. Obama’s economic spinmeisters who took their audience for imbeciles. Stock markets around the world rallied ebulliently on Tuesday, even as a credulous press rolled out a story with only vague concerns about how the bailout of Greece would be perceived by such other potential wards of Brussels as Spain and Portugal, as well as by Eastern bloc nations that were forced to beg from the IMF when their backs were up against the wall last year. But if such questions worried global investors, they didn’t show it.  In fact, they greeted the news the same way they do whenever some new, trillion-dollar claim is piled on the dollar – i.e., they bought euros hand-over-fist, treating the currency as though it were good as gold. Germany’s Burden The rescue package is being sold as an EU effort, but in reality it is almost entirely Germany’s burden, since Germany is the only member of the EU that is perceived as able to write a very large check that