More Despair, More Worry, More Buying

The markets never move without the some confusion and important miscalculations but they are always convinced whatever the current direction must be the right direction, at the moment.  EU failure to produce any real substantive economic intervention has put the world markets into end of world mode. But looking at the map, the DJIA and the S&P500 are not far from all time highs and bearish sentiment is on every sign post. We must be at that place they call Going Higher Right Now, Down Later.

Now maybe there will be an event triggered from economic twists no markets can withstand.  But the game being played here is to placate the markets.

Fed intervention to stabilize asset prices has worked in so far as it has inflated financial indexes prices.  This is in part to cover the Fed's inability to stem the downward spiral of new job creation and its ineffectiveness to produce any reasonable economic recovery.

But there are real dangers.  Affecting the balance sheets of banks and providing massive liquidity for lending is much easier than ultimately controlling stock markets which have at their core random movements kicked around by price discovery.  Added volatility resulting from a policy of asset stock inflation works both positively and negatively and up cannot be guaranteed just because a Fed points its finger higher.  Markets are now faced with having to defend speculation in stocks promoted by lower interest rates without the benefit of economic growth.  No jobs, just higher stock prices. 

The Fed and now the EU have created a cloud upon which all financial markets now sit.  With whatever the EU comes up with being probably too thin to save massive red balance sheets, the Fed is locked in.  The Fed believes it has the dominant strategy so that no matter what any of the other players do, it has implemented the correct action.  Clearly the Fed believed things would be improving much more rapidly when it undertook its strategy.  As in any other game, if you are wrong about having the dominate strategy, you lose your defense, and for the Fed that would be asset price protection.

Fed's Asset Stabilization Strategy

In the past, Fed accommodations have helped to stimulate economic growth after a brief cyclical downturn.  This time a structural downturn is necessitating greater demand for relief through massive injections of liquidity to support a strategic plan to protect asset prices via the great buy hedge. Now, the EU's cheap euro strategy which is needed to facilitate repair of the economic conditions brought about by a de-leveraging world, is challenging the Fed's asset stabilization policy.  While the Fed has provided a covered hedge for assets such as stock prices, a cheap euro policy may ultimately force the hedge to be cashed-in as world pricing power wains, profits fall, and job growth remains weak. 

The world seems to heading towards a new standard of living set point.  The Fed's policy of asset stabilization may in the end be the difference between deflation and just a bit better than deflation.  Either way, the great buy hedge will see some pressure as some may take the opportunity to raise cash by liquidating against the hedge.

The Big Wean

Bernanke testimony this week clearly shows a Fed which would love to prepare the US economy for the beginning of the end of stimulus.  Without committing to further stimulus yesterday before the Senate and in his testimony before the House today, the Fed Chairman stated he did not see a double dip recession.  His message. The beginning of the big wean or the end stimulus is being cautiously prepared. 

The problem of course is if it were not for the European economic problems, Bernanke would be more confident in the initiation of the end plan. If Europe can repair itself even ever so slightly, then the markets will not need much more help.

Now the markets may not like the thought of growing ever so slowly all by themselves which is probably not good for owning equities right now.  In fact, it is the first time since 2008 the Fed has indicated it may not be the great asset enabler in the next investment cycle.  Thus the buy for equities was between March and September of 2009 and the potential end of that Fed enabling run may be March to September of 2012.

Up To Sideways

Collective maneuvering by sovereigns is making it tough on the bear's vision of economic disaster and effectively putting a range bottom in the equity markets for the balance of the year.  Only a significant impediment to the EU's ability to cover shared subsidization of EU debt problems will turn the market south. Extended upside action and the ultimate test of all time highs will be difficult however since generational choices on spending will limit job creation and the huge government stimulus tab of the last few years will be a drag on economic growth. 

Yesterday's Supreme Court ruling on Obama Care may ultimately be the driver re-electing Obama since it will place in contrast a Republican endeavoring to take away future benefits during a recovering market from a general population who have lost twenty years of wealth in the last seven years. People may complain about big government, but when it comes to their own benefits such as Social Security, and now health care, it is not big government, its mine.   

Sovereigns Enter The Markets

Sovereigns have been collectively fighting the battle of market confidence and are hoping to ultimately win the greater war threatening world economic growth.  They have been engaged in direct intervention as we know in the credit and currency markets for some time but now appear to have entered into direct intervention into equity markets around the world where needed.  Having clearly created an economic environment which Adam Smith did not envision, i.e, where the main economic market drivers come from a circle countries printing money because their own economies cannot support economic growth. This strategy of  asset subsidization based on injecting massive liquidity into the markets in the hope that future growth will be able to pay for the radical costs is certainly dangerous. 

The problem if this particular strategy fails to deliver the broad economic growth needed to eventually pay back the gambit is not clear but probably not good. Supporting assets may lead to a greater economic divide between those whose assets are being protected and those of the much broader population whose assets really are not.  Social unrest could enlist a larger segment of the world seeking to reject current approaches.  If Europe delivers on its propensity to cycle into world disasters, they will ultimately fail at  pandering to the markets and panic would prevail.

One of the lessons learned in trading early on is that spreading into an additional position when the original positions is a loser almost always results in a greater loss than if one had just taken the loss in the first place.  Unfortunately, real fixes could come from a rather unpleasant round of economic panics and a debt jubilee a gigantic proportions.  But right now, sovereigns in the thick of a defensive battle whose end is not clear.

European Fail Safe

Stocks continuing to sort out a range bottom as Wednesday's action traversed but did not confirm a bottom.  After last Friday, many had worried that some of the broader indexes closing around the 200 day moving average meant something, let all concerned know ; i.e.  the 200 day average never means anything in any market.

The fact the Fed is jawboning the upside along with a Walker victory in Wisconsin led to some kind of mutant Stimulus/Romney rally event.  Bears got squeezed and there has been a thrashing to establish a range bottom.  

Traders have learned each economic disaster since 2008 has also been a buying opportunity and the current European economic disaster seems at least to be following the same pattern of rewarding bad behavior.   An important difference is  European problems are largely out of U.S. control despite all the stimulus if needed winking professed over the last couple of days. 

Europe has a long history of epic events spinning out of control right after reassurances from the most high.  The partial collapse of the European economic system is about the only thing which would have the magnitude to wreck  global interconnected banking. It would capsize not only the current weak recovery, but impact Federal Reserve efforts past, present, and future.  A kink in economic activity would require the rest of corporate growth to recalibrate at a lower level.  One more representative of the actual economic conditions reflected in the U.S.'s biggest industry, housing.

The usual three ground forces engaging the economic battle of the last five years has been spin, cash, and hope.  Europe will deploy all of them.   If it works, financial assets will outpace broader economic growth.  If it fails and Europe blows it, financial assets will not be able to provide a fail safe any longer.

Three Phases of Investing

Wondering whether it is possible to safely invest in stocks, commodities, or whatever asset class one may be examining is tough for pro and amateur alike.  Facebook is a classic example of investors so desperately wanting to believe they had an opportunity to enter an almost riskless trade because they were certain of " This Equals That" or what I call the TET reflex. 

One could say TET is what we rely on every day to assess problems, observations, and opportunities.  Facebook's automatic TET reflex glided through home, office, and financial industry circles with an absolute impatience for the normal processes involved in IPOs.  But alas, the Facebook IPO bombed for everyone except the dweebs who were already made.

Here were the three normal phases of the TET reflexes for Facebook investors and all investors for that matter.

Phase 1.  This is the big one. 

Wealth now or die.

Phase 2.  Why isn't this working. 

This starts when you realize maybe you've been hosed and red marks start appearing on your face, reflecting from the computer screen as you watch your investment go negative.   

Phase 3.  It's someone else's  fault.

This final phase occurs when all hope is lost for the quick score and you begin to organize lists of the responsible.  You are not on that list.

There is a reason you are stupid.  It is is rooted in the belief there are growing opportunities in a de-leveraging world.  There are not. 

Key lesson here. 

You better already own it early and be prepared to wait a long time to be successful.

Range Bottom Forming

Range bottom in equities is being established today as negative market chatter gets ahead of itself in Europe and banking fears from JPMorgan trading.  Greece does not really matter because there really is nothing new here.  When debt holders had to take 90% hit months back, it was over.   EU will create some trash solutions but in the end it will accommodate survival but lead to slow growth.   Same for Spain.  Solutions which lead to sluggish economic gains.

JP Morgan is a non event as far a scale of loss.  It will add to a extremely modest uptick in regulation.

Interest rate swings within the lower range will be great in percentage terms but modest in terms of significant impact on higher rates. 

Surprise Index

(From Bloomberg).  The Citigroup Economic Surprise Index for the U.S., a gauge of how much reports differ from economists’ estimates in Bloomberg surveys, turned negative on April 25 and fell May 3 to the lowest level since September. Last year, the gauge sank below zero for the first time in five months on May 2, the day when the S&P 500 began a 19 percent drop.

It Hurts When He Thinks

Alan Greenspan thinks stocks are cheap and likely to rise.  This from a guy that help create one of the worst economic downturns in the history of the United States.  Now except for his only lucid moment when as Chairman of the Fed he characterized market behavior as "irrational exuberance" in his testimony before Congress, he has always been a shill for Wall Street.   A tradition not lost with Bernanke.