Don't Fight the Tape - Don't Fight the Fed

In my last post I laid out a road map of how to play this market. Since that post, several of the negative factors that I listed have turned positive.  I have therefore let the stock market lead me into a more bullish construct. Here are some of the new positive factors:

1 - The Fed has symbolically raised the discount rate by a token amount and told the market that it will eventually raise rates. At the same time, the Fed indicated that their easy money policy will remain intact for quite some time. As a consequence the yield curve has steepened and the market knows that it has clear sailing for several months.

2 - Despite his apparent intransigence regarding his health care plan, President Obama and Congress have been forced to back down on their deficit building plans.
The Democrats may go down kicking and screaming, but the nation is not going to permit their left wing high spending agenda to pass. Also, the President's bank bashing has subsided. Finally, the country realizes that the Volker Plan is not a take it or leave it one dimensional cartoon. Rather, the country realizes that it is a sophisticated basis for negotiating a new set of rules for banking and risk taking.

3 - The tape has gotten stronger and market leaders such as AAPL, PCLN, CMG, etc., have broken to new highs.

The stock market is always reacting to evolving circumstances. Therefore, one should have an ongoing general thesis from which to play one's hand. By being flexible and not fighting the Fed or the Tape, one can adjust accordingly.

I believe that in this economic environment, one can not be a Nostradamus and predict where the market will be one to five years from now.  We are not in the bull market of the 1980s and 1990s anymore. Rather we are in post economic crash 2010. As our Nation searches for a new direction, I believe that it will take some time before a new secular bull market begins. Instead we will witness many cyclical bull and bear markets within a trading range below the market's all time highs.

America is going through a process to find its way again. In my opinion, the following issues that must be addressed before we get back on track:

1 - We have to get our house in order by eliminating the budget deficit. This includes changing our personal economic behavior from consuming to saving.

2 - We must rebuild our eroding infrastructure of roads, bridges, railroads, and internet delivery. We are falling behind the emerging economies of the world in this area.

3 - Our pre university education system must be revamped to keep up with the rest of the world. In addition our immigration policy must work towards keeping the foreign students -who avail themselves of our great universities - in America. If we are going to teach them, we should incentivise them to work and stay here instead of allowing them to take our intellectual property elsewhere.

4 - Congress has to be changed. Our legislative system is antiquated and needs to be fixed. I'm not saying to junk the constitution and the balance of powers. I am saying that we have to come up with practical solutions to break the Congressional logjam and stop the non stop campaigning and food fight between the parties. As I have said before, our founders wanted change to be difficult. That is OK, but grinding to a complete legislative halt during a 21st century flat world light speed internet era does not cut it.

5 - America has always been a country motivated by exploration into new worlds and horizens - from "go west young man' to JFK's space program. We must  regain our leadership in space exploration. JFK understood the need for being number one in space. President Obama's attempt to scuttle the space program in near sighted and foolish. He does understand what makes America tick. The space program is good business. Most of the scientific discoveries that we use in our every day lives came from the space program.

6 - Becoming energy self sufficient is priority number one. Green energy is good business. Therefore, whatever side of the global warming issue one believes in is not important. Even a five year old can see that there is a finite amount of fossil fuels and that carbon emissions are bad for the planet. If we don't want to depend on OPEC for energy, we have to come up with a full fledged energy program.

7 - We must ensure that we stay the world's leading economy and military power. Right now China and the East are kicking our butts. That can be reversed if we get our act together. The pro business Horatio Alger spirit must be our ultimate goal. We can be both pro business and pro regulation of business abuses. President Obama must understand that it does not have to be an either or situation.

At this time I am long selective stocks such as AAPL, CMG & MMR. At the same time, I still have a decent cash position and am cognizant of the fact that the market is extended on a short term basis. In fact, I am amazed that the market has run up this much on low volume without correcting.

Therefore, I will take profits in extended stocks and wait for pull backs to buy other stocks I like such as JDSU. I will also keep my options open to the idea of shorting the market via index ETFs if the market takes me there.

Where Do We Go from Here?

The stock market has been going through a difficult corrective phase ever since President Obama took it upon himself to take the populist political approach of attacking the unpopular banks. Much has happened since that time to complicate matters. Here is my SWOT analysis of the issues facing the markets at this time:

Positive factors:

• Strong Monetary Growth. The pump is still primed and the system is awash in cash with no place to go. The stock market has always been joined at the hip with the money supply. I recommend reading Milton Friedman's Monetary History of the US and Beryl Sprinkle's Money and Markets.

• Positive Sloping Yield Curve. This is another indication of easy money, which always leads to positive economic developments.

• Fiscal Stimulus. This is a slight positive because the entire Federal spending program is an ill conceived pork barrel laden poorly targeted joke. Lord Keynes is probably rolling over in his grave and Milton Friedman is laughing from his.

• President Obama's Recent Conciliatory Tone of Compromise. Whether this is just a political gesture or the real deal is still not known. It is yet to be determined if the President is serious about compromise and listening to the obvious anger of populace as expressed by the polls, the Tea Party movement and the Massachusetts election results. So far the President has made conciliatory gestures which have been off set by political attacks on the opposition.

• Strong Corporate Earnings. Recent earnings reports from our leading corporations have been strong. Most importantly, earnings guidance has been strong. Of course, guidance can always be wrong. In my opinion, we must give the corporations the benefit of the doubt until evidence proves otherwise – especially given the strong growth trend that is in place.

Negative Factors:

• President Obama's stubborn insistence on large spending programs. Spending huge amounts on health care reform while cooking the books to make it look like we will be saving money is disingenuous and shows a lack of an understanding of basic economics. A nation cannot balance its budget and go on a wild spending spree at the same time. The much maligned Tea Party revolt has some very good points. The nation and the markets are revolting against a government that has apparently gotten out of control. The markets want to see the President back down from this unsound spending approach. We have to get our house in order or we will become a banana republic. Tough budgetary love is required. This will have as yet unknown economic consequences.

• Relinquishment of Presidential power to the Congress. The President has let Harry Reed and Nancy Pelosi dictate legislative policy. The markets want to see the President take the lead in proposing legislation. The markets do not want to see power hungry Congressional leaders with no economic vision or mandate for radical change control how our nation's budget is deployed.

• Broken legislative system. It is clear that our legislative system is not working. It may have worked 40 years ago, but it is not working now. Our founders wanted a system of debate and difficulty in enacting change. However, our country has now gone from difficulty to complete gridlock. The President needs to get a bi partisan commission of the best and the brightest in place to study the matter. He then has to propose an amendment to the constitution that breaks the log jam in a non pork barrel laden expedient manner that has input from both political parties. We are operating in a 21st Century light speed internet connected flat world. Our legislative arteries need to get unclogged and up to date.

• Toxic Bailout time bombs. Many of our states are already technically bankrupt and many European nations are in deep financial trouble. This is the next financial disaster that needs to be fixed. We can not quantify the size of the problem yet, but it is large and can become a huge drag on the world's economy. The question is whether the world will choose to bail out all of the troubled nations and states or work out a fiscally responsible (read bite the bullet) approach. A good first step is for Europe to admit that the hasty creation of the Euro was a mistake. That will enable European nations to tackle their individual economic problems without having to worry about propping up an artificial currency.

• China's monetary tightening. So far this is not a big deal because China is still pumping money into their economy at a breakneck pace. Stay tuned to see how this evolves, because China's monetary growth is unsustainable without causing all kinds of economic problems from inflation to real estate bubbles.

• Interest Rates are Starting to Creep Up. I believe that this will be a slow process that will have little short term affect on the markets. In many ways it is a good sign, because rates have been so low. Fed Chairman Bernanke acknowledged that he will have to raise rates in the not too distant future. This is an issue that must be monitored closely, but if handled properly is the right thing to do.

In sum, the world is now going through the aftershocks of last year’s monetary crises. Our politicians are caught up in a nasty game of recriminations designed for pure political gain. Our monetary authorities are under attack and the world’s economies are having a bit of a setback. It is going to take some time to work things out. Therefore, the markets are nervous.
My guess is that during the next year it is not going to be as easy to make money in the stock market as during the past year.

Therefore, until I see a true reversal back to the bull market uptrend, I will act as follows:

• Stay mostly in cash and keep my powder dry for long or short trading opportunities

• Trade the stock index ETFs with a downside bias every time I see stock market rallies that run out of steam.

• Go long selective special growth situation stocks such as CMG and MMR that are making all time highs despite the weak stock market. Conversely, go short very weak stocks.

I always start from a macro thesis and invest accordingly. The key is to be flexible and adjust as the facts evolve. I might start to change my tune tomorrow, but I will let the markets lead the way. If I start to see market leaders like AAPL, GOOG, PCLN, etc. start to run and make new highs, I will not fight the tape. If the President and Congress get their acts together, I will applaud and get more bullish.

Bull markets always climb up against a wall of worry. I have outlined the worries. Now lets see if they can be mitigated, one by one.

The Dichotomy of The President's Attack on Bankers and Paul Volker's Elegant Solutions

Since my last post, the President's State of the Union Address reinforced Wall Street's fears of a President who is out of control and hostile to business. This caused the market sell off to escalate and plunge to a total breakdown.

On the surface, the President's address hit many of the right political notes for the crowd. However, when one digs deep, one discovers an illogical hodgepodge of half baked measures, gross inconsistencies, misstatements of facts, cheap populist attacks on convenient political scapegoats, and a denial of the fact that the country has rejected his healthcare reform plan.

Yes, the President threw a few bones to the Republicans in the form of offshore oil drilling, nuclear power plants and tax incentives for small business. But he continued his attack on the banks and his insistence of moving on with his dead policies.

Furthermore his proposed spending freeze makes no sense. One the one hand the President recently raised spending by 19% in the very areas that his spending freeze will cover a full year from now. On the other hand, the President proposed all kinds of spending increases in other areas that dwarf the so called freeze.


I could go on and on with examples, but the key takeaway from the speech is that markets perceive a president who still has not processed what has happened in Massachusetts and all over the country. Instead, the President keeps on talking about how he is now willing to work with the Republicans towards enacting his healthcare program if only the Republicans would just cooperate with him. As we all know, the problem is that the Democrats through Nancy Pelosi and Harry Reed have totally shut the Republicans out of the process. More important, the country has made it clear that they do not want the Presidents healthcare plan.


Furthermore,  the President has continued to bash the banking system in Joe McCarthy like fashion. Next, President Obama hid behind Paul Volker as a cover for his hollow theatrical exploitation of the nation's anger at irresponsible bankers and the bailout. It was almost like Europe punishing Germany after World War One. That policy led to World War Two.


Then, just when I thought that everyone was insane, I read Paul Volker's tour de force Op Ed piece in today's New York Times in which he brilliantly laid out a plan to fix the world's banking system. The article contained none of the President's attack dog rhetoric. Instead, it logically reviewed the problems and offered a common sense long term blue print to fix them. I suspect that had President Obama read Paul Volker's article to the nation, the markets would have already rallied.

In my opinion Paul Volker was our greatest Federal Reserve Chairman because he had the courage and intellect to do what was necessary and unpopular to kill the massive inflation of the 1970s and then start the economic boom that ran from 1981 through 2000. After Volker retired in early 1987, he was succeeded by the irresponsible Alan Greenspan, whose policies led to the stock market and real estate bubbles and busts.


Now Mr. Volker is back. The question is whether the President will give us selective parts of the plan or the real deal. I am optimistic but also skeptical.  Let me explain.

The reason for my skepticism is the well known fact that the President has kept an unhappy Paul Volker away from the inside for the past year. In my opinion, the President is using selective parts of Mr. Volker's plan for political gain. Despite that, Mr. Volker soldiered on hoping that the President would enact all of his ideas. He was visibly upset with the President when he recently alluded to his White House ostracism on the Charlie Rose Show. Then, White House economic advisor, Larry Summers neatly skirted around the "what to do about Paul" issue when questioned by Charlie Rose last Friday at the Davos world Economic Summit.


The reason for my optimism is that the President has no choice but to enact Mr. Volker's plan. The genie is out of the bottle and the entire who’s who of world banking and economics has seen it and will embrace it. Sooner or later, the President will also embrace the entire package and stop his bank bashing through selective cartoon like use of the plan. Maybe the President will continue with his populist rhetoric but enact the entire Volker plan, thus signalling to the markets that he is really doing the right thing.



The sooner the President wakes up and acts like President Clinton did after his health care set backs in 1994, the sooner our markets will recover. The Volker plan has a good chance of being the first step to get the President and the markets back on the right track.

Right now I am short the market via stocks like HOG and ETFs such as TZA - above right  - which I am long because it goes up when the market goes down. I am looking to cover if the market "whooshes" down into some sort of selling climax. That may start to happen this week. There is no need to rush and no need to catch a falling knife in an attempt to be the hero who picks the exact bottom.  At the same time I have selected special situation longs with very tight stops such as MMR, which just had the greatest natural gas discovery in the Gulf of Mexico in decades. The key is to have a short side bias , but trade around this oversold market in case it spikes up.

So step number one is for President Obama to let the public and our congessional leaders know the entire Volker plan. He must stop obsessing with the proprietary trading issue, which is not set in stone, and realize that Volker has placed all facets of banking system reform on the table for negotiations. The next step is for him to face the music, fess up to his mistakes and get his spending act together.

Presidential Anarchy Kills the Markets

To say that the President and the Democrats have shot themselves and the markets in the foot is the understatement of the new century. In 1962 President Kennedy made the mistake of attacking the steel companies in order to get them to lower prices. The result was the 1962 mini stock market crash. Kennedy finally got the message and backed off, thus causing the economy and market to recover.

Now we have a stubborn liberal President and an arrogant congressional leadership that are both hell bent on destroying the banking system and the fragile economic recovery. In my opinion a combination of hubris and political ignorance has caused President Obama to ignore all of the polls and the Massachussets election results. Both the public and the stock market are sending the President a clear message that he is defying. To quote the great philosopher Yogi Berra, "Its deja vue all over again" and the consequences are dire. 

President Obama was elected because of President Bush's unpopularity which in turn was caused by the Iraq war and the economic meltdown.  President Obama said that he would be open with the American people and offered a reasonable alternative to Bush.  He was not elected to delegate his leadership to Congress which has gone on a liberal healthcare spending spree based upon corrupt secret back room deals guaranteed to bankrupt the country  "The President proposes and the Congress disposes" has long been the way that legislation has been enacted in America.  

President Obama has no mandate to arbitrarily look for scapegoats in the business community, stop the war on terror and kowtow to our foreign enemies. He certainly has no mandate to go on a populist campaign for political gain without thinking about the consequences. 

The stock market is falling off a cliff right now for the following reasons:


1 - After being repudiated by the voters of Massachusetts and in all of the popularity polls, President Obama decided to up the ante and go for broke in the healthcare controversy. In 1994 President Clinton had the good sense to back off his healthcare fight and live to fight another day.

2 - With signs of the inception of a fledgling economic turnaround and with still lingering high unemployment, President Obama decided to attack the banking industry using it as a scapegoat. Why on earth would any rational person try to kill the very industry that the economy so deperately needs for businesses to grow and prosper? The general idea of fixing the banking system is good, but the populist plan is bad and the timing is atrocious. 

Hiding behind the great Paul Volker as his poster boy for change is very cynical. Changing the banking system should be well thought out and enacted over time.  Slashing and burning the banking system at the very moment when the banks are struggling to help Americans get jobs is idiotic. 

Even Democrat House Banking Committee Chairman Barney Frank agrees on that point.  He has publicly stated that he will not permit the President's plan to be enacted. Furthermore, he has stated that he will make sure that any change will be enacted over a five year period. America needs a bi-partisan commission to study the issue and make prudent recommendations. 


3 - To further complicate matters, the Congress has extended its Salem witch hunt against the banks to include Fed Chairman Bernanke. The guy may have been late to realizing the severity of the economic disaster of 2008, but once he figured out the severity of the situation he performed a yeoman's job. One can debate Bernanke's effectiveness, but to quote Lincoln, "you don't change horses in midstream." The markets are confident in Bernanke.  More important is the irefutable fact that Alan Greenspan caused the economic bubble and ensuing disaster. He then very slickly retired and handed off the ball to Ben Bernanke just when he saw the what was about to happen.

So we have a very personable school smart President with no real street "cred" in business, foreign policy or economics. President Obama can have all the meetings with every expert under the sun to help him make decisions. But, without the experience, back bone and perspective of a person who has never run anything except for a law review, he is lost.

More scary, is that the President is on a mission diametricaly opposed to the centrist view of America that made us a great nation. He is a true believer with an enormous ego trying to make wholesale changes in our country without the consent of the populace. Moreover, the President appears to still be in campaign mode rather than governing mode.  Somebody had better have the ability to speak to power and not be afraid of Rahm Emanuel or we are in big trouble. 

The country and the markets are telling the President loud and clear that he is making some serious mistakes. The President is not listening. That is a recipe for disaster.

As a consequence I am mostly in cash and short the market via ETFs and special situation stocks such as Harley Davidson, which is going through a corporate sales and profits disaster. My only long position is RMBS which has just won some major victories on the road to collecting royalties for every DRAM computer chip sold by any company. 

This stock market sell off will last as long as President Obama is asleep at the wheel.  Let's hope that the economic recovery does not get destroyed in the process.

Its a Trader's Market - Yellow Caution Light for Big Cap Leaders and Averages; Green Light for Fast Traders

Its the time of the year when the traders take over the stock market and the investors go away. Many  institutional investors have already packed it in for the year, having made hefty profits. Most of the leading stocks like AMZN, PCLN - below -  are extended and need to pull back and or rest. Other stocks like AAPL & BIDU  - see the bottom of this post - are in bases but at extended prices.

On the one hand, during the period between Thanksging and Hannukah / Christmas / New Year, trading quiets down and seasonal strength kicks in for small cap stocks. On the other hand, the light trading makes the market vunerable to manipulation.  Hence, I would not be surprised to see some vicious sell programs take the market down a bit. After all, if you are a large fund manager who has locked in large profits for the year, why not take the market down with some big sell programs. That way your performance will look even better relative to the market.

So its time to pick one's spots and trade only stocks that have extraordinary news and great charts. This is not a strategy for the faint hearted. RMBS - above - is an example of a special situation breaking out to new highs. It just broke out of a base on news of a settlement with Samsung and speculation that RMBS will settle its chip dispute with the rest of computer chip cartel. If RMBS settles, they will get paid an ongoing royalty for just about every computer and wireless chip in the world.

Investors should sit on their hands until they see the market leaders either pull back or break out of large bases. In my opinion extended stocks like AMZN & PCLN can go higher, but why not wait for a pullback rather than play a game of chicken?

At least, the extended Charts of AAPL and BIDU- above - are in nice bases. I would rather pay up for both stocks than risk further price erosion.  If AAPL breaks out of its base and sets off my 208 price alert, it will be off to the races again. BIDU will have to take out 443 to set off a buy signal.

The reason for paying up in price is to reduce risk. That sounds counter intuitive, so here is the logic behind that strategy. The idea is to invest one's money into as much of a sure thing as is possible. If a stock breaks to an all time high from an intermediate term base, the stock is in motion to the upside. If a stock is still in the base, there is no guarantee that the stock will start to run up again. Rather, the stock might drift or go down. Hence paying up reduces risk.