WHICH WAY THIS MARKET IS HEADED
As you can see both charts continue to trend lower
and even though we may see some big spikes this week due to the FOMC
meeting on Tuesday the overall downtrend is likely to continue. For one
thing traders are beginning to lose faith the Fed’s ability to ‘make
everything okay’—particularly in light of a rapidly collapsing dollar.
On Tuesday, the Fed
offered to loan $200 billion to financial institutions for low grade
securities. The Mighty Dow soared 400 points. And then Standard & Poor's
expansively announced Thursday that the end of subprime mortgage
write-downs by big banks may be near. Stock prices, which had opened
sharply lower, rebounded sharply higher. In more bullish news the Labor
Department reported Friday morning that consumer prices were unchanged
last month—and prices of stock futures soared.
These explosive rallies are typical of bear markets and don't last very
long. The fact is, in spite of all the ‘bullish’ news released last week
the SP-500 closed lower than it opened on Monday.
The reason is that
none of these events is going to end the bear market and traders are
beginning to realize that fact. The Fed lowered interest rates too far
causing the bubble in the first place, then raised them too high and
waited too long to lower them, but they still believe inflation will
moderate due to a slower economy. How can inflation moderate if the
government continues to debase the dollar? When other central banks are
keeping rates steady--or ramping them higher---our central bank lowers
rates--our exporters may benefit but we pay much more for imported
goods—like a barrel of oil.
That's because something else happens: our currency tends to weaken
against others. This week, something monumental happened---the U.S.
dollar compared to the Japanese yen dropped to sub 100. It took fewer
than 100 yen to exchange for one U.S. dollar. The dollar also hit
another record low against the euro.
Speaking of
inflation, Friday’s Consumer Price Index report is sheer BS. Are we
really supposed to believe that food and energy costs moderated in
February? Who are they kidding?
Futures popped on the report--however, when Art Cashin stood on CBNC and
questioned the portion of the report that included a 0.5 percent
decrease in February's energy prices, he was giving voice to the
skepticism many felt. Thursday's February Import and Export Prices had
shown an even larger decrease in February's imported petroleum prices,
1.5 percent, so that same odd decrease has been showing up on many
reports.
The decrease of energy prices on the CPI is likely due to the time
period in which the data was collected. Gasoline prices had dropped for
the period in February when the data was collected then spiked higher
again. Nobody truly believes energy costs fell or even stayed the same
in February--as if to underscore the fact new record highs on retail
gasoline prices, diesel and heating oil futures were hit Friday. Those
followed crude's record prices earlier in the week.
The truth is year over year the CPI has risen 4.0 percent and core CPI,
2.3 percent. Core CPI remains above the Fed's perceived comfort
level—but that won’t keep the Fed from cutting once again when they meet
this week.
This is not a pretty picture and this bear market is not going to end
soon. The best course is to take positive action to make money on it and
that is exactly what we’ve been doing—our biggest risk is bear market
rallies taking out our stops.
The problem is
deception plays a major role in bear markets—like the CPI report Friday
and even more dramatically the ongoing Bear Stearns debacle. As recently
as Thursday the Bear Stearns Chairman said their liquidity was fine—then
the very next day on Friday they're being bailed out by the Fed and JP
Morgan.
And as of this
writing JP Morgan has agreed to buy Bear Stearns for approximately $2
per share—THAT’S TWO DOLLARS PER SHARE!---A painfully far cry from
Friday’s close at $30 and a nuclear melt-down from last Friday’s close
at $70.
The deal values Bear Stearns at just $236 million,
based on the number of Bear shares outstanding as of Feb. 16. At the end
of Friday, Bear's stock-market value was about $3.54 billion.
Mark my words—the Bear Stearns crash is
going to have much farther reaching catastrophic effects than just the
poor holders of BSC stock.
This bear market is
unlike any we’ve seen in the past fifty years and that is going to
become increasingly apparent as this story unfolds. Companies like Bear
Stearns that have been around for 85 year will suddenly cease to exist.
For example Carlyle
Capital got into trouble when it borrowed money to buy a portfolio of
securities issued by Fannie Mae and Freddie Mac---securities backed by
mortgages. In the past, mortgage backed securities have been highly
liquid because most believed them to have an implied government
guarantee. However, with no market for anything backed by mortgages,
what was once liquid had become illiquid. The value of the fund dropped,
margin calls were made, and notices of default were issued when Carlyle
failed to meet those calls. By Thursday Carlyle announced that it
expects its lenders to seize most remaining assets—and this company too,
will cease to exist.
Next Week's big
event is the FOMC decision to be announced at 2:15 Tuesday, March 18.
Last week’s bounce shows that market participants are still susceptible
to pinning too many hopes on the FOMC's March decision. If the Fed steps
in to try and shore up the dollar and curtail inflation with a small cut
the markets won’t like it—and if they cut big expect commodities to go
through the roof and the dollar to go into a death spiral.
Whatever that decision is-- it's not going to prevent further upheavals
such as the one created by Bear Stearns on Friday—the question is…
HOW DO WE MAKE MONEY ON IT?
We’ve got two
super-potential plays lined up this week—one bullish and the other
bearish.
Our bullish play is
on one of the world’s largest producers of the kind of metals that are
going up in price on almost a daily basis. This particular stock did us
a huge favor by pulling back to support Friday and now looks ready to
launch MUCH higher this coming week ESPECIALLY if the Fed collapses the
dollar further by a bigger than expected rate cut Tuesday.
Our next play is
bearish and it’s on a company with one foot mired in a declining economy
and the other hamstrung by higher energy costs—AND they report this
week. This stock has the potential of completely falling out of bed
within the next few days providing windfall size profits on the right
puts—and even if it doesn’t it’s steady downtrend still promises to make
us some sweet profits!
We’ve got an
options expiration week ahead of us with plenty of volatility promised
in both directions—and we’ve got the plays lined up for maximum
benefit—so let’s get started…
One note about option
expiration: This month's expiration occurs during shortened week. We
have a market holiday for Good Friday. Check with your broker for
complete information. Wednesday, March 19, will be the last trading day
for March index options such as the SPX's. Settlement values will be
determined at the open on Thursday, March 20, rather than Friday, since
no trading occurs Friday. March 20 will be the last trading day for
March equity options and for indices such as the OEX.
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