WHICH WAY
THIS MARKET IS HEADED
As you can see the markets are still in long term
overall downtrends but there are signs we could see a short
term—tradable—bounce higher. There is a rampant psychology in the
markets that nobody wants to be left behind once stocks begin to take
off because everyone knows the largest gains come in the first few days
of a rally. You add that to forced buying through short-covering and you
can get quite a bonfire going once a few twigs get lit.
This past week the Fed may have finally lit a few
twigs. The Fed is working hard to leave no doubt that they will provide
a backstop for the financial markets. The collapse of Bear Stearns was
the turning point--an 85-year-old Wall Street institution went under and
the plague could have easily spread—and has (remember Carlyle Capital
and Thornburg Mortgage?).
That scared the Fed, the Treasury, and the White
House enough that they showed their hands. Back on March 6, the Treasury
explicitly told us the U.S. government would NOT back Fannie Mae
and Freddie Mac. Now just two weeks later, we hear the government has
given Fannie and Freddie the ability to spend an additional $200 billion
dollars, so they can buy $2 trillion worth of mortgages this year.
That’s a lot of buying power… that’s 10 million homes at an average
price of $200,000 per home.
And now there is a smoldering fire under the
kindling wreckage of regional banks, homebuilders and even the Wall
Street brokerage giants. A few optimistic comments at a few earnings
releases may be all it takes for the smoldering to burst into an open
flame.
This ‘open flame’ will result in an immediate jump
in the markets and will shoot certain beaten down sectors straight up—
But even though the bounce will
be tradable—especially using the leverage of options--it may be
short-lived. Here is why…
The markets haven’t
quite figured it out yet but the Fed is likely done cutting rates
in-spite of the massive liquidity they just injected into the system
along with their projected image of ‘easing no matter what’. There is
growing evidence of dissension among members of the Fed's Open Market
Committee (FOMC) about the wisdom of cutting—and that means the pendulum
is finally swinging against ‘easy money’.
In voting earlier this
week to cut rates by three-quarters of a percent the FOMC already faced
dissension, with two members voting against doing so. Two dissents are a
serious problem because it implies there would have been more if the Fed
had tried to cut a full point.
And there will be even
more dissension if the Fed--absent another Bear Stearns-like
crisis--tries to cut rates any further.
The significant and
growing threat posed by inflation, and the even bigger worry that the
Fed could soon find itself so behind the curve in responding to
financial crises that it becomes "180 degrees out of phase" with what's
really going on in the economy.
Fed chairman Ben
Bernanke is well aware of the risks involved with the Fed falling too
behind the curve. Bernanke is likely to raise rates just as aggressively
as he has recently cut them once the immediate danger is behind us.
When it becomes clear
that the economy is going to recover from its current period of
weakness, the Fed will take back the rate cuts, and will take them back
fast.
WHY?
ONE WORD—INFLATION
Here’s a few stats you may not have seen in the latest CPI
report---Since the beginning of 2007 eggs are up 38%, milk is up
30%--even chocolate is up 6%. Grain is hovering at 17 year highs and the
price of a barrel of oil was below $20 at the beginning of 2002 and now
stands at over $100—a whopping 400% plus increase in just six years—it’s
up 70% in just the past year alone! So no matter what the government’s
doctored figures say about inflation the truth is it’s spiraling wildly
higher and Bernanke knows it. And the more the dollar falls against
foreign currencies the worse the problem becomes because so many of our
goods are imported.
But for now there is a glimmer of hope that the
Fed’s aggressive moves from last week have done the trick—and traders
are starting to bid up sectors that have been ‘untouchable’ for
months—and that my friends is…
HOW WE’RE
GOING TO MAKE MONEY ON IT--RIGHT NOW!
We’ve got two super-intriguing plays lined up this
week---they are both bullish and they are both in sectors you would
least likely suspect as having bullish potential—and therein lies our
opportunity. These sectors lit up our early warning radar screens but
the rest of the market isn’t likely to realize they’re moving for
another couple of days—and by that time we’ll already be in.
Our first play is on a beaten down major player in
the mortgage business—yes that’s right the mortgage business.
This stock has been reduced to such an incredibly good value it’s now
trading at less than HALF of its book value in an industry where the
players are typically valued at TWICE their book! The instant shrewd
traders begin to realize the risk has been taken out of the mortgage
business by the Fed’s backstop they’ll rush back into the known mortgage
survivors in droves—and this company qualifies. We’ve already seen a
technical buy signal in the chart that qualifies as ‘smoldering’ and
will likely leap into open flames this coming week promising some
amazing profits on the right calls.
Our next play is on an unlikely ETF that is also
smoldering hotly just under the noses of most of Wall Street--it just
broke a six month downtrend to the upside on decent volume—an event
sharp eyed traders like us will be taking advantage of. The chart tells
us this index has some incredible upside—especially with the fresh
infusion of cash and confidence into Fannie and Freddie this past week.
This one is jumping out of the gate and we’ll be riding it with some
well-placed calls first thing Monday morning.
We’ve got a short-term sea change in the markets
that begs to be traded along with two excellent plays lined up to take
advantage of it—so let’s get started…
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