Of note: I am writing this after the close of the bell on Tuesday, August 9, 2011. Therefore, any mention of stock price, metal price or index performance is in relation to the close of business on this day. All highlighted text are hyperlinks to my sources, so feel free to click through for proof of what I am saying. Other than that, I stand by everything you will read in the following article.
This afternoon, in a rally that started 35 minutes before the closing bell, the Dow Jones industrial average closed up 429 points, to end the day at 11,239. And while the world stood up and cheered the magnificent run-up to end the session - and 1,000+ negative swing over the last few trading days - I thought it the worst possible thing that could have ever happened in an uncertain investment environment. Here's why:
The responsibility for rally lie solely in the lap of the Federal Reserve, whose chairman, Ben Bernanke, made a nationally televised statement centered around two points:
1. The economy is in worse condition that they, the Fed, previously thought.
2. The have seen fit to keep interest rates, for financial institution borrowing, stagnant for the next couple of years.
On point one: The sole job of the Fed is to manage the money supply, ie watch the economy. Nobody in the world has more adept men and women in their job to do just this task. Chairman Bernanke is one of the world's foremost authorities on the subject of economics during the Great Depression. So if he, and they, are telling you that they are in new, unexplored territory, then you are in new, unexplored territory.
On point two: The Fed, which historically (before 2007) addressed the issue of interest rate adjustments once per quarter, has usurped that process by announcing that the rate for institutional borrowing will remain near 0% until at least 2013. In the past, traders had stood breathlessly awaiting the word of the chairman of the Fed on that one Tuesday per quarter where he would announce a rate increase (bad for markets), or decrease (great for markets). The actions of the chairman today were indeed bold and, perhaps, necessary to stave off a market implosion. However, he shot the entire load on this one announcement. There is literally nothing else left in the Monetary Policy bag of tricks to counter whatever roadblock is put in the path to economic recovery later on. This is vastly important to remember, but more on that later.
On a day when markets supposedly "rallied," GOLD closed higher - and not by a little bit. Gold is the place money goes when it is worried about the future. That is why Gold, that closed above $1700 for the second day in a row, has risen 132% since the day President Barack Obama was elected. Don't you find that a strange occurrence during a "rally?"
Here is more bizarre for you: Where does money go to hide in time of uncertainty? Switzerland. The Swiss Franc rose another 2.2% against the U.S. Dollar today, to continue it's steady climb toward parity to the Euro (or death to the Eurozone, should that happen). Why all the interest in Swiss Francs? Because in war and peace, in good times and bad, Swiss banks make good on all accounts; always have, always will. But why, you ask, would this happen during a "rally?"
More bizarre for you: Oil fell nearly 3% on the day, which allowed for the most bizarre news of the day. Exxon, as a result of the oil dip, lost market value at the same time the market darling, Apple, was shooting up. Apple would overtake the energy giant to become the World's Most Valuable Company, if only for a brief moment before close. Now help me understand how, in the midst of a Global Depression, with tightening credit, and massive job loss, and Austerity measures being put in place in every country in the Western world, a consumer products company (Apple) overtakes and energy giant (Exxon) in market cap? IPhone 5, my ass! Yes, Apple makes much desired products. Yes, they have the most anticipated product of 2011 hitting shelves sometime in the next six weeks. But, no, people will not have the money (or should i say "the available credit" to make the splurge. Some will, but I am certain many won't, if only because they can't. Anyone sitting on Apple shares will be crying for mercy come October. $374 will look more like $275, or even $249 (since Apple likes to end prices with nines), but more on this later.
A Few Major Companies Peek Into the Future
GM - They of the Biggest Car Company in this, or any Universe, has announced their doubts about hitting their year-end target for auto sales in the United States. Now that is a pretty odd announcement to make before your brand spanking new 2012 models hit the showrooms later this month. And even before all those great rebates and sales marketing blitzes to clear out the 2011 models have taken place.
What does GM know that the market doesn't? They know that even if you: like the car, love the car, want the car, the bank is not going to approve your loan without a substantial down payment (which you do not have), or a stratospheric credit score (which you also do not have). Banks know you do not have these requirements because if you did have them, you would not be buying a GM vehicle. That is not a joke, and was not meant to be a putdown. It was merely intended to convey the thinking behind the determination made to refuse the vast majority of loan applications that will cross their desk this Autumn. Believe it!
Fossil - The watch company that makes FOSSIL, MICHELE, RELIC, ZODIAC, ADIDAS, BURBERRY, DIESEL, DKNY, EMPORIO ARMANI, MARC BY MARC JACOBS and MICHAEL Michael Kors watches, announced that it will be coming up short this year, and shares promptly dropped 12.5%. What does Fossil know that the market doesn't?
They know that purchase orders for 4th Quarter, far and away the busiest time of the year for retailers, are trickling in this time of year, and the ordering is clearly lighter than in years past. Normally a store can write an order and have it filled within 30 days. However, the orders for 4th Quarter are so large, Fossil needs more lead time to make the product, so they require orders to be turned in by mid-July or mid-August, for delivery at the beginning of November. This year's orders must look mighty bleak for them to come out mid-year and say, "we ain't gonna make our number." But, that is exactly what they did.
Bank of America - Yes, that Bank of America. The one that nearly every person on the West Coast has an account with. Bank of America has lost half of it's market value in the last 4.5 months. That is a loss of $77,000,000,000.00 (with a "b") in four months, and oh so quietly has tis taken place. Raise your hand if you knew they are actively being sued by multiple partied to the tune of tens of billions of dollars. It is not a question of if they are going to lose, but how much the company will end up paying in damages. So the Big Five will become the Big Four, and possibly before next Summer. Doesn't seem like a good thing for the market's long term outlook.
Europe in Crisis
I have hollered about the PIIGS countries long enough, so you should be well aware of that problem be now. I will only say, if it weren't for the Arab Spring, you could look at a heat map of all the rioting in non-Islamic countries, and my case would be made. Austerity is not going down too smoothly in Europe.
There are two major stories that have come out in the last week that have not been covered by the American Press, and so here they are:
1. Italian banks, in a move to make themselves more handsome for bailout funds from the EU, have openly stated their intent to give fewer loans in the foreseeable future. That will directly impact the cost of everything at all of the world's favorite luxury goods makers. And right before 4th Quarter production runs begin. Ouch!
1.1. France, the main motor behind the Greek loans just one month ago, is now in the crosshairs for a Rating downgrade. There is a critical need for the government there to reduce their spending through passing Austerity legislation. This would show the EU that they were serious about their debt issue and, perhaps, qualify them for immediate loan assistance from the European Union. One problem: the French don't play that shit. The last time someone tried to thrust Austerity on the French, via "let them eat cake," her head wound up in a bucket. This, though necessary, will not be easy. So it cannot be good for the long term health of the market.
2. Only two (2) traditionally White Western countries are creditors at the moment. Wow, can you repeat that? Yes, I can. Only two (2) traditionally White Western counties are creditors right now.
Only the United Kingdom, which is on the Great Britain Pound, not the Euro, and Germany, which is everyone in the Euro zone is indebted to, are creditor nations in the Western world, at the moment. All of the rest of the European Union and the Americas are indebted to Asian countries (specifically Hong Kong, China and Japan). The Old Boys Club way of settling repayment "issues" out of the public eye is over! There is no more back room dealing to be done; things will not be done publicly, regardless of how embarrassing it may be.
China has already said they are not buying any US Treasury Bonds until they are backed by something other than "good faith." They want assets, and that poses a problem because I am not sure America has any assets. I am serious.
The United States
Which brings us back to the Untied States. The U.S. Credit downgrade was a major embarrassment to the political class, characterized by their flummoxed, rambling, uncoordinated and incoherent response to the news. The one unifying theme that both sides of the political aisle coalesced around was, the Super Congress being put together to look for further deficit reducing implementation strategies to bring the budget more in line. This is exactly why the more the investment community looks into what will come out of this Super Congress, the more uncertain, and unpalatable, the market's future become.
Here are a few factoids you can feel free to bank away:
There will be 12 members on this special committee. Yes, we elected 635 members to Congress to represent us (535 House of Representatives, 100 Senators), but the future of our country will be decided by only 12 members of that body - less than 2.5% of the total - and their decisions will be binding.
The findings, defining up t0 $1,500,000,000,000.00 (that's trillion with a "t!"), must be made public on November 23, 2011. For those keeping score at home, that is the day before Thanksgiving. But more importantly, two days before Black Friday, the most important shopping day of the entire American calendar year. I can't think of a better idea than releasing the most catastrophic slashes, sure to impact every soul in the country, in the nation's history, the day before everyone is meant to go out and spend all the money they do not have. Doesn't sound good for the market, does it. But wait, there is more...
After the Super Congress's determinations are made public the day before Thanksgiving, the law states that they must be voted on by, you guessed it, December 23, 2011 (since Congress does not sit on Christmas Eve or Christmas). So then these massive cuts will be made into law just in time to make it under the Christmas tree of every American, young and old. Historically, the last Saturday before Christmas is the second busiest day on the American shopping calendar. Though, since this year Christmas falls on a Sunday, that will most likely fall to the Friday before Christmas (American store usually close early on Christmas Eve, and I say "usually" with great hesitancy). So what is the date of the Friday before Christmas this year? Yeah, December 23rd. Do you think that bodes well for the market? For anyone? I don't either. But wait, there is still more...
If the Congress decides that they are afraid to vote the recommendations of the Super Congress into law - perhaps because it will be political suicide to have your name attached to this - and so vote them down, or decide not to vote at all, an automatic across-the-board cut of $1,200,000,000,000.00 (with a "t") will go into effect. So it's damned if you do, damned if you don't. Austerity is coming to a Christmas tree near you this holiday season. Which can't be good for the markets, can it?
On a side note, Max Baucus and John Kerry were just named to the Commission, so Democrats can forget it! 75-90% of the cuts will come from your side of the aisle. I'm serious.
In Closing, and Back to That Big "Rally" on Tuesday
The run up to a +429 point win for the Dow took all of 35 minutes. It was done with the full knowledge of everything I just posted ...by a few people. And those people just manipulated the market up so that they might get rid of a few of their more questionable investments. And now that this problem has been solved for those few, what is in store for the rest of us? Investors are not stupid, and they will be up all night, just like me, putting together this puzzle i have just laid out for you. When they walk into work tomorrow (Wednesday) things are going to be crazy!
That fake 400+ point rally has to disappear. So I will share with you that, the worst single day drop in the Dow Jones' history was on September 29, 2008, when it fell by -778 points. Due to the faux run-up on Tuesday afternoon, that number will be eclipsed sometime in the next 8 sessions, or between Wednesday, August 10, 2011 and Thursday, August 18, 2011.
Hold on to your hat.