Wednesday, August 24, 2011

The Chairman and His Golden Stick

Stocks took the path of least resistance on a lazy Wednesday afternoon, rising gently most of the day as investors, traders and analysts await the all-important speech from Fed Chairman Ben Bernanke at the Jackson Hole confab on Friday.

Last year, Jackson Hole was the scene for the chairman's announcement of QE2, and many in the financial community are expecting a repeat performance, though considering how the markets have behaved this week - gaining in a somewhat orderly fashion - those who believe Bernanke will embark on further money printing may, in fact, be disappointed.

Since QE2 didn't work very well and created a rash of inflation in many commodities, and while most banks have pretty much stabilized their balance sheets over the past two-and-a-half years, there may not be a need for further stimulus. Besides, QE1, 2, and all the rest of the Fed-inspired fixes didn't put Americans back to work, nor solve the housing decline.

So, this little ramp up on the prospects of more easy money (isn't money easy enough already, with the 10-year note below 2.5%?) may be a serious head fake.

Dow 11,320.71, +143.95 (1.29%)
NASDAQ 2,467.69, +21.63 (0.88%)
S&P 500 1,177.60, +15.25 (1.31%)
NYSE Composite 7,273.13, +63.54 (0.88%)

Advancing issues smothered decliners, 4272-2269. There were 7 new highs and 54 new lows on the NASDAQ, and 16 new highs with 31 new lows on the NYSE, making the combined total 23 new highs and 85 new lows, still a slightly negative bias. Volume was lame, back to mid-summer levels.

NASDAQ Volume 1,859,268,750.00
NYSE Volume 5,275,260,000

WTI crude oil dropped 28 cents, to $85.16.

The only major development of the day was the wipe-out in the price of precious metals, another signal that Bernanke may not be plotting the further destruction of the dollar with more quantitative easing.

Gold was pounded down with incredible speed, losing $67.90, to $1761.30. Silver got whacked as well, dropping $2.10, to $39.70. Margin hikes and the departure of hot money (profit-taking) caused the steep sell-off.

One commentator put it into perspective, saying, "gold should go back to being a store of value, instead of a risk asset played for quick profit."

Following yesterday's late afternoon exchange over the future prospects of the Bank of America, I actually laid out a strategy on a message thread over at another financial blog. Here, in all it's simple glory, is my strategy for the next six to eight weeks:

While not exactly ludicrous, a JPM takeover of BAC is a long shot. I would be more inclined to see a Latin American or Far East involvement in a forced sale, liquidation or major buyout. Gotta figure that there's real money out there in less-developed nations who might see a move into BAC as a nice grab, maybe even China, as a hedge against their ugly UST position.

Since the rumor mill is so strong and the denials even more pronounced than ever, it looks like a matter of less than a month we'll see BAC taken out. It's been in the plans for a long time. Everybody from Bernanke on down knew CW was crap, Merrill was another boatload of shit and they'd throw money into it until it no longer made economic sense.

That said, look for major volatility (the VIX is still around 40 last I checked) beginning with Bernanke's non-eventful Jackson Hole speech and continuing through October.

The timeline goes something like:

Friday, Aug. 26 - Bernanke offers no QE, markets sell off, Dow down 300.

Monday, Aug. 29 - More fear, but some stability into end of day.

Friday. Sept. 2 - With a three-day weekend ahead and another poor jobs report behind (range: -25K - +35K NFP) nobody wants to hold, sell off, Dow -200-400 points.

After that it just gets worse as BAC is destroyed, Europe goes through another round of crisis, sending markets lower.

My personal positions haven't changed in four years. I'm out of everything except cash, silver and tools of trades. However, I am strongly considering a short market position, my favorite trade being the DIA, which tracks the Dow.

I see Dow 10,200 by October 5 at the latest, confirming a bear market. So, I'm seriously considering putting on some OCT DIA 102 and/or 98 puts before Friday. May even consider SPY puts on more volatility.

I seldom make calls, but this one is lining up nicely for late summer - early fall carnage.

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