Federal Reserve Loses $66 Billion; Volatility Meets Fibonacci Sequence As Sucker Rally Extends

Here's a fun headline:

Fed piles up $66 billion in debt.

Now, since the Federal Reserve System has been known to conjure up money out of thin air, how can they incur losses, and, if they somehow manage that feat of economic alchemy, do they even matter. The author of the article says no, but the reality is that our fiat money system - and, with it hose of the rest of the world - are fantasies. The money created is all debt. Nothing but debt. Most of it is incurred when the US treasury - or the treasury of some other nation - issues a bond. It's debt, and it's bought by the Fed or one of their agents, and, viola! instant money is created.

Most of government-issued debt is never paid off, which is why the United States has a $21 trillion - and growing - debt. Some of it is owed to other countries, some to private investors (like the Fed), and some of it is owed elsewhere.

Getting back to the Fed and their debt, how they managed to get into debt themselves is pretty simple. They bought a ton of near-worthless paper called Mortgage Backed Securities (MBS) back in the halcyon days of sub-prime lending (2006-2011), and that paper is worth today, as some of it is maturing, worth less than what they paid. They did so to bail out their friends, the big banks, and now the piper is being paid. This will continue for some time, as theses MBS mature at different times. Like most mortgages, some won't mature for 30 years, so think 2036-2041 before they're all exhausted, though some will mature well before those dates.

The Fed wants to shrink its balance sheet, so this is how they're doing it, retiring debt. Do they care? Not particularly. To them, gains and losses are ledger entires and nothing more. They exist in a parallel universe from the rest of us who can't just roll over our debts indefinitely. The Fed will outlast all of us, and they know it.

As far as the impact this will have on the economy and markets and currencies, it's likely not good, but it isn't something to lose sleep over either. The Fed's money machine is massive and they'll just print more if they run into problems. However, for the rest of us, that may be inflationary, though that wasn't a huge issue all the time they were engaged in QE, printing to their heart's content to save the world from economic ruin.

As long as everyone keeps using their money, it's fine. If other countries shy away from the glorious dollar - something that some countries already are doing - it could get a bit rough in the international trade venues. Until very many people, businesses, and nations lose faith in the almighty greenback, we're all good, however. But the Fed will still be losing money for the foreseeable future. Nothing to worry about. They can - and will - make more.

As far as the stock markets are concerned, today was day two of the Mother of all Sucker Rallies which was presented yesterday. Stocks were once again bid higher, with the Dow up more than 450 points. Once again, the afternoon was telling, as sellers took control, leaving the Dow and other indices with reasonable gains.

With the rally ongoing, it might be instructive to concern ourselves with Fibonacci levels, as detailed below.

Fibonacci numbers are often used in technical analysis to determine support and resistance levels for stock price movement. Analysts find the two most extreme points (peak and trough) on a stock chart and divide by the Fibonacci ratios of 23.6 percent, 38.2 percent, 50 percent, 61.8 percent and 100 percent.

Using Fibonacci numbers to exploit the current rally - using intra-day numbers on the Dow - maths out like this:

December 3 high: 25,980.21
December 10 low: 23,881.37

Difference: -2,098.84

First resistance (23.6%): 495.33 points = 24,376.70 (Dow closed at 24,370.24 on Tuesday, December 11; Close enough!)
Second resistance (38.2%): 801.76 points = 24,683.13 (the Dow exceeded this level today, but pulled back below it at the close. Watch for direction on Thursday.
Third resistance (50%): 1,049.42 = 24,930.79
Fourth resistance (61.8%): 1,297.08 = 25,178.45 (this is usually the key, where resistance is very high and a pullback can be expected. If the Dow powers through this level, expect it to go all the way back to where it started, i.e., 25,980.21 (100% retracement).

This should give a signal of when the current sucker rally is about to expire. After that, the resistance points will become support, and if the Dow plummets through them, get ready for another round of massive losing days.

Happy Holidays.

Dow Jones Industrial Average December Scorecard:

Date	Close	Gain/Loss	Cum. G/L
12/3/18	25,826.43	+287.97	+287.97
12/4/18	25,027.07	-799.36	-511.39
12/6/18	24,947.67	-79.40	-590.79
12/7/18	24,388.95	-558.72	-1149.51
12/10/18	24,423.26	+34.31	-1115.20
12/11/18	24,370.24	-53.02	-1168.22
12/12/18	24,527.27	+157.03	-1011.19

At the Close, Wednesday, December 12, 2018:
Dow Jones Industrial Average: 24,527.27, +157.03 (+0.64%)
NASDAQ: 7,098.31, +66.48 (+0.95%)
S&P 500: 2,651.07, +14.29 (+0.54%)
NYSE Composite: 11,943.29, +82.64 (+0.70%)

The Mother Of All Sucker Rallies

The Miracle Monday Rally has been encored by a follow-up, Terrific Tuesday, which pushed stocks further into a positive realm, though despite Herculean efforts, it didn't end that way.

Making the high of the day just minutes into the session, the Dow was up more than 350 points. Apparently thinking their work was done for the day, whoever was hitting the BUY button went out for coffee, a stroll, and lunch, because the Dow spent the next four-and-a-half hours leaking lower, to a point at which it was 200 points down by 2:00 pm ET.

Back at the controls, the clandestine clerk for the Federal Reserve got back to bidding up stocks, sending the Dow - and with it the rest of the indices - back into the green zone over the next hour.

The entire convulsion involved some seriously heavy lifting and an equally resolute effort by the sellers. From the low point on Monday to the early Tuesday high, the Dow rocketed 910 points, but then came back down another 570 before rocketing higher by 300 points. In the end it was all for naught, with the Dow losing 53 points by the closing bell.

Boo-hoo-hoo. It may be Christmas, but January's 401k statements are likely to be carrying a load of coal.

Whatever unnatural force is preventing a complete crash, it has friends in far-away places. All other indices around the world were sucked into the mother of all sucker rallies on Tuesday, saving the world from a long-overdue asset re-pricing that will, as sure as the sun rises in the East, continue to wreak havoc on the investing universe for the foreseeable - and equally, the unforeseen - future.

Bah, humbug.

Dow Jones Industrial Average December Scorecard:

Date	Close	Gain/Loss	Cum. G/L
12/3/18	25,826.43	+287.97	+287.97
12/4/18	25,027.07	-799.36	-511.39
12/6/18	24,947.67	-79.40	-590.79
12/7/18	24,388.95	-558.72	-1149.51
12/10/18	24,423.26	+34.31	-1115.20
12/11/18	24,370.24	-53.02	-1168.22

At the Close, Tuesday, December 11, 2018:
Dow Jones Industrial Average: 24,370.24, -53.02 (-0.22%)
NASDAQ: 7,031.83, +11.31 (+0.16%)
S&P 500: 2,636.78, -0.94 (-0.04%)
NYSE Composite: 11,860.65, -28.64 (-0.24%)

January Was A Dud; February Starts Badly; Markets Due for Breakdown

Call this a "call 'em as we see 'em" post.

Stocks started February without continuation of the "Japan Negative Interest Rates" rally of Friday, falling out at the opening bell and doing little to inspire confidence throughout the session.

The stock market is down and will likely stay down for the remainder of 2016, go lower in 2017 and disintegrate in 2018. That's the optimistic point of view.

There's nothing good in this market. You pick stocks you think have a good business model, reliable earnings, maybe even a dividend, and, then, WHAM! it gets whacked like a mafioso underling who looked the wrong way at the boss.

Take for instance, the case of this stock (ADS), which last week released earnings above consensus, though the top line (revenue) fell a little short. What happened? Nobody is certain, but the stock took a 20% haircut on January 28. There seemed to be no justification for the radical downsizing of the price of Alliance Data Systems, a company heavily involved in online advertising.

That's just a sampling. Things like this happen every day, without warning nor explanation (we looked, and couldn't find a reasonable telling). So, say you had $20,000 tied up in this company. That was Wednesday. As of close of business on Thursday, you have $16,000. There's a couple months off your planned retirement.

Suppose you held it in a 401k or other such pension vehicle. There was absolutely nothing you could do about it, either before or after the fact. You were stuck, like a good sucker at a rigged casino. Thank you for playing. Come again. And individuals do. They come back for more and more punishment. They loved it the past seven years, when stocks went straight up, no matter what. But now, things have changed.

It's still not too late to pull all your money out and invest in silver, gold, cash, and anything else you might need in retirement (canned goods, anyone?).

The US stock markets - and likely, all markets, globally - suck. They suck the life out of investors and then, you get to pay taxes on any gains, and sometimes, on losses. So, suck it up or get out.

Today's closing fake numbers:
S&P 500: 1,939.38, -0.86 (0.04%)
Dow: 16,449.18, -17.12 (0.10%)
NASDAQ: 4,620.37, +6.41 (0.14%)

Crude Oil 31.64 -5.89% Gold 1,128.40 +1.07% EUR/USD 1.0888 +0.53% 10-Yr Bond 1.9660 +1.81% Corn 371.00 -0.27% Copper 2.06 -0.41% Silver 14.35 +0.75% Natural Gas 2.15 -6.48% Russell 2000 1,032.39 -0.29% VIX 19.98 -1.09% BATS 1000 20,713.55 +0.14% GBP/USD 1.4426 +1.35% USD/JPY 120.9405 -0.31%

Dead Money Littering Wall Street as Suckers Flee

When you buy into a stock that refuses to go up in a meaningful way (Pfizer over the past five years is a good example) you have what is known among traders as "dead money." It's just sitting there doing nothing, not earning interest, just kind of lying around.

Now, that might be a good thing during a deflationary debacle like the one we're currently undertaking, so, maybe the dead money issue isn't all that earth-shattering a concept, after all, though, if you're used to the usual 15% returns that Wall Street hucksters promise, money lying around isn't your typical bag.

For the rest of us, those smart enough to stick our money in a coffee can or inside a wall safe, it's all well and good, so long as prices don't go ridiculously higher all of a sudden. There are a slew of misconceptions about money and its uses and usefulness, most of them aimed at baby-boomers with excess cash they're supposedly saving for a child's college, or a wedding or retirement, and most of those misconceptions usually involve keeping your money at work and not lazing around in a lounge chair in the back yard getting a tan.

However, based on the trading (in)activity the past few days, the concept of dead money might just be catching on. Stocks have just undergone a pretty significant rally - first, off the lows of March 2009, and more recently, about an 11% move back to where they now have settled, and nobody seems willing to sell, or to buy. Volume has dried up rather abruptly over the past two days, leaving open the question of whether Wall Street is even relevant anymore.

It seems that the majority of Americans who don't really have a whole lot of faith in the publicly-traded equity markets and have moved, over the past two years, into largely bond-related funds, are more than content with just keeping what they have instead of risking it in stocks. With the small investor clearly out of the market, that leaves mostly professionals and the very wealthy to do most of he trading on a day-to-day basis, but even they have become significantly more risk-averse of late, which means that the bulk of the trading has been left in the rather unstable hands of hedge fund managers and high-frequency traders.

Now, when these boys slow down there's really nothing left to keep markets bubbling, creating a sea of dead money, or more in the vernacular of economists, a liquidity crunch, which is precisely what we're staring at today.

It would seem, after the worst weekly unemployment claims figures since April came out this morning, and retail sales from a wide variety of chain stores showed poorly, that stocks would be sold off rather dramatically, and that seemed to be the case early on, but, buyers stepped in midday to soak up some of the losses, leaving the markets in a rather untidy state of affairs, with all indices down slightly, spending the entire session in the red, on volume that has to be one of the lightest five days of the year.

Truly pathetic, it was.

Dow 10,674.98, -5.45 (0.05%)
NASDAQ 2,293.06, -10.51 (0.46%)
S&P 500 1,125.81, -1.43 (0.13%)
NYSE Composite 7,174.27, -7.87 (0.11%)

Market internals showed a different side of the story as declining issues ran rampant over advancers, 3898-2509. New highs managed to maintain their sizable edge over new lows, 372-92.

NASDAQ Volume 1,704,054,000
NYSE Volume 4,089,902,750

In commodities, the September light crude oil futures contract fell by 48 cents, to $82.01. Gold gained $3.50, to finish at $1,197.20. Silver was up 4 cents, to $18.31.

With the July non-farm payroll report out tomorrow prior to the open, one would have expected a little more excitement, especially in light of the dreary economic data that seems to roll onto the street every day, but there was little movement overall, suggesting that these markets are suffering from a lack of interest bordering on apathy, due to a number of factors, but mostly, distrust, fear, uncertainty of the future and having been burned once too often.

It's the same kind of thing that happens with crooked card games. In the early stages, there a pigeons a'plenty. But, once word begins to get around and a few mouthy types get taken to the cleaners, the game dries up, and the cheaters end up playing penny-ante games amongst themselves, wiling away the hours, days and weeks.

We may be witnessing the initial stages of the final collapse of the Wall Street Ponzi scheme. They may have run out of suckers.