Analysis: The Fed Might Have Finally Broken Through To A Potential Recovery


by Dr Joe Duarte
September 17, 2012

Why This Round Of QE May Actually Work

The guys who were right on the bet, made billions, if not hundreds of billions of dollars from the fools who took the other side of the bet. The fools included a lot of big banks and large financial institutions who believed that people that made $14,000 per year picking oranges in California could afford to pay $5000 a month on a million dollar mortgage.

The fools had to sell stocks, bonds, and commodities in order to pay the smart guys. When the fools sold everything, stock prices collapsed, property values collapsed, and the world financial system almost collapsed. That was the crisis. The post crash mess is what we've been in for five years.

After five years, global central banks seem to have figured out what we've been telling our subscribers for years now. The money that went to the pockets of the smart guys, is not coming out. And the money that the central banks have been printing up to now, has only been good enough to let the foolish banks that took the wrong side of the subprime CDO bet repair their own badly damaged balance sheets.

That's the reason that there isn't any money floating around doing the normal things that money does, such as build new buildings, start new businesses, and hire employees. The banks were in big trouble, and without the government bailouts, no matter how unsavory, would have let the world collapse rather than give up whatever capital they had left.

That's where we've been. Now, here is where we think we are. Banks and other fools have filled up their tanks again. They may be close to where they were, in many ways, prior to the crash. They are no longer scared and are looking for something to do, like spur business.

The problem is that they don't have any "spare change" to take chances with, given that all they've been able to do with the central bank money that's already been printed, is to replenish their losses. They are still gun shy. And many might have learned something, although that remains to be seen.

The Fed, like most government institutions is pretty clueless about the real world. They don't have to buy groceries or gasoline like the rest of us. And when they go to work, they get to live in a nicely gilded academic world of marvelous models and discussions.

Eventually, though, a smart banker or two, they do exist, from the real world, peeks into the central bank. When they do, they mention things like, hey guys, now our balance sheets are o.k. but we don't want to be in the same place ever again. Do you think you can print a little extra money so that we can actually lend it out without taking too much risk?

And someone at the Fed, likely Mr. Beranke, seems to have gotten it, which is why the printing presses have finally been turned on into overdrive. Taking things a bit further, this is about much more than just spurring the U.S. economy. It is indeed about job creation, for an unemployed population can become dangerous.

If you believe, as we do, that the Social Cycle turns on how wealth is distributed, and on what the perception for potential advancement is, then two things have happened. One, too much money, around the world, has fallen into the hands of too few. And two, with that happening, it has become clear to the masses that even the small hope that they might have had in the past of achieving some improvement in their own existence, has now been nearly totally extinguished.

The maldistribution of wealth, and the lack of hope of ever achieving wealth, or even improvement in one's own situation, is the cause of the Arab Spring and of all the other conflicts around the world, now and throughout history. The ranks of the unemployed eventually reach hopelessness. And hopelessness reaches critical mass. This is followed by upheaval. Politics is defined as the process through which the available resources are divided. This is Economics 101. What we're seeing everywhere, in one way or another is the process through which the mechanism of wealth distribution is being rearranged. Since all other methods have failed, the most afflicted have turned to violence. This is historically well documented since the beginning of recorded time.

What the Fed's actions, correctly are trying to prevent, is the development, in the U.S., of a series of events in which a set of violent circumstances similar to the Disorder visible elsewhere in the world become inevitable. The Fed can get away with it in the U.S. for a while. Bernanke has gambled and it may pay off. He clearly hopes that it works, and so do we.

What's the take home message? The money that gets printed from now on, has a better chance of actually doing something than the money that has been printed up to now. That's because up to now, all the money has gone to replacing the money that left the vaults of stupid banks and went into the hands of the smart guys who bet correctly against the subprime disaster CDOs.

Is this a good thing? No one really knows. But it is a totally different dynamic which few in the mainstream media and the intelligentsia are speaking of. We like that. This new money, in our opinion, has a better chance to actually stimulate the real world economy, at least in the U.S., than anything that has happened or has been done so far. The alternative would have been to do nothing, and in the process, endanger the global economy further, regardless of its current state.

How do we know? If it weren't so, then we wouldn't be seeing the selling in bonds that we've seen in the last few days.

Can it last? Again, we don't know, and probably won't know for another couple of weeks or months. The one thing that we can say is that whoever wins the White House is going to have a better chance to be an economic recovery hero than Mr. Obama during his first term. Do with that what you will.

The Markets

This market remains a momentum market until proven otherwise.

The S & P 500 (SPX) made new highs two days in a row to end last week. A move above 1500 is the most likely move. That could take a bit of time to set up, though as the market is starting to get a bit overbought. We also expect a fair amount of non-believers start to get nervous in the short term. That could create a dip or two that may be worth considering as entry points.

Chart Courtesy of

The market's leadership has changed some with money moving out of bonds and into stocks. Technology is acting reasonably well, but energy stocks are gathering a fair amount of money.

Chart Courtesy of

The Natural Gas index (XNG) continues to move higher. As with the rest of the market, this sector is increasingly overbought. Note that prices are well outside the upper Bollinger Band, a sign that things are moving just a little too fast. The flip side is that there is strong momentum at work here, which is a big positive for the intermediate term picture.

Chart Courtesy of

We've been running this chart for several days now and the trends are accelerating. Commodity prices (black rising line) are on a tear as bond prices (red falling line) are collapsing. The result is that interest rates are on the rise. The U.S. Ten Year note rose to 1.87% last week, the highest it's been since 5-1-12. The high yield for the current cycle was reached on 3-19-12 at 2.69%. That means that even if this is a move back to the March 2012 levels and nothing more, it still has a long way to go.

More important is the fact that, contrary to the conventional wisdom, the Fed's actions are being seen by the markets as inflationary. Rising commodity prices are confirming that as well, as money is aggressively moving out of bonds and into stocks and commodities.

The stock market's breadth has also improved. More stocks continue to advance than those that decline. The Nasdaq Advance Decline line (NAAD) broke out of its recent consolidation.

Chart Courtesy of

The Nasdaq Hi-lo line (NAHL) made another new high on Friday. This indicator has correctly predicted the current rally.

Chart Courtesy of


The The Fed has rolled the dice. The market's early response has been positive. But there is a lot going all in the world, and trading could get choppy again.

Until proven otherwise, we are in a momentum driven market, where rising prices beget higher prices and so on. Momentum markets eventually crash and burn. Usually they last longer than anyone can imagine, though.

This won't likely last forever, but it should deliver some nice profits for as long as it lasts. Hang on for the ride.

Trading Plan Review

This is a momentum market for the next month or two. We do remain cautious over the long term but the short to intermediate term trend, the next few weeks to months, has swung to the up side.

We have several long positions open in our S & P timing portfolio. Now we will continue manage them and look for more longs to add. It doesn't make sense to chase stocks, though. So the idea is to wait for some kind of dip to buy further.

We will continue to manage each position individually regardless of the overall market trend. We'll keep an eye on the hedges but are in no big hurry to add any to the portfolio for now.

Our energy portfolio is long. Our health care portfolio is long.

We are long in the gold market. We are short in our bond portfolio.

Stock of The Day

Exxon Mobil (NYSE: XOM) Breaks Out As Refinery Bottleneck Squeezes Gasoline Supplies

by Dr Joe Duarte

Shares of Exxon Mobil (NYSE: XOM) delivered a major breakout last week.

Chart Courtesy of

A breakout in Exxon Mobil is not a very common thing. It takes a lot of money to move a stock of that size significantly higher. That's what makes the recent move in the stock more noticeable and important.

The message is clear. Gasoline is big bucks for oil companies. With the U.S. refinery bottleneck going nowhere, integrated oil companies and refineries are in the sweet spot. They are buying oil at a relatively inexpensive price, all things considered, but are able to sell gasoline at ever rising prices, in a slow economy.

The breakout is partially due to the current situation. But part of is likely due to the notion that the economy could improve with the Fed's easing of monetary policy. If that happens, then demand for gasoline would pick up but refinery capacity would remain tight.

That gives Exxon and the oil companies a guaranteed increase in margins. And that is probably the major reason for the breakout. is your own personal trading plan, updated daily. "Market Timing For Dummies" and "Trading Futures for Dummies" offer excellent ways to put together such a plan.

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