Waiting And Hoping For The Printing Presses To Roll

 

by Dr Joe Duarte
July 30, 2012

If The Central Bankers Disappoint Things Could Get very Dicey.

There are four key markets that are setting up for big moves. And when you put the charts together, the only logical conclusion that may be reached is that the market is betting on such a large move from global central banks that the world will literally be swimmingin paper money.

Last week, U.S. stocks and to some degree European stocks took off after European Central Bank (ECB) president Mario Draghi promised that the bank would do something dramatic. Now, every red blooded trader in his or her right mind would have to have a huge amount of doubt with regard to Mr. Draghi's ability to actually do something substantial. But, if you put Mr. Draghi's likely course of action, assuming he actually delivers, with the action that the central banks in Brazil and China have already begun, and if you factor in that the Federal Reserve has also been hinting at some kind of move, you may have something to consider.

Yes, the global economy is in deep trouble. Growth rates everywhere have been slumping. The U.S. GDP was reported to have fallen to 1.5% last week. And China's own growth rate, whether you believe it or not (we don't) has been trending lower, recently clocking in below 8%. Brazil's own growth rates of late have been more akin to those of a developed country. And India, another growth economy has been in a slump. That means that the global economy is now synchronized. And that the global economy is heading lower, together.

The global central banks have printed trillions of dollars since the 2008 subprime mortgage crash. But much of it is either sitting in bank vaults, propping up decrepit balance sheets that resulted from bad subprime bets and the subsequent crash, or has been used by companies to boost their own balance sheets. That means that for all intents and purposes, the Fiat money from global central banks has been mostly dead money.

But what if, and this is a big if, those bank vaults are topped off. And what if the next round of cash from the printing presses doesn't actually go into propping up balance sheets? Now, you've got a twofold situation. The bank vaults can't hold any more money. And the frightened global central banks, fearing that the global economy is about to implode, may be ready to put such an overwhelming amount of money in circulation, that it has to do something?

Think about this and why it is possible. Joblessness is rising. Social unrest is climbing. The Middle East is on the verge of a major explosion. And we are in the midst of one of the most acrimonious U.S. presidential election of all time, in which the stakes are not just about the economy but about where the U.S. heads as a nation, politically, socially, and yes, economically.

If this scribe was a global central banker, he would hit the go button on the printing presses and let it rip in a big way. And that's what the markets are starting to bet on. To be sure, the markets may get it wrong. And if they do, we would expect a significant decline to ensue.

The Markets

So let's look at four charts, starting with U.S. stocks. The S & P 500 (SPX) broke out partially from its recent trading range, closing above the 1385 resistance level. Now, it has to breach 1400. If it does, especially if global central banks do what the markets are betting on, we expect that stocks will be off to the races, perhaps until the presidential election in the U.S. That would mean about a four month rally, fully juiced by easy money.



Chart Courtesy of StockCharts.com


Next, we look at the relationship between the CRB Index of commodities (CRB) and bond prices (USB). Bond prices, at the top, seem to have once again topped out. At the same time commodity prices, especially agricultural prices have been on the rise. This is inflation in the pipeline. And bond prices are starting to react.

When you add the potential for more printed money to hit the global economy, you can see why the markets are starting to set up for some kind of decisive move.



Chart Courtesy of StockCharts.com


The traditional inflation hedge is gold. But after a multi-year bull market, gold prices (GOLD) have pulled back. Now, though, as commodity prices have been rising, and as the spectre of a potentially aggressive reflation is growing, gold is starting to once again attract money.



Chart Courtesy of StockCharts.com


Finally, we look at natural gas (NATGAS). This has been the cheap fuel, and if you will, the deflationary commodity of the past several years. The overdrilling of shale deposits in the U.S. has led to a glut of the stuff. Now, though, companies are shutting down wells. And natural gas prices have been rallying. The $3 level was quietly breached to the up side last week. And the chart has a very bullish posture.



Chart Courtesy of StockCharts.com


Conclusion

The markets are betting on something huge from central banks. It could be a coordinated move between the U.S. and Europe, or something more. But it has to be huge. It has to be so big that it catches people by surprise.

If whatever the central banks do does not meet the criteria for "huge," it is likely to be a dismal failure.

Trading Plan Review

Remain patient but look to move money into the markets, with the understanding that risk is fairly high and that a rapid reversal is possible.

The action last week moved prices to points where stocks are starting to show some strength. We have expanded the potential longs in our S & P portfolio and have changed the direction of our timing sections as applicable. See below for details.

We have several longs in the S & P timing portfolio and have added several stocks to the list. Pay close attention to sell stops. We also have one short position open in the S & P Timing portfolio.

Our energy portfolio is long. Our health care portfolio is in cash but has been given a long entry point.

We are in cash in the gold market but have also added a long entry point. We are in cash in our bond portfolio but have added a short entry point.



Stock of The Day

It's Time To Start Looking At Manpower Inc. (NYSE: MAN)

by Dr Joe Duarte

Shares of Manpower Inc. (NYSE: MAN) failed to impress during last week's rally, suggesting that investors are still not looking for any meaningful improvement in the jobs report.



Chart Courtesy of StockCharts.com


It's time to handicap the employment report. Over the last two months, the number of new jobs created has been dismal, 80,000 last month, and 77,000 and 68,000 in the previous two months. That means that it is plausible to expect some kind of rebound this time around, even if it's just due to revisions, and monkeying around with models and statistics.

But that remains to be seen. Manpower shares have been pretty good indicators of what the market is betting on. They have also been right with regard to the general trend of the report.

But there are some caveats to consider. One is that Manpower, a company that specializes in corporate placement, has a significant amount of its business in Europe. That means that its earnings and outlook are affected by the European economy which is collapsing.

The U.S. economy is not as bad as Europe's, although the growth rate was just a meager 1.5% according to the most recent GDP figures.

As we go along this week, we'll be looking at Manpower, as well as our other back of the napkin indicators to see what we bet on. Last month we predicted a weak report and got it. We'll see where things stand this month.


Contact information:
email: support@joe-duarte.com
Phone: 434 823-8181

 

 

 

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