Wednesday, December 16, 2015

Fed decision and how we got here

I wanted to take a few moments to talk about the fed decision today. Expectations of an interest rate hike were  somewhere near 50% in October, and Janet Yellen decided last minute not to raise due to some weaker than expected economic data.  Now today in December,  the expectations are near 75-80%, which I would agree is the likely chance she will raise today.  Now a few quick points, first off all raising interest rates is not always deflationary, and likewise lowering is not always inflationary, as Europe is now finding out.  You can lower rates as much as you want, to negative as Mario Draghi is doing in Europe and you will find, that if the general confidence in the overall economy is still lack luster, this will never help to spark new businesses or increased economic activity.  Instead it simply forces asset inflation, meaning the stock market will rise despite an ailing economy.  In America now, after 6 years of Quantitative easing has pushed the stock market to all time highs while the economy has remained at a standstill, we may now see a rise in interest rates spark financial institutions to begin pushing money back out into the economy, that they have otherwise been hoarding.  This could actually be very inflationary.

There is always the chance Yellen chickens out again.  If she does, this would certainly be a disappointment to the market as nearly everyone is expecting it now.  The overall effect of the fed not having confidence to raise above the 0% crisis level will likely take its toll on the economy in general. Furthermore, a 2nd fake out would likely send the Federal Reserve's credibility to 0 and having the nickname "Janet girl-who-cried-wolf Yellen" doesn't bode well in the future when she inevitably HAS to raise interest rates.  Also, interest rates have remained the same for 7 years now, and so has general economic activity.  Insanity would be carrying on the same policy and expecting a different result to somehow magically manifest itself, so I think the idea of her not raising is a lot less likely.  

With equity markets at all time highs and commodity markets at decade long lows, we could very well see today's desicion be the beginning of at least a temporary top in stocks, and final bottom in commodities over the next few months.  We are fast reaching a point in commodities,  where producers are making $0 for the products they are producing and debt markets for these companies is approaching a quick and painful rise in defaults and bankruptcies. This is stemming over mostly from high yield junk debt in the energy market, which has begun already crossing over to high yield debt in all commodity markets.  This could easily and quickly expand to all debt markets in general.  Another tick on the side of raising rates today is that if this were to occur and become the next immediate crisis, the fed would much rather be at an interest rate they can then lower from rather than already be at 0% to begin with.

The purge in commodities and producers has and will continue effecting the better companies in the mix as well as the weaker ones.  As everyone's expectations begin to be that all commodity producers will be making nothing in their line of business, their stocks will get priced accordingly, in single digits, at multi decade lows in an all out capitulation like panic to sell.  This will lead to an unbelievable opportunity in some bigger names that run virtually no risk of bankruptcy.   Because when expectations are of earning a penny a share, earning 2 pennies a share is a 100% rise in earnings expctations, and the stocks will likely rise 100% or more as well.  (for a perfect example of what I mean see FCX, and the 50% rally it recently had from below 8 to above 12 in a period of 24 hours).  Both panic and enthusiasm make investors drive prices of assets to extreme levels in both directions, recognizing this is key to not losing your shirt in a quick downturn while everyone is patting themselves on the back, and making fortunes buying other people's junk as they quickly liquidate for "whatever they can get" in a panic.   

I want to now go back and retrace the footsteps of the Federal Reserve and the overall economy over the last 7 years.  In 2007, before the financial crisis was in the limelight,  wall street and the top 1% were busy selling worthless financial products to the public, while secretly betting against them themselves. In 2008 as the crisis loomed nearer, and these worthless products became a problem,  the agreed upon solution was to hand these institutions hundreds of billions of dollars to fix the problems with the illegal activities they were engaged in.  (And in the 7 years since, no one has gone to jail for this).  With the worst economic downturn on the horizon since the great depression, the middle class public did exactly what prudent people should do in such a situation; they sold some of their more speculative investments in the stock market to raise cash, they paid off some of their credit card debt and their mortgage debt, they downsized, they cut back on their spending habits and they kept a buffer of cash available to the best of their ability.  The Federal Reserve rewarded their prudent effort to save cash and cut back on debt by lowering interest rates to 0, making debt less expensive to have (only to the few who were deemed "credit worthy" which basically means "already has enough money to not need to borrow anymore") and making the return on cash savings 0% which actually works out to be a negative rate of return when you calculate increased cost of living and massive bank fees.  So as the prudent middle class public try to spend less and save more, they are penalized by watching their cost of living increase drastically over the last 7 years while their savings increase at 0% or less.  In the mean time, the top 1% on Wall Street who are very "credit worthy" began borrowing money at 0% simply because they can.  (You would too, but as I already explained, you can't)  But being that the overall economy looked rather dismal, and no one really had any confidence the situation would be any better 5-10 years later, there was no interest to start new businesses selling products or services to the middle class who are now determined to save and spend less, so instead, all that money borrowed went into investing in assets, ie, the stock market.  In the 7 years that followed, the middle class languished.  After a period of time, their savings were eaten away by increased cost of living, and high unemployment or underemployment, as many were forced after the crisis to take jobs for a significant cut in pay vs what they made only a few years ago, resulting in them having to dip into their cash hordes or 401ks or credit cards and home equity loans to pay their day to day expenses.  Eventually the pressure was too much and many of the middle class public had no choice but to resort to increasing their credit card debt or home equity loans, or going back to school for a graduate degree and taking on more student loan debt to try and get a better employment situation.  As it currently stands, Student loan debt is about $1.3 trillion dollars, over 150% more than what it was in 2007.  Credit card debt, which paused it's rise in 2007 just under $1 trillion is now back up and close to breaking over that level.  Auto loans have increased dramatically, taking over the subprime lending void left by the housing market and have now also exceeded $1 trillion dollars.  Mortgage debt in this country is also now nearly $14 trillion.  All of this falls mostly on the back of the middle class keep in mind, because obviously the rich can just pay cash for their cars, homes, and education. 

In the mean time, the top 1% who put all their money and then again all additional borrowed money into the stock market, saw a 250% rise in stocks over the last 7 years, which is about the best 7 year performance the stock market has ever had in 198 years since the founding of the NYSE back in 1817.  Now today, here in 2015 the stock market is actually DOWN about 2-3% for the year for the first time since the financial crisis and it looks to most of the Wall St 1%, like it is time to cash out on their winnings and do something else.  Conveniently, right at the same time the Federal Reserve is looking to RAISE interest rates, making it more profitable to be holding cash, while making debt more expensive.  The debt that the middle class has been forced into against their will and their own prudent mindset, due to the Federal reserves policies of trying to force an economic rebound by manipulating the rates of borrowing and saving.  So over the course of the last 7 years, every step the Federal reserve has taken has benefited the top 1% in every way possible, and hurt the middle class in every way possible.  (And thats just the last 7 years, look back over the last 100 years, as I have spent my entire career doing and I assure you, the same basic outline has not changed) So as we look at the problems with the wealth gap, and the left blames big business, and the right blames government (that is assuming those on the right even bother to bring up the subject of wealth gap to begin with)  let us all look at the actual evidence laid before us, because the real culprit in this is, and always has been our money system and how it functions.  

Europe has been endlessly in the news recently as some of it's countries are beginning to default on their massive debt holdings and are rolling over into a depression, like Greece.  I see a lot of people on the right have proudly exclaimed that, "This is what happens when a Socialist society fails".  Ok, I will not argue Greece is failing, I will also not argue that they more often than not, have been more of a socialist society then say, America, or Japan.  Speaking of Japan, that CAPITALIST society, which has 10.3 trillion dollars in debt, which is 250% of their GDP vs Greece's debt of only 175% of GDP, who has been in an economic standstill and has been suffering massive deflation for almost 2 decades, I would argue it is also a "failure".  So one could look also at Japan, and argue this is what happens when a capitalist society fails.  Hmm, pretty similar. So clearly one can take away from this that the "answer" to our problems is not at all a debate of capitalism vs socialism.  Throughout Japan's history, and Europe's as well as our own, we have all had a fair share of politicians in power that have been both on the conservative right side of things, as well as the more liberal left.  Despite the best efforts on either side, here we still are.  So the meaningless debate over republican vs democrat, as if your guy getting elected will magically fix everything and the other guy will always be "Hitler", is also pointless.  The simple fact is, the barometer, the yard stick, the unit of measurement for which we judge all things for which all economic activity calculated, for which wealth, minimum wage, spending, budgets, jobs, welfare benefits, every aspect of everything is calculated, is the US dollar; our money system.  If you want to live in a world where politicians can't spend $4 trillion dollars on illegal wars in the middle east, where governments can't endlessly borrow money to fund it's own bureaucracies, where the richest 1% don't have access to 100% of the money supply while everyone else gets trampled, where minimum wage keeps up with the cost of living, where a dollar spent as a consumer is equal to a dollar earned as an employee is equal to a dollar earned to the investor is equal to a dollar earned by the CEO, across the board, linear for small businesses as well as large and individuals, then you need to realize who your real fight is against.  The money system itself, not the specific politicians, not the economic system.

In conclusion, no one really knows what will happen today but it looks as if NOT raising rates today will be a massive disappointment. I think the likelihood is they do raise, and I described a likely scenario going forward if that is the case.  What happens today will paint the picture of the next few years to come and the general trend going forward, whatever that may be.  We will find out soon. No matter which way this goes, at 2pm EST today, will be the most important event for the economy and financial markets in almost 7 years.

-Jonathan M Mergott

Friday, December 12, 2014

Jingle Bells

...Market sells (off), Oil lays an egg.  Oh what fun it is to trade an algorithm run financial market.  (I was never much of a poet.)  Well, boy oh boy do we have some interesting things to address, so we will dive right into it.

We have to talk about oil first.  As I write this, oil just broke 59, after breaking 60 last night.  Now down to $58.60/barrel.  Holy crap is all I can say.  In May of this year, oil was 107/barrel and it has now been roughly cut in half in 6 months.  This absolutely amazes me beyond anything else happening in the market right now.  Actually, scratch that.  What absolutely amazes me the most, is the amount of people who have NO CLUE what kind of implications this has.  I saw Rachel Maddow post a pic on Facebook a few weeks ago of a screen shot of a Fox News Broadcast.  The headline was "Is Falling Gas Prices Bad for the Economy?"  Her comment was something along the lines of "4 years ago Fox News was blaming high gas prices on Obama, now they're saying it's bad for the economy!"  Then she laughed and implied that Fox News was a complete joke (Which I don't disagree with, but so is MSNBC) Now, I'm not trying to get political or stir the pot up.   Both sides are full of shit and have no idea what there talking about.  But the point being made by Fox, was the DEFLATIONARY aspect of oil crashing as well as just about every other commodity out there which on avg have fallen about 30% or more recently.  Which certainly should be the major concern in this situation that her and the rest of America should worry about.  If they were capable of thinking past step 1 in any situation.  But I can't even fault Rachel.  She's a TV news reporter.  Jim Cramer however, who is talking everyday on CNBC about how great this is for the avg American, and is therefore WILDLY bullish on stocks, seems to think that the $200-300 a month the avg American will save on gas, they will then take and go buy stocks with.  Which first of all, HAHAHAHA!  Are you serious?  Do you really think that's where the money is going?  IF the avg American saves any significant amount of money due to lower gas, first and foremost, it will go toward paying down debt.  But even if it didn't go to that, the amount you are saving in gas is likely just now evening out with the amount more you have already been paying for health insurance.  But even if every penny of that went directly into stocks, it would not account for much in this multi trillion dollar financial system.  Shame on you Jim Cramer, you've been at this too long to say asinine stuff like that.  You've worked for Goldman, you manage millions of dollars. You should know better.

Now if oil is down 50% in 6 months, a natural thing to assume is that oil companies are making 50% less money now than they were 6 months ago.  But that's not the case, most people don't think about the cost of it.  So lets say that an oil company can produce a barrel of oil for $25.  At $100/barrel they are making $75 in profit.  If oil than falls 50% in 6 months and is now $50/barrel, their profit is now only $25/barrel.  Their profit dropped by 66%.  In 2012, Exxon earned $45 billion.  If that profit dropped 66% its now only $15 billion. I know, I know, "Only 15 billion".  Believe me, not me, or anyone else on this planet (except for maybe the politicians in Washington)  are crying over the oil companies profits, that's not the point.  The point is, that's $30 billion dollars of money that won't be in the economy anymore.  And that's just ONE oil company.  That far exceeds any benefit to the economy an extra $200-300 dollars a month the avg American will save.  Also, lets face it, if Exxon makes 30 billion less than they did last year, who do you think takes that hit?  Will the CEO get a reduced salary?  Will the board of directors get less stock options this year?  Hell no.  They are going to fire employees.  Starting always with the low to mid level jobs, of course.  And it won't just be them, but all the other oil companies or any other company who has taken a similar hit to their balance sheet due to falling commodity prices and the effects of DEFLATION.  And do you know who that is?  The avg American.  So now you're going to save a lot of money on gas prices, by not having a job to go to to begin with. Nothing is ever an isolated event.  And if Rachel Maddow, and Jim Cramer, and the rest of the world that think similarly realized that, maybe they would be as concerned about this as I am.

Below is the monthly chart.  I kept it simple, there's nothing to see in terms of technical indicators, you can pretty much get the idea, its all going straight down.  At this point 55 is a shoe-in, and likely if that happens, the momentum and the algos will probably send it down to 50.  If that level gives way, there's not much in the 40s in terms of support.  It's basically right down to that 40-35 level which was the lows in the financial crisis.  As far as Brent is concerned, they are reaching closer to par, and I suspect if 50 is reached and broken they will probably get there just below it in the 40s.  Ladies and Gentlemen, there are no excuses that can be made.  This oil chart is downright devastating.


Enough about oil now, there are other markets, but it does tie into a common theme.  You guessed it, DEFLATION.  So Europe is falling apart, and after years of talk, Draghi has said they will begin buying assets in their own QE attempt.  The Euro is collapsing and the dollar is soaring for reasons that some foolish people seem to believe are fundamental, or anything other than the fact that the Euro is collapsing along with most other currencies.  (Except gold.  In terms of every other major currency except dollars, Gold was actually UP this year.)  The dollar continues its reign as the cleanest shirt in the laundry pile.  Further East, Asia is slipping as well.  We seem to be the only ones immune to it...for now.  The SPX is beginning to falter.  Currently we are trying to bounce off of support at 2020, which is also where the 50 day MA is, so this level is important.  I suspect if this were to break down, any rallies will be capped at around 2040.  If 2020 breaks, 2000 will come soon enough.  If that level there and at 1980 can't hold, its about 100 points down to 1900-1920.  If that fails, it's another 100 or so down to 1820.  This looks like it may give us a nice trade from the short side but it probably needs a little more time to clearly unfold. 

Lets take a quick moment to look at gold which seems like it is trying to do something right now, but no one seems to have informed the gold miners of that.  Gold broke the all important 1180 level last month and dropped down to 1130, as I suspected at the time it's turning out to just be a bear trap that rebounded back above 1200 shortly after.  I realize that it's not over yet, and gold could still fail here and fall lower, but when you have a major break of support like that, if it was going to break sharply lower, it would have done so and not been holding on for a month.  Recently, silver has been outperforming gold, and the GDX has outperformed the GDXJ.  Which is certainly interesting.  Silver out performing gold typically occurs when the metals move into a bullish phase, and the GDX outperforming the GDXJ typically happens then they are moving into a bearish phase.  So, no clear direction in the gold market.  And being that the assets have been headed lower for the last few years, we MUST assume the bears still are in control of this market until it shows us otherwise.  Christmas is not usually a good time for gold.  The low volume typically sees it slide till the end of the year.  I would not be surprised if the metals made a new low before the year ends.  I'm almost 100% sure the miners will.  But I suspect come Jan, things will be very different.  We will have to wait and see.  Here are the charts for the GDX and GDXJ.  



That's all for now guys.  Keep your eyes on oil, which is now 58.02, about to break down further.

****UPDATE**** Oil breaks 58, now 57.36.  Down over 4% today.  We will likely hit 55 Mon or Tues.

-Jonathan M Mergott

Monday, October 27, 2014

Under the weather

The title of this post has nothing to do with the markets.  It's me that's under the weather right now but the market trades on, and so must I.  So here's whats going on.

Oil is in focus today as it went to test the double bottom it made at 80.  As traders say in this business, double bottoms hold and there is no such thing as a triple bottom.  Oil confirmed that saying and broke below 80 moving down to 79.40, bouncing to retest 80 and failing there so far which is likely what sent the market down.  Stocks, which opened lower already don't care an hour and 45 min now into trading and after being down about 80 points a few min ago, the Dow just turned positive.

Gold and gold stocks have done nothing but continue to disappoint.  In terms of what I said earlier about triple bottoms, well watch gold carefully because the lows at 1180 very well might fail.  The nice rally the metal had off of that level and the consolidation and drastic under performance of the miners is looking less and less promising.

So as a trader your stuck in a weird position as the market indices have taken off skyrocketing and the alternative assets like gold are a stick in the mud.  So we must look for individual stocks.  So here is what I was buying on Fri and why.

First up, Burger King (BKW).  BKW gapped up to 34 then slid down to fill the gap, which it did and caught perfectly on trendline support and the old resistance (now support) at 28.  Bounced nicely off of that level and gave us a nice bullish set up.  My initial target for this is 34, but I am not looking to blindly sell it at that level unless it rockets up there in the next couple days and stops dead.  Then I will sell and wait to see what happens next.  If it breaks through, I'll be back in.  If it steadily moves up there and everything still looks on the side of the bulls, I will have no reason to sell there until that changes.  We will see soon enough what it feels like doing.


Next thing I was buying was Blackberry.  (BBRY...I know right?  Who the hell wants BBRY?)  I do.  Same sort of bullish setup.  10 and 20 day MAs crossing higher and both crossing the 50 day.  That nice little consolidation it is making right above the 50 day is making me believe this thing will likely rocket higher, and it can do so quickly (which is why I like it).  Resistance comes at 50 cent incriminates up  as you can see, 10.50, 11 and 11.50.  But thats really just the start.  I think a move to and above the 11 area is likely and if so, it could run up to 13-14 easily.  (nice 30-40% profit on a 10 dollar stock).  If I back the chart up a bit, you can see how 18 is even plausible over a longer time frame.  So this is one that could be big profits with relatively little risk at this level.  I iniatally thought this would look fine so long as it holds the 9.50-10 level.  This morning it was sent down to 10.08 and rocketed back higher, now at 10.40, renewing my confidence in it.  I think this level between 10 and 10.50 is what will decide whether bulls or bears are in control, but I obviously feel it is the bulls now.




That's all for now.  As I curse the fall/winter season and the fact that I live in a place that experiences it, I will be raiding the medicine cab for a remedy.  Remember, today is Monday and Monday's can be tricky and deceiving.  Oil will likely dictate this market for now (which is now BACK over 80 at 80.60 now.  It's a MIRACLE!!! Watch to see if this holds or falls back to make yet another lower low)

-Jonathan M Mergott