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The Central Banks Will Save You! – and other Hooks to Avoid

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#1 Russ Winter

Russ Winter

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Posted 03 June 2012 - 09:12 AM

Over the last few days, I have noticed increasing chatter about QE and other Wizard-of -Oz (the Fed) and Ministry-of-Truth (MoT) mucky muck, a Winterism or disparaging term for central bank policies. Although governments’ central-bank-crisis mucky muckisms can’t just be ignored, keying on it can lead you to peril.“Mother of All Hooks” is a must-read article before continuing. Rereading it reminds me that waiting for “Weekend at Bennies” Bernanke to get out of his bathrobe and “take action” is fraught with danger. Bennie has a speech (aka “a hook”) coming up on Thursday that will likely lather up the markets.Rumors from the sistema, a Brazilian term for “the criminal kleptocratic powers that be,” will be disseminated soon enough. Some have pulled the curtain back and seen the game for what it is. Other investors will continue to chase the sistema’s carefully crafted merda, even though others in their congregation have had their head handed to them lately.Regardless, we will no doubt get a test once again as to the effectiveness of the central bank/MoT confidence game. Rather than give real people a little break on their essentials, like fuel costs, the Wizards will pull indicators out of their ass, such as the 2-year TIPs forwards, to give them an excuse to start using meaningless terms like “deflation” as cover to hide and then add to all the maladjustments, economic distortions and baguncas, or messes, they have caused.Posted ImageImage source: TheSoberLookMy hunch is that short of something massive and coordinated from all the central banks, QE will have little effect. Anything less, such as Operation Twist tweets, will be met with disappointment. These markets are addicted more and more to heroin-like interventions. There are massive maladjustments to fiddle with and inflated fictitious capital to support. Interventions can result in large losses to the official sectors involved [Official Sector Losses from the Greek Re-default]. Plus, in a political year, there is opposition to big mucky-muck operations [John Galt Moment on the Fed].In a CNBC interview last week, Mitt Romney clearly expressed doubts and opposition to big QE, and questioned Fed policy and dependency on Wizards generally. So barring another big leg down, I feel the Fed will engage in “policy” tweets, although there is some chance they might do some distortive mucky muck with the MBS housing markets, which just piles more risk on its balance sheet. What I find intriguing is that sectors other than housing are coming unraveled [Three Critical Industries in Capital Destruction Mode], and the Fed seems clueless once again.From a practical trading perspective, there is support in the 1240-1260 area. If the sistema can’t come up with at least a great rumor or something other than retreads on old rumors, we may see that level next week. The U.S., Japan, Germany, and U.K., the key sistema operators, still have free money to borrow to support their Ponzi schemes. Having already bankrupted our children’s generation, they’re now hard at work on trashing our grandchildren and the voiceless unborn.  About half a future generation a year is being thrown under a bus all just to maintain the sistema.On my actionables, I don’t want to be short much with McClellan readings of negative 225 or more. Right now, it’s -128, so a quick follow through to 1260 next week would take the reading into the -200 handle. Such a move decisively takes out the 200-day MA, and often that is a short-term head fake, as the sistema will use more resources and rumors to reverse and screw with the bears. Then the bulls who chased the rumor are clipped.  Short interest for the end of the month is not out yet, but we can extrapolate that it is up substantially. Shorts are cannon fodder for sistema market manipulations, so I am now hesitate to get carried away.Accordingly, late Friday and too late in the session to post in comments, I sold my SCC (retail inverse). Since splitting,  SCC hasn’t been tracking that well, and I would prefer to later use selling naked calls on XRT as the implied volatility premiums are up. I’m only short WFM and long the REIT inverse SRS at the moment. My primary interest in shorting is going to be focused on the discretionary consumer sector (XRT, XLY and higher-end luxury stocks), as opposed to broader indexes. Even before the fiscal cliff, there is also an immediate austerity crack in the government transfer payment scheme developing, as 700,000 are losing extended unemployment benefits. That’s a lot of fresh protesters, too. If the Fed invokes more QE, Joe Six Pack will be hurt even more.Posted ImageI don’t see the energy sector, or even some parts of the material sectors, as exploitable shorts right now. IT IS VERY IMPORTANT TO DIFFERENTIATE within the commodities and resources sector because there is definitely a very hard landing and liquidation cycle under way in China. Longs of industrial metals in general should be avoided; however, some commodities, such as oil and grains, are less influenced by China. In commodities like uranium and solar, China is just getting started. Then there is a question as to whether a Chinese panic and capital flight will benefit precious metals [China and Silver].Posted ImageOther heavily used Chinese commodities, such as iron ore (see chart), still have serious inventory reductions ahead. Any benefit consumers could get from lower fuel prices would evaporate quickly once the Fed does its mucky muck routine. The Fed can’t just hope and pray that China’s hard landing lets them off the hook on energy prices specifically. The Iran premium has also been taken out of the price.Posted ImageIn terms of actionables, I’m comfortable holding about 5% in some carefully selected, deep-value names in the resources area: silver miner Pan American Silver [post on PAAS], strategic rare earth producer Molycorp [post on MCP], solar pick and shovel company GTAT, uranium companies Cameco (CCJ) and  Dennison Mines (DNN), and an uranium ETF (URA) [see "Opportunities in Uranium"]. I’m not looking for home runs here and am perfectly content with selling high implied volatility options against those that are optionable. These stocks are discounted enough to reduce risk. If the market trades further down, I may add to these types of positions.Don’t use these as central bank hook trades but more as distortion trades that reflect the real economic impact resulting from Wizard policy. My focus is to recast investing and speculating using a different type of template. It’s bottom-up stock picking and micro-analysis, which seems to be a lost art in today’s quant/algo days.Don’t use baskets of material ETFs or the tired risk-on, risk-off correlation hooks, but rather differentiate and think outside the box. For instance, keep tracking names like CHK [the CHK Turd Box], as that collapse will open up distressed mezzanine plays. That explains why I would defer on oil services outfits at the moment and proceed on uranium. Euro exits, debt restructuring and devaluations in places like Spain, Portugal and Ireland will present opportunities. This was discussed in the last half of this post. The experience of Argentina was posted, but here are the stories of six currency devaluations. We should develop more of a community on this and put more eyes on it, but using these concepts. That is more my goal on this site.The main indicator to follow is the Treasury Bubble. I’m convinced China is a critical risk here ["Risk of Hot Money Flight in China"], and the U.S.’ “AAA”-safe-haven scam and perp is beyond extreme. Once again, this Bubble seems largely supported by expectations of massive Fed support and not real money. Isto nao combinam. If that’s not enough, now we have a big commercial short lining up against the 30-year (see chart below) and also the 5-year treasuries. At such extraordinarily low yields, there is extraordinarily high risk in holding such AAA-safe-havens. Accordingly, I doubled down on my 5-year Treasury futures short in the 15 minutes after the jobs number, hitting it at about 0.59% yield.The other trade is long Swiss Francs in forex [see "Out of their Tiny Little Minds"]. The peg to the Euro is unsustainable and both the Swiss Franc (COT) and the Euro (COT) have extreme offside spec trades. CNBC late last week was running contrary indicator lead-ins about how to short the Euro. There’s nothing special about the USD versus the Euro and most certainly not against the Swiss franc at 50% debt-to-GDP versus 105% for the U.S.  I haven’t bought yet, but I’m going to move money into Swedish Krona (32% debt-to-GDP) via FXS starting Monday, if the currency is still quiet. There are countries around the world that don’t carry out-of-control, excessive debt-to-GDP of 100+% like the U.S.: Switzerland 51%, Norway 55%, Czech Republic 44% and even Russia 12%. Eyeballing the commodity currencies and oil, I’m not convinced the liquidation is finished. Once it is, I will consider STO of Norway (more later). There’s still USD carry trade out there [COT- Cdn Dollar].Posted Image

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