6/14 Daily Commentary

Jesse Livermore committed suicide in the cloakroom of the Sherry Netherland Hotel in Manhattan in 1940.  "What beat me was not having brains enough to stick to my own game – that is, to play the market only when I was satisfied that precedents favoured my play. There is the plain fool, who does the wrong thing at all times everywhere, but there is also the Wall Street fool, who thinks he must trade all the time. No man can have adequate reasons for buying or selling stocks daily – or sufficient knowledge to make his play an intelligent play."

There are times when you have to put your hands in your pockets or work intently on other projects or hobbies.  There are also times when you have to go against your instinctual pattern and close positions, not because of fear of losing profits but because it is the right time to stop riding the trend.  Friday was one of those times when I went turtle.

The daily technical composite actually advanced today to +22 indicating further rally ahead.

I1 is a composite of composite series.  The short-term timing component developed an 8-day lead during the Japan quake.  Today was a partial validation that the lead still exists because 8 market days from today this series advanced beyond +2, which is a buy signal.  If the market reverses lower without at least several more days of higher prices then the 8-day lead no longer exists and instead I'll be looking at a low 6 days from now, the last day before the series rallies above +2. 

I bought 2% SDS today at 21.63 and 2% TWM at 45.50.  I sold 1% TWM near the close for 45.52.  I hold 1% SOPIX and 1% UCPIX as well.  I still believe that this rally has more legs but the market completed a 3 up at a resistance M/A, so I took a chance.  Any new high gets me out of the short ETFs.

Longer-term I believe that the markets comprehend the corner that Congress and the Fed have painted themselves into.  One of the many flaws of Keynesian economics (sic) is that it assumes that there is an endless capacity to create debt.  Keynes has been the guide of Democratic congresses while the Laffer curve and military spending stimulus have guided Republican congresses.  Both have lavishly increased debt and both are about to be taken over by market forces.  The reason for this iminent event is that the Fed is about to lose control of interest rates, propelling federal debt service into ever-higher realms.  The Fed will lose control because they have steadily increased leverage by acquiring debt (now at 50-1) and if/when the market starts selling then the Fed will be forced to sell faster than the market just to keep it's 50B capital from disappearing.  You can bet that Ben will be jawboning the bond market trying to keep it afloat.  This cycle will be the end of Bernanke unless he can get blessing for another 1trillion QE3.  This is not likely, given the political enemies in congress.  If QE3 does happen next year then the Fed's leverage will be 80-1.  Bernanke's predecessors rarely took it beyond 10-1.  This mess and the fiscal situation are not policy, but acts of desperation.  So currently the Fed supports low debt service costs for Treasury.  After QE2 congress must cut spending plausibly in order for the debt service cost to merely rise with the new debt added.  Without aggressive cuts then debt service will spiral with interest rates.  This dynamic along with similar, more advanced situations in socialist Europe will combine with a slowdown in Asia to create global recession next year.  This is the backdrop of future stock market declines and collapse in sentiment.  The spike in commodity prices over the past 2 years will lead to margin deterioration starting in 3rd quarter. 
So, a timetable of events:
2nd quarter - 4th quarter Japan quake impact on world growth
3rd quarter                      Corporate profits impacted by cost squeeze
3rd quarter                      End of QE2 means reduction in liquidity to hedge funds and higher rates
2nd quarter thru ?            Sovereign debt crisis
3rd quarter thru 2012      Fed leverage in reverse as it deleverages ahead of the market
2012                                China bad loans and over-capacity collide with softer demand
2012-2015                      U.S. fiscal crisis
now thru April, 2012      I1 sentiment is in general decline