Tuesday, July 10, 2012

Hurdles, It Is All About Low Hurdles (And Short Squeezes)

Most long time readers know that I basically crawl into a shell at earnings season till AAPL reports. I'm a trend dude, and I like the major indexes (obviously SPX and the E-mini) avoiding the individual equity action. It is not that I can't trade stocks (I sometimes do), it is that I prefer to focus or specialize on the broader markets.

Earnings season used to be a joyful time. Markets used to follow fairly predictable cycles, you know, the ones you learned in your economics textbooks years ago. Now post manipulation or post 2008 FASB/regulation elimination things have changed. Earnings are now a not so carefully correlated dance between the Fed, banks and government's wishes that represent the land of unicorns and fairy tales.

Pre-QE if a company cut guidance it was a big deal and the market reacted appropriately breaking out the big black paddle and taking it to the backside of price for said company. A good example of this is with Cummins today. In a non-QE environment there is no levity or trampoline effect that lifts all ships sinking or not.

Where am I going with all of this? Coordinated manipulation of course. In a QE dominated environment (INTC is my favorite example of this) you can downgrade all you want and there are no consequences. On the guidance cut announcement you get an initial spike down and then are back at even or green before the day is over. What have they achieved by this? Lowering the earnings hurdle! 

Follow me here, at earnings they beat, raise guidance and the markets celebrate lifting price. Then at some prescribed time of the year (coordinated with the Fed) they are able to lower guidance (multiple times if necessary without penalty - remember QE) which lowers the hurdle making the easy beat in the next earnings season where they may raise guidance again. Rinse repeat. The analysts are all in on the action as well, but they are just pawns in the game. As for the banks and all of their earnings tricks (repos, adjustments etc,,,), that is another post all together. 

So all is always well in the land of righteous price action for all. But what happens when all is not well as it may be with this quarter? Nearly every economic indicator has been beaten down for months now and things economically are clearly trending down into this earnings season. What happens when a market is so rigged that trend no longer exist? They must create or manufacture them. 

Whatever metric you want to use (I use my gut combined with TA) the SPX honestly IMHO should be near 400, but here we sit above 1300 pretending all is well. The Fed has a slight problem with elevated price, desperately needing more QE, which would be hard to justify without some real fear being generated on your brokerage statement. Something needs to adjust the artificially levitated market they have created. 

Que the shorts! Que the fall. Que the fear. Que the justification to print a few more trillion to keep the illusion alive and kick the can one more time while with each turn of the printing press we fall further down the black hole of debt that will eventually particalize every asset on the planet. 

The Fed must ease again. There is no other option, but they can't just do it just to do it (not yet at least). Their set up has been a 20% fall, get the shorts in line, tease easing, squeeze the shorts for the first 10% and then turn on the liquidity. 

Most know since last August (before they instituted the new "Twist") and when the super congress was in session (total waste) I have been looking for a manufactured fall to make easing more accommodative. Off the 1420 top I believe I am getting my second shot at this call (I was screwed by Twist last time). I'm looking for SPX 1220 to 1170 here which will be near 20% which should be just right to get the presses running again. If you think I am nuts, then see Biderman Blasts The Bernanke Put And Questions QE-Hopers

So that's about it. You have to throw all your years of hard earned knowledge in the trenches out with the bath water and simply follow the Fed. Be prepared for a brief period of panic and then wait for that one huge candle to start the final short squeeze bull trap. I believe the coordinated dance of lowering estimates (or future hurdles), dropping price and then instituting the last great QE squeeze is upon us. 

As for the effect of future QE, I have been discussing the diminishing returns of QE for over a year now as well (as Biederman discussed). Will they be able to drive price to new highs one last time? Only if Romney is elected will that happen, but even then I think odds are really good the top is in (not called just yet). Lord help us all if the Manchurian Moonbat gets reelected. Global turmoil and deteriorating economic conditions (the effect of trillions in stimulus making it to the banks and not to the public) are really starting to effect sentiment thus capping upside action. 

As for Twist (which the new "twist" screwed me last time when they veered from QE) there are dangers for prognosticators like me and traders like you to get screwed again. What could the Fed do to quell the rapidly growing dissatisfied and angry public? What 'tools' do they have in their pocket that can extend and pretend another year? A direct bailout to the sheeple. Not unencumbered, like a blank check, but as recently discussed a direct check to the banks to pay off consumer debt (which in another way is a direct bailout to the banks). 

I am also on record that the first quarter of 2013 will be as long as they can drag this misery out. I'm beginning to wonder if the Fed can pull another year out of their ass or now. I don't think so as the euro zone is finally at its breaking point and middle east tensions are wearing thin.

Be prepared for one last bull trap folks. then the fireworks really start and even if they remove all the hurdles nothing will matter in the next fall.

GL and GB!

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