15 Sep 2012
10 Sep 2012
It isn't very often when you can pick a date in the future where you know that "something" is going to happen to the US stock market. But this time it's different because we do have a couple dates coming up and yes....something's going to happen. The question as always is... just what?
Most of you already know what's coming down the Pike. On Thursday (tomorrow) the ECB should/could lay out some idea of what their bond buying program would/could look like. Then we get the non farm payroll report on Friday. But those are just warm up pitchers for the "big" news that will hit on Sept 12 and 13. On the 12th the German court will decide if indeed their constitution allows them to even join in the ESM. Finally on the 13th, Bernanke wraps up a two day FOMC meeting where 80% of market participants believe he will come out with further measures to move the economy along (more printing).
Well as we know, on Thursday Mario Draghi came out with the blueprint of his plan to buy sovereign bonds. He had taken the steps necessary to say “all the right things” such as the money would be sterilized, and that absolute following of the rules by the borrowing Countries must be upheld. Well the result was a market that was up some 225 points by midday on Thursday.
Here’s some more of what I had to say Wednesday…
So that much we do know. What we don't know is
1) will the Germans go along with the plan, and
2) how much and of what type of stimulus Bernanke unveils. Now, here's the issue, which prompts us to say the market will do "something". If the Germans vote down participation in the ESM, moods are going to sour in a big big way. Basically the whole Mario Draghi plan goes right down the toilet and Europe is tossed into chaos. Then if by some chance that's followed up by Bernanke doing nothing, or even just not "doing enough", we're going to see the market puke. We could easily see a 20% drop.
On the other hand of course if the Germans go insane and vote in favor of the ESM, AND Bernanke tosses up more stimulus than anticipated, we will indeed see the market take off, and will quickly challenge the old highs. That in a nutshell is the gamble the market is playing as we speak. They don't want to be out of the market and miss a great run up, but they're afraid to be in "too big" because the disappointment factor would be huge.
My take is and has always been that Bernanke and the FOMC lugnuts are going to announce more "accommodation". It's his only choice. Right now, QE3 which is what the "operation twist" is, is still in effect. Yet today FedEx warned that global slowing would cause them to miss estimates. They had to lower their earnings guidance. The day before the ISM report came in below 50 for the 3rd month in a row, signaling contraction. Unemployment hasn't budged. Initial claims still hover over 350K a week. All this while a stimulus program is in place! Am I to think the Fed will sit on its hands and watch the economy fade into wreckage? I don't think so.
Bernanke is no different from a lot of lunatic bankers. He told us housing wouldn't ever crash. It did. He said it was hard to see the economic meltdown, while silly newsletter writers such as myself saw it years before it happened. He said he studies the great depression and would know how to avert another one if one ever showed up. One has and he has failed to fix it. So now as the economy rolls downhill again, he has but two lowly choices. Let the economy crash, take the lickin, and heal itself....or Print up gobs more money and put on the show that things are better by kicking the can down the road. I suggest he punts that can for all he's worth.
The German vote is simply a guess on my part. I think it really boils down to 1) the Germans go with the plan, the European Central Banks takes lessons from Bernanke and starts a printing binge, or 2) they say 'no" and Europe dissolves into a logistical mess. Greece and Probably Spain pull out of the Euro, and all manner of hell breaks loose. Given those two scenarios, I'm guessing that they do say "yes" and then we have a coordinated stimulus plan on both sides of the Atlantic. The economies will show some activity and the Central Bankers live on to kick the can another day.
Now that we’ve seen the Draghi outline of the ECB maneuvers, the one thing that caught my attention the most was that over and over in his delivered speech he repeated the news that all the Countries would have to follow the rules they put in place. This was in direct response to the Bundesbank President who dissented on the original plan because he felt that Countries would take the money and go party like nothing had ever happened. With Draghi repeating the mantra that the Countries would have to tow the line exactly as Brussels laid them out, it was a pretty clear signal to me that the final “German hang up” was laid to rest.
Yes we still have the results of the German vote on the constitutionality of Germany belonging to the ESM in the first place. My guess of course is that yes, they’re going to wink and nod, tell the people that since it’s sterilized and Countries will adhere to strict guidelines, we are indeed allowed to go along with this.
That simply leaves Bernanke, and I feel that he too had put out enough press at Jackson Hole that indeed he’s coming out with “something” for us. So all the stars are falling into place for a final hurrah push. A coordinated push by Central banks on both sides of the Atlantic to “do something.” What and exactly how much is the final question.
If indeed we do get all this and so far it looks like it’s coming, we should see the markets run up strongly. There’s a good chance we even threaten the all time highs set in 2007. But then what? Is the European plan going to work? Probably not. Is more Fed debt piled on all the debt they already hold going to magically fix everything? Probably not. We’re going to see a spike in economic activity for sure; trillions of dollars often create a short term party. But we’re also going to see inflation, the biggest German fear.
What this all boils down to is this… If they don’t pass all this, the market’s going to tank. If they do it’s going to rise, but more importantly, Gold and Silver should finally break free and start another very strong leg higher. While most of us don’t trust the SLV or the GLD, they’re still functioning and could serve as a vehicle to catch a big move. Naturally we much prefer physical, and if you think that they’re going to come together on the 12th and 13th, pass all this bond buying and more QE… this could be the last chance at getting a decent price on both.
Some will ask, “Why buy gold and silver instead of stocks?” That’s not the right question folks. We ARE going to buy stocks; we want to catch this wave. But when stocks do their thing and then run out of gas, the Euro is still a mess, the US economy didn’t recover, then there’s nothing left and down they’ll come in maybe one of the biggest bear markets of our lives. Gold and silver however will defend against that. Inflation will see to it.
So to wrap up, we want to lean long into the insanity of global Central bank printing, but we want to continue to amass Gold and Silver because they too are going higher, and they won’t crash back down when equities do.
This is the final hurrah. The grand finale. Their last desperate attempt to keep the wheels from flying off. They know it. The market knows it and you know it. We need to benefit from it, and then jump off and hide in the safety of precious metals. This is truly a significant historic event. Bring the popcorn it will be quite a show.