The price action is incredibly interesting so far this week.  Here are a few thoughts, including some follow-up on issues I've mentioned previously.

Bank of America:  I had previously mentioned that BofA (ticker BAC) was effectively bankrupt and trading as such, except with an idiotically high stock price.  Although my short-term timing is often hilariously bad, in this case the stock has gone straight down over 10% from almost the moment I wrote about it.  There has also been speculation that the upcoming Wikileaks release of bank information will be from BofA.  Whether or not that turns out to be the case, this stock is still a great short if one can take a lot of volatility.  Anyone who owns this (or any other commercial bank) stock is a fucking moron.

General Motors:  My opinion that GM (ticker GM) was a good medium-term buy on the open of the first day of trading hasn't proven to be terribly impressive so far.  The offering has suffered from a fair amount of indigestion as many who managed to get in on the IPO seem to have taken a quick profit in the stock.  On the other hand, my cynicism seems to have been well founded as the stock has yet to trade down through its IPO price of 33 and is now rallying back, even in the face of a declining market.  My short-term timing of purchasing on the public trading open was admittedly crap, but my opinion that this is a good medium-term buy is starting to look better.  The jury is still out on this one.

Consumer Stocks:  If there is one thing propping up this market, it's consumer stocks.  The best measure of this is SPDR S&P Retail ETF (ticker XRT).  With the economy getting worse again and the consumer increasingly strapped, to say that this is hard to believe is quite the understatement.  However, as the old saying goes, "The market can remain irrational longer than you can remain solvent", so I wouldn't be looking to fade this yet.  This sector has upward momentum and a life of its own, similar to tech stocks back in 1999/2000.  At some point, it will all end in tears, but I'd need to see some serious proof of an end to the momentum before shorting this sector.

Oil:  Oil is whipping around as much as two percent a day.  This is a crazy amount of volatility for the biggest consumable commodity market in the world.  At the same time, the net movement in Oil is very small.  It's been trading around $83 to $85 a barrel for quite a while now.  This kind of volatility with little net price movement is indicative of something that's trying to digest two strongly competing factors before making its next big move.  In the case of oil, the competing factors are quite clear:  inflationary printing of fiat currencies vs. deflationary economic forces reducing demand.  I have no strong opinion on the direction in which this will eventually resolve; however, I'm of the opinion that if oil breaks down, the stock market will collapse even more strongly (and largely for the same reasons).

Precious Metals:  What can one say?  In the face of increasing stock market weakness, gold and silver have taken off again.  This is a clear indictment of global monetary policy.  There are also serious supply/demand factors at play, especially in silver.  It looks like some very large players may be standing for December delivery at the COMEX (the primary US metals exchange), which has the potential to cause a short squeeze of epic proportions.  If you're not reading the precious metals commentary at Along the Watchtower, you're missing out, as the author has been so perfect in his market calls it's spooky.

The stock market is hanging by a fraying thread.  The only thing holding it up at all is Fed monetization and some vague hopes about holiday sales.  If it collapses, the question becomes whether other risk assets will collapse along with it.  This goes back to the question of whether a 'wealth preservation' strategy or simply holding cash is the best option.  With all western nations monetizing as quickly as they can get away with, I still believe wealth preservation will win out over the long run.  In the short run, however, a sharp downward move in the stock market would likely lead to a similar move in commodities, especially oil.

Posted by: Hermit Dave at 02:10 PM | No Comments | Add Comment
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Even with the holiday week (including today's half session), there was some interesting movement in the markets.  The US Dollar was much stronger, due to the insolvency issues in Europe, yet commodities were still very firm.  This is rather ominous for inflation.

The stock market still feels like it's poised for a sharp drop, but the Fed will be injecting approx. 35 billion dollars of monetization in the coming week.  The problem is that, with so many holes in the global capital structure, even 35 billion may not go nearly far enough to keep propping up stocks.

The current state of our fund battle:

The Wealth Fund is back up about 2% over the Investment Fund.  Also, the spread between consumable commodities and precious metals has come in a fair bit.  Both these movements are what we should expect over the longer term, although there is a chance that silver outperforms drastically, due to ongoing supply/demand issues.  For those with limited wealth to preserve (or those who are willing to accept the increased risk of non-diversification), silver is likely to be the best place to keep it for a while.

No changes to the Bonehead Ben Bernanke betting game.  See last week's post for odds.  I hope everyone is having a good Thanksgiving holiday.

Posted by: Hermit Dave at 11:13 AM | No Comments | Add Comment
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This week saw some strong early movement to the downside followed by consolidation and a pop into the GM IPO and options expiry.  With the market pegged into the Friday close due to options expiry, and the GM IPO not acting terribly well, it feels like we might see some more downside volatility early next week.  On the other hand, short holiday weeks are usually good for advances on light volume.  So, for the short-term, flip a coin and hope for the best.  Current results for our funds and their components:

Not a whole lot of net movement, obviously.  The most interesting thing here is the increasing divergence between consumable commodities and precious metals.  Oil and foodstuffs were sold heavily most of the week, while gold and silver sold off, then consolidated.  While this kind of divergence can continue for a long time, it seems unlikely that DBC can continue to move lower without other risk assets selling off as well.

On to the Ben Bernanke betting game.  What will be the fate of Bumbling Ben by the end of next year?  Place your bets:

• Strangled by Ron Paul -- 1000 to 1
• Hung for Treason -- 100 to 1
• Commits Suicide -- 75 to 1
• Killed by bankrupt lunatic -- 50 to 1
• Dead by other means / natural causes -- 35 to 1
• Fled the country -- 25 to 1
• Under indictment (or already jailed) -- 10 to 1
• Forced out of the Fed but free -- 3 to 2
• Still selling America down the river -- 3 to 2

As the GOP is starting to make some real noise about the Fed, I've increased the odds that our favorite criminal is forced out and decreased the odds that he's still thieving away.  I've also added a generic category for his demise because, well, hope springs eternal.

Have a good weekend.

Posted by: Hermit Dave at 12:42 PM | No Comments | Add Comment
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Regular Zero Hedge commenter "Turd Ferguson" (if you don't know where that name comes from, well, too bad) has started his own blog.  TF is a precious metals fanatic and very much into the semi-conspiracy theory of market manipulation in same.  I say semi-conspiracy because some of the manipulation is so well documented as to be proven, while some is a bit more 'out there'.   Unlike many gold bugs, however, TF is very smart and methodical in his analysis and worth reading.

His new blog is called Along the Watchtower, and I'm adding it to my blogroll.  With the continued devaluation of global fiat currencies, and thus the increased prominence of gold and silver, it's worth keeping up with a blog that is dedicated to precious metals.  I haven't included one before because, quite frankly, most gold bugs are batshit insane and have the writing skills of 8-year-olds on a sugar high.  It's good to see someone who can address the subject in a rational and readable fashion.

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The GM IPO is pricing today.  Bloomberg Businessweek has a good summary of the deal.  This is going to be a huge event, and will be very closely watched by everyone involved in the markets.

I think it's a no-brainer to buy the stock at the open of public trading tomorrow, almost regardless of price.  There are just way too many powerful interests that need to see this offering go well, and for the stock to perform well, at least for a while.

This would be a pure cynicism play, with no regard for the fundamentals.  As I've noted previously, fundamentals are almost entirely meaningless in the current market environment.  This will eventually change, but with an IPO that's this important, there is almost no way in hell that the stock price will drop for a while.

The broader market could do almost anything.  I've seen markets rally strongly on a big, successful IPO, and I've seen markets sell off as a big IPO sucked the air (and money) out of everything else.  But I think that, for the medium term, mindlessly buying GM is the correct thing to do.

Posted by: Hermit Dave at 11:47 AM | Comments (1) | Add Comment
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In light of the continuing collapse in risk assets (although I'm sure this very post will cause the collapse to stop), I think it's instructive to look back to see where the last rally started.  QE2 was proposed, and started getting priced into the markets, at the end of August.  Here are the levels of the assets I'm using for the fund battle as of August 31, and their increases as of the date of the QE2 announcement:

If the entire recent rise in risk assets was speculative, these are the levels to which we should fall back.  Given that the Fed was still doing QE1.5 during this period, and is now on QE2, I would expect to stay above these levels, all other things being equal.

Of course, all other things are not equal, and we've seen continued economic deterioration since the end of August.  Also, Europe is having major issues, with their attempts to paper over the problems in Greece, Ireland, and elsewhere beginning to fail.  The inflation vs. deflation battle is still raging on, more strongly than ever.

Unless and until the Fed is forced to stop monetizing the debt, I'm going to stay in the inflation (wealth preservation) camp.  Note that under none of (what I believe to be) the possible scenarios would I be in the investment camp.  To me, the choices are between cash and wealth preservation.  At the moment, cash is winning out, as all risk assets are declining back towards the August launch point.  It remains to be seen how much of the rise since then was speculative, and how much (if any) was actual inflation.

Posted by: Hermit Dave at 10:06 AM | Comments (6) | Add Comment
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It was a wild ride this week, especially in commodities.  Everything peaked  on Tuesday, and at one point the broad commodity complex was outperforming the stock market by about 5%.  Then the exchanges started to raise trade margins, and speculators were forced to post cash, reduce, or close positions.  The result was a whopping sell-off that kept going all the way through the close today.

As for QE, it looks like a case of buy the rumor, buy the news, and sell the living shit out of the actual event.  QE cash injections (POMO) will be an ongoing thing for the foreseeable future, but if today is any indication, the Fed has been frontrun many times over.  The second half of this week took a lot of froth and short-term speculation out of the markets.  The start of next week will be very interesting, as it should be an indication of how much speculation on QE remains.

Results to date for our fund battle:

The wealth fund is still a bit ahead of the investment fund, but the difference is down to about one percent.  In the short term (especially early next week), the relative performance is likely to be based on how much speculation remains to be shaken out of risk assets.  In the longer term, I'm still a firm believer in wealth preservation over investment.  That won't change until the Fed stops debasing the dollar.

No changes to the Bernanke betting game.  See last week's post for the odds on the fate of Bernanke by the end of 2011.

Posted by: Hermit Dave at 01:48 PM | No Comments | Add Comment
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Another major market bell-weather, Disney (ticker DIS), just reported terrible earnings, missing on both top (revenue) and bottom (profit) lines.  While Cisco is an indicator of the health of the technological infrastructure segment of the market, Disney reflects the strength of discretionary consumer spending.  The stock, while holding up much better than Cisco, is down significantly in after-market trading (at the moment -- the situation is highly volatile).

My commentary here is identical to my earlier commentary on Cisco.  Stocks are a terrible investment.  Stick with wealth-preservation strategies.

Posted by: Hermit Dave at 01:12 PM | No Comments | Add Comment
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Cisco (ticker CSCO) came out with earnings last night, and the top line (revenue) was a disaster.  The stock is absolutely crushed today -- down about 16% at the time of this post.  Cisco is a bell-weather stock:  as one of the largest economic infrastructure companies in the world, they are an excellent indication of the overall health of the markets.

Collapses in Cisco have presaged both recent major bear markets.  If one had used Cisco as a market timer, one would have done quite well on exits prior to broader market collapses.  That being said, this time around is likely to be different, with the Fed printing money through QE.

Cisco is telling us that the economy sucks and that the market is overpriced.  This is no surprise to anyone paying the least bit of attention.  However, the broader market is no longer trading on anything remotely resembling fundamentals.  With the fed doing QE POMO (cash injection) operations starting (again) tomorrow, the market is likely to stabilize and start moving higher again.

So, should one buy stocks?  Absolutely not.  As I've noted repeatedly since the start of QE2, the stock market is a terrible place to put one's money.  Cisco's results merely clarify the broader economic picture, and reinforce my view that an investment strategy will massively under-perform a wealth preservation strategy.  Stick with gold, silver, and consumable commodities and let the Fed and the stock market jerk themselves off.

Posted by: Hermit Dave at 10:51 AM | No Comments | Add Comment
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Bank of America (ticker BAC) is a fascinating stock at the moment.  It's trading like a bankrupt penny stock, but it's priced around $12.50.  There's huge volume and extremely violent price swings.  On any rational basis, BofA is bankrupt, but it's being propped up by the Fed.  At some point, it almost certainly has to go, but God only knows when that might be.  If you have an extremely strong stomach for volatility it's a great short, but you have to be prepared to take the position up the ass for a while.

One way to try capture value in the market is to trade around the relative valuation of gold, silver, and DBC (the three components of my 'wealth-preservation fund').  If we're treating gold and silver as alternate currencies, and DBC as our inflation benchmark, we can expect that (in the long term) they should move roughly in tandem.  In the short term, however, there can be a lot of price volatility.  The idea would be to sell gold and/or silver if they get too far ahead (in percentage terms), and buy DBC with the proceeds.  When the precious metal(s) came back into line, we'd deallocate from DBC back into gold and/or silver.  This strategy would have worked very well during the recent silver ramp-job as it got way way ahead of both DBC and gold.

 I love Mish's writing and he's a valuable source of information, but at some point he's going to be carted away to a rubber room screaming 'There is no inflation!' as gas hits $10/gallon.  This is a perfect example of the difference between theoretical and practical economics.  In Mish's theoretical monetary terms there may well be no inflation, but it certainly exists for the average person.

For real-world examples of practical economics, one can look to the earnings of producers of consumer goods, and expect to hear the term 'margin compression' a lot in the near future.  Denninger is ahead of the game on this, with the earnings results of both Dean Foods and Campbell's.  In short, their input costs are way up and they have no pricing power due to the dire circumstances of the average consumer.  Result:  stock goes into the toilet.

Posted by: Hermit Dave at 10:52 AM | No Comments | Add Comment
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My earlier post on Mr. Market calling Bernanke out on QE couldn't have been timed any better.  I top-ticked today's spike in precious metals to almost the exact fucking minute.  Now, the larger picture still holds, but damn, that was impressive short-term timing on my part.

I wonder if I can get a job producing the covers for Newsweek.

Posted by: Hermit Dave at 12:21 PM | No Comments | Add Comment
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I thought it was relatively simple to foresee the long-term effects of the Fed's QE policy.  Well, it turns out that Mr. Market has no intention of waiting for the long term.  In the six short days since the announcement:

• Silver has gone vertical.  It's now up over 16% and being aggressively bought on the tiniest pullback (more on silver coming in another post).
• Gold is up over 5%
• Broad-based consumable commodities are up around 5%, on average.
• Trade and currency wars are already starting:  China is downgrading  US Treasury Debt and starting to enforce capital controls.  Other nations are telling us to go fuck ourselves in a variety of ways.

Zimbabwe Ben has completely screwed the pooch.  At this point he's trapped.  If he changes his mind on QE, both the stock and bond markets are likely to collapse.  Banks will immediately start blowing up left and right.  If he keeps going, other nations will move to protect themselves and then let the dollar go.  The US gets severe inflation in the short to medium term, followed by a currency collapse.

The only sensible thing to do at this point is kick Bernanke to the curb, announce that QE will be continued in the short term, as needed and only for liquidity purposes, and start to wind down the big banks.  This, of course, will cause other types of pain, but there is no way out at this point that won't be very painful.

The US is like one of the victims in the SAW movies.  To save our lives we have to disfigure ourselves.  Are we going to be able to do it?

Posted by: Hermit Dave at 09:56 AM | No Comments | Add Comment
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Plus a new Ben Bernanke betting game!

Before we go any further, however, I haven't made a disclaimer in a while:

I am not a qualified investment advisor.  I'm a moron posting stupid shit on the internet.  Anyone who takes my thoughts and predictions seriously enough to use them to trade or invest is an even bigger moron than I am, and should be shot on the general principle of improving the human gene pool.

Here are the results for Week One (really only half a week, but this starts regular Friday results posting):

The Wealth Preservation Fund is off to an early, and statistically significant, lead over the Investment Fund.  That being said, the horses have just left the gates, and it's a very long race.  I expect this trend to continue in the long term, as the Fed can prop up the stock market by printing money, but only at the expense of even higher inflation.  Still, this is a very volatile situation, and any given week could see large swings in any direction.

On to the Ben Bernanke betting game.  This will be where we can bet on the fate of Ben Bernanke as of the end of next year (Dec 31, 2011).  Here are the odds:

• Strangled by Ron Paul -- 1000 to 1
• Hung for treason -- 100 to 1
• Commits suicide -- 75 to 1
• Killed by bankrupt lunatic -- 50 to 1
• Fled the country -- 25 to 1
• Under indictment (or already jailed) -- 10 to 1
• Forced out of Fed but free -- 2 to 1
• Still selling America down the river -- Even money

If my spreadsheet is correct, that adds up to 100.64% -- close enough.  Feeling cynical?  Even money looks pretty good on him still going about his merry business of ruining America.  Feeling lucky?  Lots of good options at the top of the list.  I'm going with the 10 to 1 shot that he's in an orange jumpsuit by the end of next year.

Fund results and Bernanke odds to be updated next Friday.

Posted by: Hermit Dave at 12:33 PM | No Comments | Add Comment
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OK, not really, but I think it will be useful to measure, going forward, the effectiveness of a wealth preservation strategy vs. a dollar-denominated economic investment strategy.  To that end, I'm going to track a number of key statistics.

In the wealth preservation corner, we have silver, gold, and consumable commodities (energy, foodstuffs, etc.)  As a proxy for consumable commodities, we'll use the commodity fund I referenced yesterday, the PowerShares DB Commodity Index Tracking Fund (ticker DBC).  Our 'wealth preservation fund' will be 25% gold, 25%, silver, and 50% DBC.

In the dollar-denominated economic investment strategy corner, we have the stock market.  For this fund, we'll use a blended average of the Dow, Nasdaq, and S&P 500 indexes.

We're going to mark the funds to the close of business yesterday.  As there was sufficient time to enter a position after the Fed announcement made it clear that they were going to go the full-retard debasement/inflation route, this makes sense.  Because of the structure of the funds, it will be easiest to start with an amount that is divisible by both 3 and 4, so we'll give each of them $12,000 fake internet dollars.

Going forward, I'll post the performance of the funds and their components every Friday.  This is much, much simpler than trying to manage an active portfolio and is a much better approximation of what the average person can do to try to preserve their wealth.

Ladies and gentlemen, place your bets.  I'm going all-in on the wealth-preservation portfolio.  Unless and until the Fed is forced to change their policies, I think this is a no-brainer.  If, at some point in the future, the Fed is forced to stop driving the short bus over the cliff, we can revisit the issue of fund composition.  Until then (and God only knows when that might be), there will be no changes.

We're at the starting line, and here are our marks:

Posted by: Hermit Dave at 12:17 PM | No Comments | Add Comment
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The model portfolio managed to survive today's QE announcement.  It wasn't pretty, especially with the heavy reversal of the banks and the collapse in volatility, but it survived.  However, this is just too much work to put into a blog that nobody reads.

The truth of the matter is that when you have a market that is trading at valuation extremes, based strictly upon the Fed debasing the currency, you have to be extremely proactive in portfolio management.  This is one hell of a lot of work to do for no reward.  If I really wanted to do this kind of work, I'd try to go back to Wall Street and make some money at it.

That being said, this was a good exercise for me.  It got me back in touch with the markets and shifted my thinking from the realm of theory into the realm of practice.  There is no good way to do this witout having something on the line, even if only fake internet dollars and the chance of looking like a complete fool.  Final statistics:

So, not terrible, but hardly impressive.  Two and a half weeks is a blink of an eye in the bigger picture, but the early performance trend (vs. benchmarks) isn't encouraging.  As the portfolio would need massive post-QE announcement changes and serious daily maintenance, and I'm not going to put in that kind of effort, it's best to just shut it down.

My biggest mistake was overhedging.  During my trading days (in a previous life) I ran long-short books with little net exposure, but I also spent 80+ hours a week doing so and had the ability to react instantly when things started going against me in the markets.  I also had the benefit (or curse, when losing money) of massive leverage.  Running that kind of a portfolio is completely different than managing a wealth preservation portfolio and I simply didn't adjust my positioning enough.

So, what's a person with wealth to preserve to do?  I'll have some thoughts on that when I post on today's Fed announcement.  Short answer:  silver, gold and oil, baby.

Posted by: Hermit Dave at 03:43 PM | No Comments | Add Comment
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Let's imagine for a moment that Bernanke and his butt buddies on Wall Street are worried about a new Congress coming in and fucking up their plans to continue to rape and pillage the average American.  What's the best way for them to maintain their oligarchy?  Create a panic, of course.

The markets are setting up perfectly for this scenario. One with a sufficient amount of tin foil might say they've been set up this way.  All Bernanke needs to do tomorrow is announce no further QE.  At the same time, the Wall Street boys turn off the 'liquidity providing' HFT computers.  The stock market goes kablooie, giving the appearance of a 'no confidence' reaction to the election by the markets.

This would put the incoming Congress in a very bad spot.  They'd need to decide immediately whether or not to continue to sell out to the banking oligarchy.  As most politicians aren't looking much past the election, and are mental midgets relative to the banking crooks, odds are that America would find itself sold further down the river even before the last vote was counted.

Tomorrow is going to be a very interesting day.

Posted by: Hermit Dave at 10:19 AM | No Comments | Add Comment
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