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3.11.2015 Financial Intelligence Report Bookmark

What You Should Do

On Sunday I wrote a controversial piece about why we could see some major market dislocations ( a crash possibly) heading our way in the Aug – October time frame. While we got a lot of great feedback from the letter, one of the big questions people had was …what do we do about it?

That’s a great question. But it will indeed be focused on what you’ll allow yourself to believe might happen. That is going to be a very individual decision.
What You Should Do

On Sunday I wrote a controversial piece about why we could see some major market dislocations ( a crash possibly) heading our way in the Aug – October time frame. While we got a lot of great feedback from the letter, one of the big questions people had was …what do we do about it?

That’s a great question. But it will indeed be focused on what you’ll allow yourself to believe might happen. That is going to be a very individual decision.

First a little background. The following is a small piece I lifted from David Stockman’s March 9th notes. I figure that since a lot of you think I’m just some doom and gloom nutcase, with an axe to grind…let’s see what another “outside the box” thinker has to say. But first…who’s Stockman?

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.

Okay so this guys got game…what’s he got to say about the way things are right now in 2015? Let’s look…

Never has there been a more artificial—-indeed, phony—–gain in the stock market than the 215% eruption orchestrated by the Fed since the post-crisis bottom six years ago today. And the operative word is “orchestrated” because there is nothing fundamental, sustainable, logical or warranted about today’s S&P 500 index at 2080.

In fact, the fundamental financial and economic rot which gave rise to the 672 index bottom on March 9, 2009 has not been ameliorated at all. The US economy remains mired in even more debt, less real productive investment, fewer breadwinner jobs and vastly more destructive financialization and asset price speculation than had been prevalent at the time of the Lehman event in September 2008.

Okay so as you can see I’m not the only nut that’s been screaming till I’m blue in the face that we’re only at the levels we’re at because of fraud, manipulation, artificial interest rates, trillions in printed money, ridiculous buy backs, etc. Dave thinks so too.

Now back to my thinking…

I focused Sunday on some of the interesting “cycles” that come into play later this year, and there’s no doubt that even if you think some of that is pure voodoo, the amount of interesting cycles that converge on that September time frame are pretty remarkable. But disregarding all that, just think for yourself about the REAL situation we face. The world is racing toward economic destruction. From the incredible amount of nations slashing interest rates, to the currency wars, to the fall in the Baltic shipping index, to the doctored up jobs releases, to you name it, it is evident that this charade of US strength cannot go on for ever. And so…it won’t. It will end. The only question that was and still is in play is this…when? Unfortunately the answer is, who knows? It could end tomorrow. It could end in September. It could end in 2017. We simply don’t know.

But there’s a common sense sort of logic that says “if we don’t belong up this high in the markets, and the economic situation is truly horrid, and some day it must come down, shouldn’t we be prepared for that day?” We should. The problem there is, if you do the wrong things and this lunacy continues for another year or more, you’ll either lose money preparing for a drop, or you’ll miss out on a ton of money you didn’t make. Neither of those choices sound so swell.

I’m just an old clam digger from the Jersey shore; and I guess that makes me a simple kind of guy. In my mind, I’m a whole lot more comfortable missing out on gains I could have gotten, then losing any money. With that in mind, we now only have 35% of our available cash in our little 401K in stock funds. We have another 15% in bond funds and the rest in cash. While it is true that the market “could” go up and up and up and we’d be missing out on bigger gains if we were totally invested, we’ve done very well in the last 6 years, and I’m not about trying to eek out every last penny of any run. I’ll take my slice out of the middle thank you.

Now let’s suppose you sit back and think that “hey, this buy Bob is making sense. Maybe the big run is indeed almost over and it is time to cut back our exposure”. So you slash your overall investments in your 401K, you move money into “cash” and sit tight. But the market doesn’t crash, in fact it soars for another thousand points. You just left a bunch of money in Wall street’s pockets. ( oh… and I look like a dope)

This has been the most frustrating part of “my job” for the last few years. This market didn’t just get expensive and overbought in the last few weeks. The jobs reports weren’t only faked for January and February. This has been going on for years, and yet each time when we’re right on the verge of tossing in the towel and going full scale defensive if not outright short…the Central banks pull another gimmick rabbit out of the hat and “up we go again”. Do I know that this year will be different? Unfortunately, no. I’m just leaning towards that conclusion.

I’ve often said that the single biggest income we’ve ever experienced here at InvestYourself was being short the market with put options and short sales in the 2008 – 9 meltdown. But we didn’t get it “all”. We didn’t catch the very top and we didn’t catch the very bottom. We simply took a tremendous slice out of the middle of that melt down. That’s what I’m looking for again. We won’t know the exact highs, and we will see the market drop a lot before we decide to act on it with an all out “short” side position. However we very likely will start to nibble on some defensive plays in the not so distant future.

This brings up my point earlier about “what you’ll do will depend on how bad you think things can get”. If you think we’re only looking at a 20% decline, you might decide to weather the storm or just protect some of your long side positions with protective devices like inverse ETF’s or out of the money puts. However if you really think that we’re in for a smackdown, you might consider the idea of moving more things to cash, exploring the 2 and 3X inverse ETF’s and learning proper use of put options.

I try my best not to be the boy that cried wolf. That’s exactly why we haven’t liquidated our 401K or loaded the boat with short sales over the years. But we did scale back our longs and we are now seriously pondering the idea that this fall could bring us some crazy events. Don’t forget folks the US is desperately trying to foment a war with Russia. Don’t forget that Israel is desperate to bomb Iran into the stone age. Don’t forget that the “experiment” called the European Union is still in position to dissolve if the Greeks exit. Don’t forget that China has announced its own payment clearing system is ready for launch this year. Don’t forget the BRICS have formed their own bank now. Don’t forget that the US dollar is being shunned globally and every time the dollar reserve status is challenged we generally see troubles emerge.

Any of these and a dozen other topics could lead to an “event” that causes a real disruption in the way things are going. The world is a very dangerous place and then add in the economic distortions and I don’t think it’s a stretch to say that later this year, all hell “could” break loose. It might not… but I’m willing as the year progresses to “defend myself”. We’ll talk in depth about how to defend yourselves in future articles. Stay tuned.

The Market….

Speaking of crash…the market did its best impression of a mini crash on Tuesday, dumping 332 points on the session. Why? Take your pick of reasonable excuses. One is that the Fed’s are indeed using the bogus jobs report as more fodder to hike interest rates and their little weasel Jon Hilsenrath just happened to pen an article the same day suggesting that the Fed’s will drop the word patient from their March 19th meeting.

Or you could look at the soaring dollar. While currencies go up and down all the time, even making very bold extended moves…the speed of this latest dollar surge has certainly caught a lot of folks off guard. There’s no doubt that when a currency moves this quickly it has damaging effects throughout the economic system.

Then of course there’s always those intangible things. Word has it that the US is shipping heavy armament to the Baltic states including 100 tanks, etc. While no one in the main stream is going to talk about how unsettling that is, take my word for it, Russia knows those tanks and arms are coming and they know the reason for them. Or maybe the word about the Chinese finishing their development of an alternative to the Global SWIFT payment processing system had some folks unnerved about what that will lead to. Maybe however it was a combo-platter of all the above.

In any event we lost some important support levels Tuesday and that got the talking heads in a huff. So after losing over 600 points in 6 trading sessions everyone wanted to know if the selling was over and we could get back to the business of watching them push the market to new all-time highs or not.

This morning they tried to bounce the market, but it was a feeble attempt in the early going. We had green futures and the market did indeed open green. In the first hour we saw them get the DOW up about 58 points and the S&P up over 7, but it was weak and an hour later the S&P actually dipped red again.

From then on we played the “bouncing ball” game flipping between slightly green and slightly red. But when the final bell rang… we were down about 25 points. So, that leaves everyone in a bit of a pickle. We’re below the January “tops’ that served as a support level early in the month. But we’re above the next support level which is loosely grouped around 2018 on the S&P. If that were to fail, the 200 day moving average around the 2000 level would be next.

Between 2018 on the downside and 2060/2064 on the upside, the market is in total no mans land. Closing today at 2040 it’s got 20 points to go to either direction before it hits resistance or support. So calling a direction from here is nothing more than a crap shoot. Yes we could bounce strongly and head back up. But it is just as likely that we fade again and seek support.

After hitting the highs last week, we mentioned that we felt a bit of “backing and filling” was in the cards and we took profits on our open positions. Some like little WEN rewarded us nicely with 16% gains, while others weren’t quite that robust. But in our mind, a gain is a gain and hey…we’ll take it.

Most of this action is the market pouting about the fact that the Fed’s might very well drop the “we can be patient” language from their March 18th statement. In fact their little stool pigeon Jon Hilsenrath wrote an article suggesting just that. Well the Street has LOVED absolutely free zero interest money and will indeed make a fuss about them hiking rates, even if it’s just a quarter of a single point.

My guess, and it is ONLY a guess is that we’ll fade a bit more tomorrow and then see a nice snap back sort of rally. That rally will probably be buyable, but you might want to just consider it a trade as we will probably run into some resistance when we see them get us back to that 2064 level. Then I think we’ll “hover” there or close to it until we get past that March 18th Fed meeting and see exactly what they have to say.

I’ll see you all on Sunday, until then have a profitable day!

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