US Debt Mountain

The debt ceiling doesn't matter.  What matters is how much new Treasury debt is being issued each year.  The budget deficit since 2009 has gotten to such large levels that you are getting a huge increase in US Treasury supply.  Everything is determined by supply and demand.  With demand staying equal, an increase in supply can only do one thing: decrease the price.  The pace of Treasury supply increases has gone parabolic.  These are truly historic budget deficits that the US has never seen before in its history, even inflation adjusted. 

From 2009 to 2011, approximately 4 Trillion in new Treasuries will have/had to be issued due to the budget deficits.  Fed's QE through expanding its balance sheet by nearly 2 Trillion has taken out almost half of the supply either directly (direct Treasury purchases) or indirectly by displacing MBS holders (MBS purchases) pushing them into other debt/investments.  That is how long term Treasury rates have been kept artificially low.  Add to that, the fear of the average investor who has fled stocks for the "safer" waters of bonds has boosted demand along with the Fed purchases.  Bond inflows have been massive since 2008 and this strong fund inflow has helped to keep rates low.  But we all know that the average investor chases performance, and bonds have been performing strongly over the past 30 years.  What if that performance fades in the face of pressures of new Treasury supply?

I see 2 scenarios here.  First scenario with QE3 and the second scenario without QE3.  With QE3, more Treasuries will be purchased, sopping up much of the extra Treasury supply coming from the huge budget deficit.  This will help keep long term rates low but I guarantee you that investors will stampede out of the dollar.  There will be extreme dollar weakness, similar to what you saw in the first half of 2008.  Gold and silver will go through the roof.  Equities will also benefit somewhat from the extra money printing.  This is the most likely scenario which is why I am so bullish on precious metals.  It has nothing to do with the debt ceiling or the European sovereign debt crisis.

Under the other scenario without QE3 (very unlikely), the economy will have been relatively stable (otherwise there would be a QE3) leading to bond weakness, which with the big increase in the Treasury supply would lead to a bond market rout.  Long rates would shoot higher and bond fund outflows would only exacerbate the move.  The dollar would be weak, but stable.  Equities will struggle under this scenario because of the threat of higher interest rates and tighter money. 

There is no scenario where I see deflation or a significant reduction of the budget deficit.  The U.S.  has taken the road of Keynes and tried to spend their way out of their problems.  Europe has taken the road of austerity reducing spending.  That is why you are seeing such weakness in European equities compared to the U.S.  In the short run, austerity will hurt equities and spending helps equities.  In the long run, in currency adjusted terms, the opposite effect will occur, all things being equal. 

Year

Nominal Dollars

Inflation Adjusted

2002

157.8 Billion Dollar Deficit

186.204 Billion Deficit

2003

374 Billion Dollar Deficit

430.1 Billion Deficit

2004

413 Billion Dollar Deficit

462.56 Billion Deficit

2005

319 Billion Dollar Deficit

347.71 Billion Deficit

2006

248 Billion Dollar Deficit

260.4 Billion Deficit

2007

162 Billion Dollar Deficit

165.24 Billion Deficit

2008

455 Billion Dollar Deficit

455 Billion Deficit

2009

1416 Billion Dollar Deficit

1416 Billion Deficit

2010

1294 Billion Dollar Deficit

1294 Billion Deficit

2011

1650 Billion Dollar Deficit

1650 Billion Deficit

Intraday Upside Seen

That seems like the upside for the day session.  I think we've seen the highs for the day.  There is that dirty word again:  hope.  Traders are hoping for a deal and hoping that there is end of month tape painting.  I am not expecting a giant short squeeze in the 2nd half of the day, because I just don't think many are short.  Also don't expect a collapse like yesterday after a strong first half of the day.  We should consolidate this move up off the morning bottom, and then have a weak close. 

A Day to Buy

We are reaching the apex of worry about the debt ceiling.  The process to raise the debt ceiling is taking longer than many expected.  The fear mongering is getting extreme even though there is no crisis.  There is no financial dislocation and comparing this to 2008 is asinine.   I don't know what time today we'll bottom, whether its the open, close, middle of the day.  If we do bottom today, will we call it the Raging Boehner bottom?  I am leaning towards a weak first couple of hours.  Afterward, I'll have to see the price action. 

Purchases of stock today will be rewarded in the coming weeks, downgrade or no downgrade.  But I don't think we'll V bottom like we did off of 1292 like last week.  Feels like we'll need to shake the tree a bit with a U bottom starting today  and lasting much of next week.

Debt Ceiling

If everyone expects the US debt ceiling to be raised, and most people expect a rally on that news, how long can that rally last?  Especially when we rallied all of last week because of European bailout goodies and a debt ceiling deal. Will we even have a rally after the debt ceiling is raised with the possible S&P downgrade of US debt to AA looming?  I don't suggest that one should play the short side, but going long at current levels entails a risk of even lower prices after the news comes out.

Thinking Long Term

" There is the plain fool, who does the wrong things at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. "  -  Reminiscences of a Stock Operator

I started this blog in November of 2009, things were going very well.  Thereafter, I've had ups and downs, with most of 2010 being a bad year.  2011 hasn't been good either.  I can blame myself for being bearish when the market was rising, but there are other more general factors. 

For me, trading is a game that tests your psychology more than your analytical skills.  I have found analyzing the market data and reading the patterns to be the easy part.  What has been more difficult has been to overcome the psychological barriers to trading success.  I have a different mindset when I have been winning for several months than when I have been losing for several months.  When I am winning, I don't rush into trades, have a lot of patience, and wait for the easy trades.  When losing for a while, I become less patient and try to make back my losses quickly.  This has caused me to trade much more frequently and less than optimal setups.  I can't win at this game trading that way.  The last 2 years have taught me that.  But I continued down that road.  It is a psychological weakness which I need to overcome. 

The best way for me to regain my previous trading form is to forget about past losses.  To be more selective in my trades, and to think about more than the next few hours or days of stock movements.  Fortunately, I don't need to make money everyday like a worker on a salary. 

I have decided to focus on the big picture and the longer term.  The big money is made in the big swings.  I am not a daytrader and the best timeframe for my trading is a few weeks to a few months, not a few hours to a few days.  It is something that I have learned painstakingly over the past couple of years.  Numerous times over the past 2 years, I tried to catch the next ten points down and set myself up to reverse from short to long on the reaction.  But too many times the reaction was too shallow or it never came and I was left holding the short bag.  Even though I knew underneath that the market was strong and would eventually make back its losses.  I was trying to play a pullback perfectly, trying to pinpoint the exact bottom to cover and then go long.  I was able to do neither at prices that I desired.  You can't be Mr. Perfect.   I lost the forest for the trees.  Trying to capture the intraday movements left me badly positioned to capture the bigger moves. 

I will be making less but more substantiative posts.  There will be no regular schedule.  Maybe a few a month.  I am not sure yet, and it will depend on the market.  Future content will have less to do with the daily fluctuations.  When the daily fluctuations are such that it is worthwhile to daytrade, when there is lots of volatility, I will make more posts.  But mostly, I will be focusing on the bigger picture.

Fewer Posts

I see a slow market for the next several weeks until September.  So I expect volatility to go down steadily over the summer.  In order to focus on the longer term view, I won't make as many posts because there just won't be as much intraday action to comment on.  It won't be worth it to daytrade.  If the volatility picks back up, I will post more.  But right now, it's looking like a sleepy summer coming up. 

Give the Market Its Due

The pullback is likely over and we're probably back to a narrow range grinding market that eventually bursts higher to get to new yearly highs.  1400 is probably coming up sometime in September. 

Market Feels Heavy

We are up over 1% but something feels heavy about this rally.  I expect a weak close.

More Can Kicking in Greece

Extending more credit lines, accepting selective default at the ECB who will now accept toxic Greek debt after restructuring.  Of course they were going to do it, they aren't going to shoot themselves in the face.  They are not getting ahead of the problem, they are putting band aids and the market will eventually sniff this out.  In the meantime, shorts are squeezed but they didn't do triage.  They are putting their resources towards saving the guy who will die anyway instead of those who still have a chance to live.  Expecting first half weakness today on this Greek Gap Up. 

Europe = Punching Bag

Again.  Shorting European stocks is like fighting a midget.  You can't lose.  Sure they can occasionally bite you in the knee caps and you can have some cuts here and there.  But in the end they get KO'ed.

During US hours:  US rallies, Europe grudgingly gains about 1/3 of the US gains.  US drops, Europe drops the same percentage.

During European hours:  Europe usually just drops, and when it doesn't, it barely goes up treading water.  Swimming upstream.  ES usually unaffected and squeezes in the 3 hours before the opening bell putting on their best Alfred E. Neuman mask.  ES has a scary moment during a European mini-panic, but that is the bottom, and it continues to squeeze into the US open and amazingly, gaps up while Europe is stuck in the mud.  That is the story of this market.

Closing In on a Sell

With the big ramp up today, I am getting a sell signal.  The debt ceiling relief is a joke.  We all know it is going to be raised, another ruse by the bulls to jump over midget hurdles and find an excuse to rally.  A gap up tomorrow based on an AAPL earnings beat will be a screaming sell.

Gap Ups Steal RTH Move

Another classic gap up and dare.  Dare you to buy up 10 points on the ES.  Dare you to sell here and tempt fate with a gap and go squeeze.  The bears got set up yesterday and are now trapped.  That is why you can never hold overnight shorts unless you are totally sure that we're gapping down.  Because you expose yourself to these random 10 point gap ups.  You rarely see random 10 point gap downs.  They only happen in a nexus of fear which is uncommon. 

With AAPL earnings coming up, no one will want to be short heading into those "blockbuster" earnings.  So we'll drift higher today with high probability.

Trend Down Day

Friday was the short squeeze to clean out the weak shorts, and suck in the overbullish longs before the market continued its mission lower.   Expecting a classic trend day lower with the lows right near the close.  The market is more complacent today compared to Thursday even though we're lower.  Amazing.  We broke down that cliff of worry with a hydrogen bomb. 

Market In Trouble

This is not selling because of Europe.  It is selling because the US hasn't priced in a slower growth economy while the other world stock markets have.  The strongest are always the last to fall.  The fund managers have already cleared out their European inventory.  Now it is time to clear out the American inventory.

Gold Bubble Is Simmering

It is hard to find a good investment now.  Stocks, bonds, and commodities are not cheap. So what is the best thing to do?  Buy the thing with the best chart and favorable supply and demand.  Gold and silver.  These markets cannot handle big investment flows like equities and bonds without going much higher.  The steady pressure to chase performance, lack of good investment ideas, and weak economy make gold and silver the perfect performance vehicles.  We are right in the middle of the bubble.  I can't imagine it ending without some huge up moves.  Traders will flock to the precious metals, whether the market is up or down.  I see this continuing for at least another year.

I expect weakness today, the market is grinding lower and there hasn't been a flush out yet.  It should come soon.