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"As screwed up as it gets"
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James
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Nov 05, 2009 08:12 PST
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Taipan Daily: An Overly Full Measure of Faith and Credit
by Adam Lass, Senior Editor,
WaveStrength Options Weekly
As I sit to write to you today, the market is up for the third day in a row. This brings a bit of relief to the bulls who, no doubt, have been quivering as they watched the blue chips set seven lows over some 14 trading days.
It's really quite fascinating watching folks try to attach meaning to these short-term oscillations. Kind of like playing connect the dots - with only two and a half dots.
I'd love to claim I was completely immune - that my interest in history has inoculated me against such foolishness. If that were true, I wouldn't have a bank of screens on my desk, all busily displaying the day's action in 10-second increments.
Still, my faith in certain eternal facts tends to carry me through such moments of short-term doubt.
Sorta-Kinda-Maybe?
Just the other day, we saw just this sort of straw-grasping play out over at the dollar futures trading pits. Early Tuesday morning, word began to circulate that the Fed might change its wording come its next FOMC policy statement.
(Come to think of it, I believe you will have that statement in hand by the time you read this. But let's not let that get in the way of an illustrative story.)
The rumor ran as follows: "The Fed isn't going to raise rates (currently hovering between naught and not much). But they might change the accompanying text from 'we simply adore rates right where they are and plan on keeping them here until we retire - or simply die of old age' to 'Perhaps someday in the very distant future, if we were ever to see inflation, we might think about raising rates a quarter point or so.'"
The Rally That Didn't Happen
The mere threat of this sort of radical change was all it took to launch dollar futures on a wild 1.56% run. (To give you a sense of scale, Monday's action saw dollar futures move a whopping 0.02% between open and close.)
And since so much depends on Washington's feckless dollar habits, the very idea of a rising dollar caused quite a stir across the whole trading universe. American stocks began to fall, as did oil and gold futures.
In the end, it was a mere tempest in a teapot, most probably propagated by some party or parties intent on making a small fortune the fast and dirty way. Dollar futures closed Tuesday the way they so often do, up about 0.34%. By Wednesday, even that modest gain had evaporated, as fact caught up with rumor, and the dollar resumed its steady downside march.
The weakening dollar encouraged stock buyers to resume purchasing overvalued shares of nigh-profitless companies. And on the metals front, gold shot to a new all-time high of $1,087 an ounce as India's central bank revealed that it was purchasing some 200 metric tons from the International Monetary Fund.
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A Temporary Advantage
As I mentioned earlier, you have a bit of an advantage on me today, at least in the short term. Due to a mid-afternoon deadline that I must respect (or risk the terrible wrath of the fine folks who process my typewritten screeds into legible, grammatically correct "news"), you will have the Fed's actual statement in front of you by the time you read this.
One might think that a columnist like myself would be paralyzed by such uncertainty. "What if they say something that completely contradicts me?"
Quite frankly, I am not particularly worried about it. I may not know what weasel words the Fed will sneak into its report. But I do know Washington's genuine intent regarding the dollar.
Who Says You Can't Buy a Thrill?
I could trot out a panoply of facts and statistics, but for the sake of your eyes (and the aforementioned deadline), I will restrict myself to a particularly germane area: As of September, home prices had risen for three straight months. Pending home sales were at a three-year high. And construction spending posted the largest jump in more than six years.
All of these gains can be credited to a single Federal program: an inane $8,000 tax credit ostensibly designed to induce new buyers into the market.
I say ostensibly, because even Washington has conceded that many of the participants did not qualify for this largesse. And many more would have in all probability bought a house, sometime in the near future anyway.
As for the "inane" tag, isn't inducing folks who can't afford a house to buy one anyway how we got into this mess in the first place? In the end, this was simply another effort to front-load sales forward a quarter so as to generate a bogus rising GDP figure.
No One Wants to Kill the Golden Goose, Even if the Eggs Are Pure Poison
As a result, the home builders index has been falling for days on investors' fears that Washington will allow this program to lapse into the obscurity it justly deserves. They shouldn't have fretted so: Just this morning, the Senate agreed to roll the existing $8,000 credit forward to at least next April.
They have also decided to expand the program: Folks who have owned their homes for more than five years will receive some $6,500 if they will please go out and buy another one soonest.
I may not know what the Fed will do. But I do know this: Washington will never, ever voluntarily stop inventing and handing out free dollars. No government has ever had the spine to do this until they are absolutely forced to by inflation so horrid that voters are threatening to burn down the capitol.
Call me a cynic. I know this whole deal is about as screwed up as it gets. But so long as Wall Street has faith in Washington's ever-extending credit line, I remain long stocks and short the dollar.
Yours truly,
Adam
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