<<Fed will focus on the
consumption aspect of GDP, and will also say the CPI was too high, and
use
that to justify continued rate hikes.
The CPI was higher because higher energy costs finally made their way
into
areas that are not pure energy related. That has everyone saying
inflation exists. Inflation occurs when there is too much money supply
chasing too few goods. It is not when a cartel curtails production and
artificially causes price hikes. Raising interest rates to slow the
economy is no way to lower fuel prices?it may do it by ultimately
slowing
the greatest economy on the earth today to the extent that we don?t
need
as much fuel, but it won?t accomplish that feat in the shorter term.
The
cause and effect for that result is convoluted at best. What will
happen
is that the effects of the price increases will be exacerbated as the
rate
hikes will make it more difficult for businesses to use their usual
ingenuity to figure out how to offset rising energy prices. That
increases the likelihood that these artificially high costs will be
further passed along. Raising interest rates to help quell supposed
inflation that results from a cartel-induced increase in fuel costs is
similar to beating the dog when you child misbehaves?it does not solve
the
problem of child impudence, and creates new problems with the behavior
of
man?s best friend.
The bottom line is that the Fed once again believes the Phillips Curve
is
economic law even if inflation had not shown its face at all before the
rate hikes started. If the March CPI did show actual inflation (and we
do
not think it did, at least nothing that is a trend), is it the result
of
the continued economic expansion or the Fed?s string of rate hikes
starting to distort the allocation of resources companies have
available
to them. If rate hikes result in higher costs to producers of goods
and
services (through higher loan costs as investment funds dry up as the
stock market sells off as we have seen as a result at least in part to
the
Fed rate hikes), is there not pressure on producers to raise their
prices
to maintain their margins? Doesn?t the same argument that the Fed uses
apply to the costs of rate hikes, i.e., that higher costs of labor,
etc.
result in inflation? If you buy the Fed?s theory that tight labor, low
unemployment, and higher labor costs lead to inflation because they
cost
producers more, you have to conclude that higher interest rates
resulting
from Fed rate hikes do the same.
The Fed?s stated reasons for raising rates in the face of no inflation
have never held a lot of water with us. They don?t hold a lot of water
with a lot of people, yet on television all we see are those who line
up
to kiss the Fed?s feet and pay homage for the great expansion we have
enjoyed. To its credit, the Fed has not messed things up yet. It is
getting close to screwing up its batting average, however. There is
something else going on, and as we discussed last week, we don?t think
the
U.S. is going to be the beneficiary of whatever is happening.
PLAYING THE DOWNSIDE OF THE MARKET
This weekend we talk about the market possibly testing the lows again
or
heading lower to some extent. During the last selloff we discussed
playing the downside, i.e., using the market to make you money when it
went down as well. We highlighted several plays where we thought we
could
make money as the market fell, and many of those plays returned great
rewards in a very short time. We have had a lot of questions about
this,
and since we are looking for some possible downward pressure again, we
are
going to quickly look at how we will play these.
The down side is really no different from the upside. Stocks act the
same
way, it is just a mirror image. Right now we see many tech stocks in
downtrends. What they are doing is the opposite of a rising stock.
When
a stock rises in a bull market, it moves up, falls back to test its
trendline or 10 day moving average (some test the 18 day moving
average),
and then moves back up from there. As long as it bounces off that
trendline or moving average, the trend holds. Falling stocks fall,
move
up to test the down trendline, then bounce down off of that just as a
rising stock bounces up off of a trendline.
We can play these stocks two ways. First we can play the trend, i.e.,
riding the stock as it falls then rises to the trendline and falls
again,
exiting when the stock breaks the trend, i.e., rises above the down
trendline. With the high volatility we see in this market, however,
there
can be $30 from the point where the stock stops falling and moves up to
test the trendline again. We don?t know about you, but we don?t want
to
let all of that profit evaporate on the chance that the downtrend
holds.
Remember, bear markets and downtrends are typically much shorter than
bull
runs. Any move back up could be the one that breaks the downtrend.
So, we tend to watch for the stocks to hit their trendline and start to
fall. At that point we can move in and play the stock to the downside
with puts. In this volatile market we prefer to play puts than to
actually short stock. You can get squeezed hard trying to find shares
in
a hard bear market rally. Thus, we buy in or at the money calls, 2-3
months out (we don?t plan on being in the trade very long, so we use
shorter expirations) when the stock starts its downward momentum. We
ride
the puts until we see the stock start to bounce up. We pay very close
attention when the stock approaches previous support, a key moving
average
(50 day or 200 day), or the bottom of its downtrending channel, i.e.,
the
line drawn connecting the lows (it is usually parallel to the down
trendline connecting the highs.
These are quick plays for the most part. When a stock trades in a
narrow
channel ($5 or so), we can ride the ups and downs as the stock trends
down. We can ride the stock up $4-$5 as it tests the trendline and
starts
to fall again without getting too antsy, though that is still not easy
to
watch. You play the move as long as the trend holds. If a stock is
moving in a $20 channel, however, we don?t want to ride it back up. As
we
have seen, some of the techs that were leaders can scream back up. You
never know when the trend will be broken. Therefore, those plays are
to
the downside part of the cycle only, and we cut them off when the stock
shows signs of rebounding.
We will be discussing these types of plays this week in The Daily and
the
Technical Traders Report ? both are available at InvestmentHosuse.com.
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