STAFF NEWS & ANALYSIS
Stock Shock Surge – Is It Real?
By Staff News & Analysis - December 19, 2014

US stocks leap after Fed signals patience on rates … U.S. stocks surged on Thursday, extending Wall Street's best day of the year, after the Federal Reserve said it would be patient in increasing interest rates. Equities came off session highs, however, as oil turned lower. – CNBC

Dominant Social Theme: Things are looking really good for the dollar and US stocks. Who expected this, eh?

Free-Market Analysis: The Fed has signaled that it has moved to a slightly tougher position regarding eventual rate hikes and the reverberations are felt around the world. The dollar has benefited so far and so have US stocks.

But are the reasons being offered in the mainstream media actually the correct ones? Reading through the analysis it becomes clear that the interpretations being offered are just that.

Articles begin with what's taking place and then offer justifications for it. The whole process seems a kind of "directed history." In the US it has resulted in a higher dollar and two days of upward movements in US marts. In this case, the argument is that investors believe that the Fed's stance indicates confidence in an expanding US economy.

Here's more:

Thursday data had jobless claims falling by 6,000 to 289,000 last week, the lowest since early November. And, the Conference Board's index of leading indicators advanced in November for a third consecutive month, signalling the U.S. economy is picking up steam heading into the new year.

After a 268-point jump, the Dow Jones Industrial Average was lately up 228.69 points, or 1.3 percent, at 17,585.56, with Microsoft leading blue-chip gains that included 29 of 30 components.

… For every share falling, more than three rose on the New York Stock Exchange, were 264 million shares traded as of 11 a.m. Eastern. Composite volume neared 1.4 billion.

The U.S. dollar gained against the currencies of major U.S. trading partners and the yield on the 10-year note used to figure mortgage rates and other consumer loans gained 7 basis points to 2.2104 percent.

… U.S. stocks surged on Wednesday, with the Dow marking its best session of the year, as investors celebrated a rally in the energy sector and the Federal Reserve's pledge to be patient in raising interest rates.

In fact, on Thursday the Dow would eventually go on to realize a gain of 420 points, a high-water mark for the year. The S&P 500 rose 2.4% while the Nasdaq added 2.2%. The key to explaining recent market rallies is that the Fed is now pledging "patience" in raising rates. But other news commentary offers differing interpretations of what the Fed has indicated.

Reuters recently posted an alternative explanation in, "Dollar edges higher in wake of Fed statement, Swiss rate move."

The U.S. dollar rose against major currencies for a second straight session on Thursday in the wake of the Federal Reserve's signals that it could hike rates soon and looser monetary policy overseas.

… The contrast between approaching tighter monetary policy in the U.S. and looser policies in Europe, Japan, and Switzerland "could not be starker" and continued to push the dollar higher, said Shaun Osborne, chief currency strategist at TD Securities in Toronto.

Rate increases are expected to boost the greenback by driving investment flows into the United States. The Fed's upbeat assessment of the U.S. economy also helped the dollar extend gains against the safe-haven yen.

We can see clearly that this Reuters article does not support CNBC's conclusion that the US stock surge was the result of a Fed pledge "to be patient in raising interest rates."

For Reuters, the stock surge was the result of an interpretation that potentially higher rates constituted an endorsement of a growing US economy.

The UK Telegraph seems to support this view as well, posting an article entitled, "Fed calls time on $5.7 trillion of emerging market dollar debt."

The thrust of this article, like the Reuters article, is that the Fed´s position indicates the potential for higher rates – and this is going to benefit the US at the expense of overseas assets.

Here's an excerpt:

World finance is rotating on its axis. The stronger the US boom, the worse it will be for those countries on the wrong side of the dollar … The US Federal Reserve has pulled the trigger. Emerging markets must now brace for their ordeal by fire.

They have collectively borrowed $5.7 trillion in US dollars, a currency they cannot print and do not control. This hard-currency debt has tripled in a decade, split between $3.1 trillion in bank loans and $2.6 trillion in bonds. It is comparable in scale and ratio-terms to any of the biggest cross-border lending sprees of the past two centuries.

Much of the debt was taken out at real interest rates of 1pc on the implicit assumption that the Fed would continue to flood the world with liquidity for years to come. The borrowers are "short dollars", in trading parlance. They now face the margin call from Hell as the global monetary hegemon pivots.

The Fed dashed all lingering hopes for leniency on Wednesday. The pledge to keep uber-stimulus for a "considerable time" has gone, and so has the market's security blanket, or the Fed Put as it is called. Such tweaks of language have multiplied potency in a world of zero rates.

Officials from the Bank for International Settlements say privately that developing countries may be just as vulnerable to a dollar shock as they were in the Fed tightening cycle of the late 1990s, which culminated in Russia's default and the East Asia Crisis.

We can see this article is considerably grimmer about the world's economy, though upbeat about how the US and its equities and currency are positioned.

For us, the alarmism is perhaps overdone. Recall, please, that the Fed has not done anything yet. Not a single thing.

And in its conclusion, the article backs off the alarmism just a little. "In the end, the Fed may not be able to raise rates, or at least not by much… Both of the G2 monetary superpowers may have to pull the stimulus lever yet again. First markets must endure a rare few months of chilly discipline."

This is a more sensible perspective. We're at a point now where the market is high enough for additional volatility to occur – perhaps regularly. Marts are beginning to make higher highs, not just to recover previous highs.

But let's take a step back and survey the economic and investment scene from a wider perspective. From our point of view, anyway, these markets are not in the least bit sensible, nor are reactions to the kinds of non-statements that the Fed is issuing.

Remember, please, that the data the Fed is studying is probably "cooked." It's government data with an optimistic bias that minimizes price inflation and boosts employment. We're asked to believe that the Fed can come to proper conclusions using such questionable date points.

So to summarize, the Fed issues a statement that indicates it MIGHT at some point do something to hike rates in the future – and it generates this conclusion via inaccurate government data. Nonetheless, torrents of newsprint treat proffered conclusions as a series of commandments from on high.

Our term is "directed history." Conclusions proffered are ones that the Western elites broadcast to justify what's taking place. Really, one ought to look at underlying trends, not at "reasons" provided by the mainstream media.

We return to our VESTS system. Our analysis seeks to determine what the leaders of the Western central banking community are trying to do – and then seeks to figure out whether these plans can be implemented.

We've already determined the meme at play – the Wall Street Party – and thus we believe marts may be going higher, certainly US markets. The top men have shifted around regulations and dropped interest rates to nearly zero.

What ought to be the conclusion to all of this? In the shorter term, for however long that happens to be, stocks will retain some zip. In the longer term, we foresee a terrible asset deflation on the heels of the current inflation.

The trick is getting from here to there. And pulling profits in the process. Try to determine underlying motivations and keep in mind these are manipulated markets in terms of many key parameters. Even central banking itself is a manipulation.

So … try to figure out what the monetary manipulators have in mind. And then determine as best you can whether or not their policies will "stick."

This is probably a better way of evaluating markets than using the oracular non-statements offered to the general public by central bankers as "analyzed" by the mainstream media.

After Thoughts

Trust in your own analyses. And maybe pay attention to VESTS.

Posted in STAFF NEWS & ANALYSIS
  • Bruce C

    I’m not comfortable investing in things I don’t understand, and I don’t understand US stock market activity. It may just be that there are very few investment options besides equities, especially now that some junk bonds are unwinding, and the money has to go somewhere.

    • Nobody understands the market Bruce C and I include myself. With the rapacious machinations taking place in the financial world today, return OF capital becomes more important (IMHO) than return ON capital. As you know very well Bruce, the surest way to make certain your capital is returned is to keep it under your personal control in the form of hard assets with no counter-party risk. The few who manage to do this before it is too late will gain immeasurably.

      • A lot of money has been made in these markets already. And more to come seems likely. Figure out a hedge and an allocation, and you can participate too, so long as you are careful and don’t commit funds you can’t afford to lose … It will end of course, but how and when is yet debatable ..

        • A lot of money has been made – true! But has that money been taken off the table? Profits are nothing but an illusion, until they are banked by closing out the position. We differ in our views here, at this point in the “cycle” (whatever that may be). I have been bearish (and wrong) for the last few months. My old commodity broker always said “if you are good, you are early” but being early does not make you any money does it? For me personally, I find that once I have fully hedged myself I may as well be flat (no position) and save the commish. Timing is everything, but clearing out too early, on the way up, may prove to be infinitely superior to waiting one day too long.

  • “A few months of chilly discipline”?? The Fed “dashed all hopes for leniency”?? Oh, that is rich!! Where do they get this stuff?? While mincing words between “considerable time” and “patience” Ms Yellen managed to communicate nothing of substance, except that rates would NOT be raised “for at least the next two meetings” which takes us to April 28th and she makes quite clear that actions beyond that date will be “data dependent”. And so what, exactly has changed? Nothing. This is “chilly discipline”? This “dashes all hopes for leniency”?? We truly are watching a grand comedy in the theater of the absurd!! As for the rally, it was one HECK of a two day rally!! Wow. But here is the deal: the good cop/bad cop combination of trillions in new money (inflation) in tandem with zero (even negative now, in Europe!) interest rates (deflationary) has been sucking wealth out of the 99%, into the coffers of the 1% for 5 years. The next stage of this abomination is to suck the wealth of the 1% into the coffers of the .01% and how will this be accomplished? By crashing the markets, bankrupting the banks, and instituting bail-ins!! That will do the trick, while at the same time ploughing the ground for a one-world cashless currency – two birds with one stone. We have all played with tops – spinning tops, remember? Just before the top gives up the ghost, it begins to wobble. What we saw in October, and again last week were the first wobbles. Clear signs of instability and risk aversion. I salute DB for being even handed and objective in its take on the “Wall Street Party”, and for having been 100% right about the direction. Kudos!! But the party has gotten out of hand: it is time to call a cab before the cops arrive, and you end up in jail. : )

    • Thanks, Greg. Very good. The key word is “timing.” The “party” could end tomorrow or in six months or in two years, etc. You are surely correct that volatility will increase …

      • Truer words have never been spoken – timing is everything!! Only the hidden hand knows the timing of when they will crash these markets, the rest of us have to guess so “you pays your money, and takes your choice”.

        • Bill Ross
          • Bruce C

            Yes, a good reminder, but it is also “them”, those who buy into the markets like Pavlovian dogs.

        • Bruce C

          I basically agree with you, but I also don’t think it is as simple as getting the timing right. That assumes a number of things that I really question, namely that the rule of law will be upheld and that you will in fact be able to ultimately “bank” your paper profits. There are innumerable things that I can think of that could foil the best laid plans, even if one’s timing is right.

          A lot depends upon why the stock marts are rising inexorably. If it’s to sheer the sheeple then unless you’re a real expert and/or an insider you’re probably going to get shorn.

          • Good post Bruce! My point exactly. Given the incredible, quaking tower of debt, the even more inconceivable tower of derivatives, the ridiculous leverage used by the major banks, the inter-connectedness of world markets, and the speed of the modern internet it could all go up in a puff of smoke over a weekend. Making profits and banking them are two different things. Banking profits and turning those digital dollars into something of permanent value in your personal possession are also, two very different things. Complacency will not be a big winner here.

          • Bill Ross

            “why the stock marts are rising inexorably”

            because the “value” of the marts is measured in terms of (ratio) fiat currency, the unit value of which is falling inexorably, converging to ultimate REAL value of zero. Anyone still trading in Roman Dinars or Zimbabwe dollars? Financial extinction / oblivion once the marrow (productivity) is sucked out of a civilization by glib criminals.

            The “markets” are attracting “excess” liquidity, diverted from productive investment to speculation based on misplaced trust.

          • Bruce C

            Yes and what do you think the stock sellers are doing with their proceeds? There is a rotation occurring in which “insiders”/existing-share-holders are passing off their shares to new buyers. The media never talks about the sellers, only the buyers, and why there are such good reasons to buy stocks (e.g., rising corporate profits, to hedge inflation, only game in town, “money printing”, the Fed’s “put”, improving US economy, etc.)

            So what are the sellers thinking and doing? They must be real dopes.

            P.S. It’s a rhetorical question.

  • robertsgt40

    The markets are as real as the fiat currencies in which they are valued.

  • In our opinion, the only strategy’s that have proven to work time after time are the ones that maintain exposure to trends, and reverse course as necessary within quantified time-frame specific parameters.

    Has Santa Found His Way Back To Wall Street?
    http://www.elliottwavetechnology.com/2014/12/has-santa-found-his-way-back-to-wall.html

  • Bill Ross

    DB: “monetary manipulators have in mind”

    well, manipulation, to count coup by defrauding the marks (productive). There will and are, of course be consequences:

    http://www.nazisociopaths.org/modules/article/view.article.php/c1/32

  • I was trading all day every day in a brokerage house in Chicago when a fellow trader who became a friend told me this story. A true story that relates here, at least as I see the market today. A buddy of his found a super bowl pool for $500 per square, the winner would get 10K. They both decided to go in, he gave $500 to his friend who selected a square for himself, and one for my pal. That night the other fellow had a dream, that my buddy had won the pool, so he switched the tickets before going in to the trading office the next day. Guess who won the 10K? Right!! My pal!! So he took the entire 10K and bought soybean calls. There was a drought that year, he ran the 10K into $100,000 by the close on a Friday but did not offset and stayed through the weekend. Beans came in limit down on Monday and were limit offered for 11 days in a row………. poof. His friend said nothing but acted strange for several days – finally they went out drinking to commiserate over the loss of the 100K. After quite a few they were standing side by side at the trough in the men’s room, when his buddy finally admitted what he had done.

  • One of the best analyses the DB staff has produced.

    In watching the stock market’s steep rise over a short periods of time, one must check the option markets for last hour spikes to see the influence the PPT (Plunge Protection Team, legally known as the” Working Group on Markets”) has on manipulating market rises.

    • Ingo – it is well to remember – what the PPT and their ilk can do on the upside, they can do on the downside. They certainly are not manipulating markets for our protection! : )

      • Gregg – Keep in mind though, the “Working Group on Markets” is the “Plunge Protection Team”. It’s mission is not to “tank” the market, but to “prop” it up.

        The “Working Group on Markets” was formed by Executive Order issued by Ronald Reagan in the aftermath of the 1987 stock market crash. The crash occurred when sell orders were triggered by newly computerized stock market portfolio sell instructions. Alan Greenspan had been confirmed only a few month prior to the October 1987 crash. As the equities were dropping, he implored the brokerage houses to pay up with the promise that the FED would make good. It did……

        However, to prevent such “electronic trading” melt down in the future, Ronald Reagan was persuaded to establish by executive order a group made up of the chairmen of the FED, SEC, CFTC and the heads of the major trading houses to intervene in the markets should “computer trading” again threaten market stability. The executive order would free them from being liable for collusion.

        While at first the need to use the authority given the PPT was rare, it now is needed to intervene in markets on a constant basis. Brokerage houses do not willy, nilly sell stock. They have to have cogent reasons to trade large blocks of shares. Without any conspiratorial agreement, the brokerage houses know exactly when to “meet” their fiduciary responsibilities by buying options to move equity prices.

        The main effort of the PPT these days is to protect the pension fund investments and ERISA from obliteration.

        • until they tank it. Just as the Patriot Act is UNpatriotic, and the Affordable Care Act is UNaffordable, the PPT is not there to protect US from a plunge, Ingo, but to precipitate a plunge at a time of their choosing, after lulling the participants into complacency for years. All markets are manipulated Ingo, there is little argument about that any more. Do you really think they manipulate all of these markets for OUR benefit?? There are only two purposes at work (1) Make profits from the suckers (us), and (2) Advance political agendas, such as is the case in the suppression of the Gold price, and is very likely part of the collapse of crude oil recently. Do you believe everything the government, the media, and the Fed tell you? Take whatever they say, and reverse it if you want to get anywhere close to the truth.

          • No, I don’t take everything the government tells me as gospel. You should know that about me by now.

            However, I don’t automatically assume the opposite is true. I think about the implications of what the central bank crowd is up to, before I form my opinions.

            I don’t think that you have the picture of the situation that exists between the central bankers, and the main stream media which do their bidding, and the “oil people”, who control the world price of crude, just right. They are not buddies……

            As regards the suppression of the “gold price”, I must inform you that gold has no “price”. When what you call the “gold price” drops, it means that the USD is strengthening. Since the “price” of gold is perfectly synchronous with the price of world crude, it is much more likely that the “price” of gold is caused by the manipulation of the price for world crude, rather than the reverse.

            Who manipulates the price of oil…..??? Ask the CIA. Why do you think the head of the CIA, Mr. Brennan all of a sudden developed a spine to stand up against his boss, President Obama and to the J.P. Morgans and the Goldman, Sachs for whom Obama chills…..????

    • Thanks.

  • Praetor

    The dollar is the best export, the U.S. has, for now. Jobless claims, who wants to sit down at the UN-employment office at this time of year anyway, when grandma’s cooking, of course claims are down. Wait till after the New Years Party. Obama’s got that Keynesian smile back and is going to the beach, all is good. Is the U.S. still in control of the BIS? When will that letter arrive at the oval office, your account is closed and we need to settle your accounts imbalance, pay-up. You have had the reserve currency and only been able to subjugate 3/4th’s of the worlds population, we aim for 100%. You fail, U.S!! “Watch Obumer’s smile Its a tell”!! (Poker). He’s just hoping it doesn’t go down the toilet while he’s in office.

    • Bill Ross

      “your account is closed and we need to settle your accounts imbalance, pay-up”

      That appears to be the “pound of flesh” that was paid, circa 1913 with the creation of the FED, selling us all into servitude, in perpetuity (until we balk) and depriving us of our humanity, decreeing us (rule of man) “corporate citizens”, subject to Admiralty (as opposed to common) law, straw-men, identifying us by “YOUR NAME CAPITALIZED”, a “legal” fiction which is “not us” and requires a major, collective exercise of “freedom to NOT associate” in response.

  • chuck martel

    “264 million shares traded as of 11 a.m. Eastern. Composite volume neared 1.4 billion.”

    That’s called “churning”. It’s not investing.

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