1/29/08 (Taleb wears Jack Boots! Supply & Demand)

Traders,

The market had a good rally up – but not really to those resistance levels for the most part. The rally was based on (as it makes me almost sick to say it) the government spending MORE money (between voting through the $800+ billion stimulus combined with the NEW BAD BANK – which the FDIC will run). The new “Bad Bank” will be adding and estimated $1 trillion worth of crap and toxic paper to the books. Don’t forget the second round of $350 billion in the TARP fund. So in the first two weeks of office – the new administration has spent over $2 trillion in bailout money. Of course they are selling this as it will create jobs – but in reality how does giving people money create jobs?

Let’s step back – because we have recent history to see how it actually worked. First let’s looks at last year’s stimulus checks – it sure didn’t create jobs. What did people spend their stimulus checks on? Flat-screen TVs, computer games, etc. In fact one survey showed the biggest percentage rise was in pornography. One thing people didn’t spend it on was paying down their mortgages, or catching up on credit, or even SAVE. Now let’s look at the combo FED/TARP spending spree – they gave over a trillion dollars to banks and companies – some of the companies (even after getting access to the FED money) failed (AIG, Lehman, Freddie, Fannie – to name a few). The ones that didn’t sure didn’t start hiring people or loaning money – they used it to write-down more debt and/or horde it. If you really want to get sick – all you had to do was look at how Thain spent his money over at Merrill Lynch ($1 million dollar office / $250k driver’s salary, etc.) So – I think we SHOULD of learned our lesson by just tossing 100s of billion to companies and the people.

We are a consuming nation – give someone some free money and they will spend. Of course some would argue with me that is what they SHOULD be doing to keep the economy going – and I would YELL back – are you F’n kidding me. Giving people money to keep this deficit spending party going is just INSANE. STOP and listen to what you are saying. We NEED to pay down our debt, stop deficit spending, and start living within our means! Will companies see short falls in revenues as people LEARN to pay down their debt and save? Sure – but we must realize that if we stay on this deficit spending road and “HOPE” the government bails us out – not only will we be dumping trillions on the back of our kids (and grandkids) to pay for it (via – eventually massive taxes) – but we are seriously putting the dollar in jeopardy.

I was pondering last night on my drive home – what does THIS nation have to offer anyone (in terms of assets)? NOTHING – we have some coal, but for the most part we have already consumed the majority of our natural resources. Our soft commodities don’t even cover our current consumption. This nation NEEDS the other nations of the world to keep going – we food, energy, hard commodities are shipped into this country to consume. So how do we PAY for it? With paper – paper that is not backed by anything other than the good faith of our government. One day a foreign nation (or many) is going to seriously look at that paper dollar and say – what can I do with THAT? What is it really worth? We are sending all our resources to the United States for them to consume and we are getting a piece of paper with some old guys picture on it and I really can’t do anything with it – other than “HOPING” the next guy down the line will think it is valuable. At the end of the day – this nation doesn’t have anything of materialistic value to trade (of any massive quantity). Coal maybe – but what else? It’s just food for thought – but it gets you thinking as to why China (and some other nations) are buying massive quantities of GOLD or hording other resources. After you ponder what I just said – reread the first two paragraphs (about printing money) and I think you’ll may come to the same concerning conclusion. Inflation is a very real possibility, Hyper-inflation maybe improbable – but certainly not impossible.

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FORD – show me the money?

FORD burned through $5.5 BILLION in the 4th quarter – the worst performance in its 105 year history. Guess what – they are going back to the well for more money – while it did say it didn’t NEED federal aid like GM – that is ONLY predicated on the fact that they have some credit lines to tap. The credit line will give them access to $10 billion for next quarter as their reserves quickly deplete. The question is how much longer can they last before they have to go back to the well or the government.

Regardless of market reaction – even if it goes up – owning a car company is not the sharpest idea you could have.

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Taleb – for nationalization?

In an article in Bloomberg, respect author (maybe not any more), Nicholas Taleb said, “Bank nationalizations are absolutely necessary to avoid taxpayer having to bear the burden of their risk taking.” – WHAT? Now I have read his books (no doubt he is a very smart guy) – I do have issues with many of his observations in his books (which I mention in my reviews) – however it would seem (IMHO) is that he is not thinking about this FULL-CIRCLE! Additionally – don’t we have FDIC and a Banking oversight committee, as well as a Federal Reserve?

You could rephrase his statement by saying, “The government has failed in their ability to insure banks at the FDIC level, the Banking oversight committee has failed to properly regulate the banks, and the Federal Reserve is bailing them out. Since our government has done such a bang-up job managing and regulating the system with taxpayer money – we might as well just nationalize them!” – he states you can’t trust the banks, so he wants us to trust the government. Is he kidding with that? I don’t deny the banks have screwed up – but tossing your hands in the air is stupidity.

While I enjoyed both his books (criticism aside) and he is a sharp guy – his most recent statement leaves me to believe he should stick to trading and bail on his economic hypothesis.
But – what should we expect in there times – even wise man will spout utter sh#t. Maybe he is looking for a place in the new administration – or a dinner invite over to Pelosi’s house?

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Futures Pre-market

Durable goods orders fell for the 5th consecutive month, combined with the vote pass on the $800 billion check – futures are seeing some down side in the pre-market. The euphoric optimistic rally based on the government riding to the rescue is now being meet with harsh reality – who is going to PAY? The spread is in and expect ARB traders to purchase futures and short the cash going into the opening – which will create pressure on the market at the opening.

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Support / Resistance

Got close and now we are seeing the pressure at resistance.

INDU 8000 (8250) 8500 (The question - --- is 8250 a pivot level or the new support. I certainly wouldn’t get long at 8250 – but rather flat.)

NDX 1100-1150 / 1200-1250 (The band in the support and resistance area is a little wide – I would say the outside levels are around 1100 – 1250. 1200 could be pivotal for sure. 1250 is still resistance for now.)

SPX 800 (850) 900 (Above 850, but we could revisit that today.)

RUT 400 (450) 500 (Not up to 500, but above the 450 level – to we come off and revisit the 450 area – sure we could.)

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Conclusion

As I was driving home I was really trying to think about value and wealth – not based on fiat currency but what people (nations) HAVE. Land could be one – but if the land produces NOTHING then the value is dwelling. Raw materials (including soft commodities) are what keep societies going. Our nation is very close to being tapped out in that respect. Sadly (and please don’t think that I agree with what I am about to say) – occupying assets is a reality that all governments (nations) at some point deem necessary – for without resources the society is threaten. In the old world – countries would concur other countries for the needed resources. In modern times that war is played with currencies and trade.

At the end of the day – everything is based on supply and demand. With the suppliers ALWAYS in control – whether we like it or not. The War on drugs has proven completely useless. We spend our resources and human lives to stop the suppliers – but as long as there is a demand the suppliers will continue to supply and continue to make money. As we continue to spend money to stop supply. The same is true with oil – as long as we demand it the suppliers will supply and make the money. Supply side economics is the winning side, the demand side is the losing side. You want to know what separates the rich from the poor – simple – supply and demand. Nothing more or less. Supply/Demand knows no moral right or wrong – it just IS!
The problem is this nation is a consuming nation – that means we are (for the most part) on the demand side – not the supply side. Our advantage – power, military, and the dollar (which for now – is the world reserve currency) – that is a very fragile situation. This countries might is largely built on perception of the value of the dollar.

We face a difficult road ahead.

Did I mention this year - better to hedge your positions?