Thursday, June 9, 2011

My Stock Market Call and Bill Gross of PIMCO

My proprietary market analysis call can be divided into long term (one to three years), Medium Term (2 months to 12 months) and Short Term.( Week to two months).  
The Long Term forecast is rather easy to make. When combined with the demographics, debt and business cycle and mixed with volatile geopolitical situation developing, we are looking at a rather grim picture. The debt deleverage process has started and balance sheets will contract. Social unrest and xenophobia is increasing and will soon take an epic proportion right here in USA as well as in Europe.  I think the stock markets around the world will see their values reduced in half by the year 2015. However market can remain irrational longer than we can remain solvent. So don’t go and short the market today. There will be many rallies between now and the bottom and each one of them is a trading opportunity.
The Medium Term call is the tough one. Let us not delude ourselves with the thought that the markets are free and fair. May be I am wrong but I think the markets are manipulated to the hilt and it is our job to see that we don’t end up as suckers. As they say “Caveat Emptor”. In the medium term, the market is moved more by liquidity than by fundamentals. And that liquidity is now being provided by the central banks of the world. Banks are able to borrow at 0% and invest risk free in the treasury. So all the money that Fed provides to its primary dealers by POMO end up lowering the treasury yield, pushing the stock prices and as an unintended consequence, push up the commodity prices.  We see lots of churning in the medium term. High volatility will be norm. I expect by Sept 2011, the endgame will start and that trend will continue for a long while.
In the Short Term, things get really interesting. Please remember that I am not a day trader or scalper, so I am less interested in the inter-day movement. It seems that the stock markets in USA are reaching a top.  We are seeing a mini sell off in the beginning of June 2011. We hear talks of front running the end of POMO and people getting off the risk trade, which is equity and commodity. But I do not think that the end of the world in here yet. I am not a TA but let me make some simple suggestions about where S&P going to be in the short term and then we shall evaluate these projects as they come to pass.
From the top of 1370 in April 2011, we saw a close of 1279 yesterday (8th June 2011). That is a 91 point or 6.7% drop. We see the channels as 5% or 10% not something in between. So I think the drop is not over yet. By end of June S&P should be near about 1230-1235 range. In the mean time option expiration is next week, 17th June. They have to inflict the maximum pain on the maximum number of people. So they will now want to kill the put buyers and the short sellers. I expect the market to go up from here and show little pop till option expiration. Then the drop begins again till end of June.
Just when everybody and their grandmother is convinced of a crash and the air is heavy with the talks of end of POMO, thereby end of easy liquidity, and have piled on with all sorts of puts and short trade, the market starts to climb again from July onward. The retail trade will be the worst looser, as they will not believe that the market has turned till the S&P has reach or crossed 1400 by August. Then everyone joins the bull bandwagon and the last remaining dollar is put in the stock market.
Beyond August 2011, it becomes the subject of Medium Term projection. In support of my short term project, I have an unlikely witness. Bill Gross of PIMCO. Mr. Gross is one of the smartest fund managers in the world. He thinks that at the end of June, when POMO is closed and QE3 is not immediately announced, the yield in treasury market will go up. The reason treasury yield has come down below 3 is because Fed is monetizing debt and is engaged in a giant Ponzi scheme to keep the interest rate low. Gross thinks the treasury investors are destined "to get cooked like frogs in an increasingly hot pot of water,"
Now here I would like to draw your attention to the correlation between SPX and TNX.( COBE Treasury Yield Index). When TNX goes up, S&P Follows. Sometimes this correlation brakes but that is due to direct intervention of the FED. If as Gross says, the Yield will immediately go up from July, TNX will go up and S&P will follow through to the high. Till such time, the high rate of interest starts biting the growth and it becomes apparent that the 3rd and 4th quarter GDP will be zero or negative. By then it will be September. As far as conspiracy theories go, this one is brilliant as it gives the manipulators the chance to make a fool of everyone else.