Ebola and Airline Stocks

What is going on in Africa is an absolute tragedy.  Unfortunately it appears as if this situation is getting out of control and now we have reports of an Ebola victim in Atlanta.  Additionally: “Our government has declared this now as a humanitarian crisis that is above the control of the national government,” Tolbert Nyenswah, Liberia’s assistant minister of health, told CBS News.  Also a good friend of mine told me today he is thinking of canceling his trip to London this October due to the Ebola news. The sector most levered to this situation is the airline industry.  The earnings leverage is immense and if people start to cancel or if governments restrict travel these stocks will get absolutely decimated.  These stocks have been home runs but they are very cyclical.  So far the charts are not indicating anything is amiss but that could change quickly.  I am not going short these stocks because it feels wrong to profit off of misery but if I was long I would be thinking of ringing the cash registrar.

FYI:  I personally think this ebola scare is nonsense.  2-5 million get the flu every year and about 200k-500k people die and we don’t ban travel or stop flights.  My fear is that governments need people to believe they are good at something so there might be a knee jerk reaction from the powers that be.   The fear imposed on joe six pack will be greater than the reality.  Bleeding from your eyes is sensational while dying in your sleep from the flu is common place.  It has been reported that the national guard has received ebola detection kits in all 50 states.  They received these kits in April.  We live in very interesting times.

As many of you know I have been bearish since arriving here in May.  I was confident then because many of my double secret probation indicators were screaming top.  That set up was erased and I was wrong in the short term.  We now have a better set up than we did then.  However, I am cautious about getting too short here because I now firmly believe the market is completely rigged by the Fed.  Someday the Fed will get overwhelmed and when they do all hell is going to break loose.  If we get follow through over the next few days then we should see a decline into August/September time frame on the order of 10-12%.  The rally out of that low should be very important.  If that rally fails to take us to new highs then THE TOP is in and get out of the way.  Until then take it day by day and stay nimble.  If the Fed negates this set up then look for a melt up top but let price be your guide.  My main point today is to warn you that the market is extremely dangerous here and things could unfold very fast. Cash is best until we get some clarity.

On a separate note 7/16 was the closing top in the DOW and also a major voodoo Bradley Turn Date.  In addition, if this is the top then it occurred in month 64 which is a fractal number in nature and happens to be the count in which many parabolic structures peak.  In no way do I use this stuff to make my decisions but it creeps me out to no end.  The DOW peaked intraday on July 17th which was the day that MH17 went down.  The market may be discounting the likely hood of War with Russia.  I have followed the situation in Ukraine since it unfolded in February.  I just want to say that what you read and hear in the MSM is not the reality.  This is a financial war that looks likely to spill over into a real war or at least an ugly proxy war.  This about the hegemony of the dollar, energy and the sovereign debt endgame.  100 years ago WWI began and the market tanked 30% and was closed for four months.  I would rather see a blow off top than War but so far the chart and cycles are telling a different story.

Today is very interesting.  The DOW looks like it may be breaking down.  Watch 16,900 as a close below suggests a break in trend.  Divergences are everywhere in this market.  A close below 16,805.38 (July 10 low) would really give the bears something to work with.  I am still mostly cash with small amount of DIA puts.

Throughout most of my career geopolitical noise was something that only temporarily affected markets unless there was an actual threat of war.  I think unfortunately (I hope that I am wrong) we are very close to things going hot in the Ukraine.  I believe that the Washington power brokers have left Putin no choice but to enter the Ukraine and annex it.

Let me explain.  To all but the dimwitted, the coup in Ukraine was a joint Nato/CIA backed operation to isolate Russia and enrich the West.  Putin has held back because he has been trying to build a case with the EU that it is in their best interests to resist the overtures of the West.  He is openly telling anyone who will listen to move away from the dollar and the associated issues that come with it.  With the downing of flight MH17 the demonization process of Putin has begun.  I don’t really care who shot down the plane, the point is it has happened and the Western media has decided to try and convict Putin in the court of public opinion.  The idea is to convince the EU members to go along with our sanctions and turn up the heat.  Sanctions from the EU would hurt the already ailing Russian economy very badly.  Washington thinks they now have the upper hand against Putin.  However, Putin knows that Obama has very low approval in the US and abroad.  He also knows that we have been downsizing our military and we have extended ourselves all over the world.  The comments today from Obama were timid and weak.  Putin knows that the US people have no stomach for more war.  I think he makes his move soon and it will catch the US and the world by surprise.  The best defense is a good offense.

Obviously if this happens I think the markets tank but let the market be your guide.  It will likely sniff this out and break down in anticipation of Putin’s move.  If we start melting up then I am wrong.  Again I hope that I am wrong.  War is awful and I don’t want to see it happen.

Yesterday President Obama announced more sanctions against Russia except this time they had teeth.  Forget the Kaubuki theater going on in Ukraine.  This was really retaliation for the Russian assault against the hegemony of the US dollar as the reserve currency of the world.  Russia was the leader in the recently formed BRICs bank and is actively seeking to de-dollarize the world.

In addition the Obama administration has done a bang up job of fomenting open dissent by our partners against the dollar.  For example, recent actions against French banks for supposed infractions has French officials actually calling for an end to the dollar’s rule.  The powers that be should be very careful when it comes to the dollar.  Should we loose our reserve currency status then the standard of living in this country would plummet.

Make no mistake about it but we are unofficially at war with Russia now.  The prior sanctions were a joke but these actually affect the flow of capital.  I think it is only a matter of time until tanks roll into the Ukraine now that we have upped the ante.

Stock futures are down due to the sanctions and we are still contemplating what the newly hawkish Janet Yellen said as well.  The market is beyond stretched and these two things may be all the excuse that we need to head lower as we are technically set up for a correction.  However, the bull is strong and we will have to wait and see how this unfolds and perhaps earnings will save save us.  It is just starting to get interesting.  I think many stock fund managers are going to have sleepless nights while on vacation this summer.

I read a lot of things.  Perhaps too much.  But it has come to my attention that traders are a superstitious bunch of folks.  Apparently today is a major Bradley turn date.  I have no idea what that is but many seem to be paying attention to it.  The market appears to have a bid to it this morning after Yellen’s stock picking recommendations from yesterday.  If we should fade and close red then Satan surely has taken charge of the situation and indeed strong voodoo magic is at work.  At the time of this writing we are green.  Good luck and lets be careful out there.

Janet is now picking sectors.  This is beyond weird!  She basically called out social media, biotech and small caps.  Apparently the Fed is now in the business of picking sectors.  Clearly they want to now control the structure of the market and they are basically trying to engineer a controlled correction without affecting the rest of the market.  The question is should investors ignore this or do we follow the maxim of “Don’t fight the Fed?”  Let price be your guide on the expensive stocks.  We have really entered new territory.  The hubris of the Fed and its belief that they can micromanage a correction is stunning.  I think it is about to get very interesting.  Watch 1950 on the S&P.  If we take that level out over the next few days then this correction has legs.  Otherwise it is noise.

A little birdie told me that Lloyd is trying to figure out why the bond  market is broken and is researching the subject.  Trading revenues in fixed income at GS are awful.  What is going on?  Well the bottom line is that the Fed has bought much of the supply leaving the yield seeking muppets to fight over what is left in the market place.  The problem is liquidity has dried up and a once robust bond market has become a perverted Frankenstein market.  Repo collateral fails are on the rise and are at the highest level since the Lehman collapse.  Regulation and Fed perversion have forced big players on the buy side into the derivatives market.  Why is that a problem?  Because derivatives are leveraged vehicles and leverage kills when yields rise.

Recently it was rumored that the Fed was looking at Bond Fund exit fees.  My sources tell me it is not a rumor.  Why would the Fed pursue such a strategy?  Conspiracy theorists would say the Fed sees something ugly on the horizon.  Regardless the mere fact that the Fed is looking into this suggests that there is a problem.  When yields rise the potential for a huge bond market dislocation appear to be epic.  Why should stock investors care?  Primarily because when there are margin calls in the bond market there will be zero bids.  This is due to regulation that has reduced the Streets capacity to commit capital for fixed income trades and people will be forced to sell what they can and that will be stocks.  Watch the bond market as it may be a key to unlocking the extended bullish energy in the stock market to the downside.  Bottom Line: When Lloyd and the Fed are looking into the bond market structure we should all proceed with caution.

The high beta stock recovery has been impressive since the May lows.  The broader averages never even flinched.  The fundamentals have been decelerating but the market continues to grind higher.  The only thing that matters is price and price is laughing at the fundamentals and the bears.  I have never seen a market so disconnected from economic reality.  At least during the tech mania in 1999/2000 the economy was actually on fire until it wasn’t.  Now we use snow as an excuse to explain away a -3% GDP print.  Anybody with a brain in their head knows this is a central bank induced bull market and because it is I fear a quick death to this market.  As an example I have a friend that manages $20 billion of Large Cap Growth stocks.  He called me out of the blue on Thursday asking me how to procure physical gold because he is worried about the dollar collapsing and the government taking his money.  He was not joking.  I asked him if he was positioning his portfolio for a correction.  He said no because the market does not pay attention to fundamentals.  That is what I call major cognitive dissonance.  He continues to play this stock market game that he does not believe in because he must.  The market has punished those who do not follow the merry central bankers.  The problem is the central bankers are taking us to a cliff.  I wonder how many large participants in this market don’t believe in what they do anymore.   The end game here is going to be epic.

All the sentiment indicators and all technical measures indicate that we should see a healthy correction soon.  If you are a bull you want to see some of the excesses worked off and some fear come back into the market so you can reload and buy the dip.  If we do not have a correction soon then I think we will have the potential for a terminal “phase transition” blow off top that will surely mark the end of this bull market and result in a crash.  The odds of a melt up of epic proportions were increased last week when Janet Yellen essentially said “have at it boys I don’t care about bubbles.”

I am mostly cash getting ready to shoot this market in the back (especially high beta tech) or meekly play the blow off top.  This is a very dangerous market that is disconnected from reality and is full of Zombies that are following the printing presses.