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[roguedolphin]

Very interesting article from a while back that I believe is "Dead On".......a good read and I do believe the author has the "big picture" nailed here.


The Trillion-Dollar Head Fake

The Trillion-Dollar Head Fake
By Tobin Smith
03/25/2005

Every once in a while the market does a VERY extraordinary job of confusing the most people possible. This is one of those times, and I am anticipating what I call the Trillion-Dollar Head Fake.

The Trillion-Dollar Head Fake will:

# Take the broader indexes higher for a short while on an over-the-top bearish reversal.
# Take energy and energy infrastructure complex stocks back to January lows via a sharp, secular bull-market correction.
# Suck in a bunch of money at the top of the S&P 500, Dow and Nasdaq trading ranges.
# Suck money into the Nasdaq 100 stocks and Philly Semiconductor Index.
# Turn that latecomer money into dog poop.

This is the time to re-examine your exposure to the energy sector. Remember, it's important to have the firepower to profit when the head fake itself plays out.

IS THAT A MIRAGE?

#When you combine the critical moves the Fed made yesterday, today's CPI numbers and last week's price-deflator numbers, and the bond futures markets for 2006 delivery, you get one of those rare glimpses of what I call an "investment mirage." Here are the components:

# Look for the oil bubble to burst and take prices to under $50 per barrel. This takes exploration and production stocks down to January support levels -- as much as 20% lower in cases where the companies have no hedging.

The key to this will be the U.S. announcement that the Strategic Petroleum Reserve purchasing is complete, with 700 million gallons of light, sweet crude in the ground. As 400,000 to 500,000 barrels a day come back into the market, we should see another leg down in oil prices to below $50.

# Expect 10-year bond rates to rise to 5%, moving 30-year mortgages to 7% by year-end. This will be hard on housing market demand with a rush to get in starting NOW, with soft demand continuing into Fall.

# Chain-weighted inflation moves to 3%. That's high enough to get the Fed to raise rates 0.5% in June on the way to 4% by November -- with more to come IF we don’t see GDP come back to 3.5%.

# Capacity utilization rises above 80% in the next quarter for first time since 2000. This would be another harbinger of slightly increased pricing power and systemic inflation.

# Unit labor costs continue their 2.4% annual rise, which pressures service companies to raise rates.

# A short-term bottom for stocks on ultra-negative sentiment launches an oversold rally in stocks -- which peters out just around the time that energy complex stock sentiment reaches its nadir.

# Another long-term rally in energy complex stocks takes the leadership of the market back from the Dead Tech bounce.

What does this mean to you? Well, it means you have one more shot at selling your:

# Financial services stocks.
# Mortgage stocks.
# Faux financial services stocks (e.g., General Motors, GE, Ford, Deere).
# Old tech.
# Early-stage cyclicals (e.g., cars, consumer durables, airlines, etc.).

The S&P 500 is down around 7% this year, excluding energy complex stocks. And since energy complex stocks only make up about 7% of the indexes, most investors are down for the year.

The head fake is on. Ignore it at your own peril.

YESTERDAY'S FED CHANGEQUAKE

The Fed is CLEARLY telling us from their notes and new language of yesterday that they will continue to raise interest rates well past the neutral rate if the economic numbers continue to roll around a 4% GDP. And our ChangeWave Alliance research shows that this kind of GDP growth will be the case in Q1 and close for Q2.

Listen, I’ve been a Greenspan Fed watcher for almost 20 years. Historically, ANY expression of concern shown by the Federal Reserve with respect to the inflation outlook has been met with rising interest rates in the bond market.

When the Fed tells us that the inflation rate is on the rise, they are telling anyone who will listen that they will respond to ANY inflation threat by raising interest rates as much as necessary to maintain “containment.”

Here were the cues from the policy statement by the Federal Open Market Committee yesterday when compared to the Feb. 2 statement:

Feb. 2: The committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters to be roughly equal.

March 22: The committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be KEPT roughly equal. (My emphasis.)

In February, the Federal Reserve indicated that it believed inflation risks were inherently low. Yesterday the Fed told us that if these risks are to be "kept" low, it will require actions from the Federal Reserve.

Strike one.

Feb. 2: With underlying inflation expected to be relatively low, the committee believes that policy accommodation can be removed at a pace that is likely to be measured.

March 22: With underlying inflation expected to be contained, the committee believes that policy accommodation can be removed at a pace that is likely to be measured.

"Relatively low" is NOT "contained."

This is NOT a subtle change. The Fed told us yesterday that they are no longer characterizing the inflation rate as low. They told us that ACTION, not words, would be needed to keep inflation contained.

I expect the Fed will raise interest rates by a half-percentage point at the June 30 FOMC meeting. And guess what? The market has already priced this into the futures.

This big shift qualifies as a monetary ChangeQuake, and I want us to make money from it.

This is part of the trillion-dollar head fake.

OIL PRICES

The risk here is a faster slide to the $45-$48 per barrel level as the inventories build and 500,000 barrels a day stop flowing into the Strategic Petroleum Reserve.

I can also tell that the market psychology has gotten too far ahead of itself. The big move to $57 oil seemed to turn the oil bears into roaring bulls. Too many traders on one side of the canoe tips it over, and that is exactly what I see happening right now in the oil trading pits.

Here are my fears -- and the trap I do NOT want to fall into:

1) Oil peaks and sells off fast. Energy exploration and production names and the most extended energy stocks come back 30%-40%.
2) Negative market sentiment measures move to extremes, which cements an S&P 500 bottom.
3) Oil falls further.
4) Non-energy stocks rally further.
5) When oil once again finds its footing around $45-$48 -- end of rally.
6) Energy complex stocks bottom and quickly rise to reflect structural supply/demand imbalances.

This is a classic market “head fake” that sucks in a lot of money at the top.

Then we see a fundamental supply/demand imbalance in oil rally prices back to the highs, and possibly beyond. Ditto the alternative energy and infrastructure plays.

All the while, non-energy and infrastructure stocks (i.e., the S&P 500 index tied primarily to financial stocks) simply run out of steam in a cloud of interest rate hikes.

We are going to make ANOTHER KILLING in the energy complex spaces when this two-step is over. But you gotta be prepared and ready to strike when the time is right.

Sometimes in life, timing IS everything.


LINK: http://www.changewave.com/BreakingWaves.html?Source=/Archive/2005/3/25-69417.html


Rogue