Thursday, September 6, 2007

There Is No Free Lunch

Stocks Decline After Beige Book Reading Doesn't Guarantee Rate Cut
NEW YORK (AP) -- Stocks finished sharply lower Wednesday as a jittery Wall Street sold off on a report showing a large drop in pending home sales and read anecdotal data from the Federal Reserve's regional banks as offering little more assurance that an interest rate cut is likely. The Dow Jones industrial average dropped more than 140 points.

Aw, look at all the pooh faces on Wall Street. You'd think free lunch had been canceled. Lunch was never supposed to be free you dumb asses. If I recall my first introduction to the stock market... "To put it simply, stocks go up because their profits are 'expected' to rise, and stocks go down because their profits are 'expected' to fall." The cost of money 'can' effect the cost of doing business, and it 'can' effect a companies profits. But cheap money, or even free money for that matter, can NOT guarantee a companies profitability.

So why do stocks go down on "fears" there won't be a Fed Funds Interest Rate cut, and up on "speculation" that there will be a Fed Funds Interest rate cut? The answer is simple. Investors who shouldn't be buying stocks they can't afford, can not buy them if the money isn't real cheap or free. When the money is cheap or free, these same investors who can't afford to buy stocks buy all they can because "the stock market only goes up" and they have to get a piece of the action.

It isn't any different than the nonsense of the past six years in housing. People who couldn't afford to buy homes did because they were given the money to do so. And everybody knows that home prices ONLY go up. That is until they go down. Just like stocks. When there are no more "legitimate" buyers, home prices fall. And in the stock markets, when there are no more legitimate buyers, stock prices fall. Just like the rising housing market was fueled by easy money the past six years, the rising stock market has been fueled by the same easy money.

Home prices didn't rise the past six years because of any "value" attached to them. And neither have stocks. They both rose ONLY because people had money to buy them. Given a rising, unlimited supply of money, people will spend it and prices for assets will rise. It's called INFLATION. Take away the free lunch, and prices will fall. I know, shocking isn't it?

Oh look! Oil prices have been rising and nobody seems to notice. The chart posted above is a textbook picture of a bull market. The only thing that has stood in Oil's way has been Goldman Sachs rigging of their commodity index. Oil is in a SOLID uptrend. A falling Dollar will only give rising Oil prices more support. This morning Oil has cleared 76 and again set it's sights on 80. Soon we will begin to hear stories of heating oil shortfalls at the refineries and the price of Oil will move even higher.

Oh look! The US Dollar is staring destruction in the face again. The Dollar reminds me of that floater that won't go down the toilet even after the second flush. Time to get that 8050 plunger out of the cabinet for a power flush. That Fed Funds Interest rate cut all the pooh faced Wall Streeters are hoping for will go a long ways to sanitizing the toilet bowl the Dollar currently floats in.

Today most major retailers will post their August sales numbers. If they suck, it does not bode well for the economy going forward. Tomorrow the most revered monthly economic report will be released. The convoluted non-farm payrolls number. And all indications are that this number should suck as well. Another arrow in the heart of the economy. Captain Bernanke has promised "appropriate action" should the economy signal a turn for the worse. He has promised to to stop fighting inflation and create more of it to SAVE THE ECONOMY. Ben, you're awesome!

As Gold attempts the much anticipated breakout at 682, I note the current price of Silver relative to Gold. When Gold was last priced in the 680s, in late July, Silver was trading around 13.25. This morning Gold is 686 and Silver is ONLY at 12.29. I would say that Silver has a lot of catching up to do. It wouldn't surprise me if it did it quickly either. Silver IS the BEST value available today in ANY asset class.

The July high in Gold was 687.75. Gold has it's sights set on that mark this morning. Having broken the May 2006 downtrend line this week at 682, Gold must now clear horizontal resistance at that July high to confirm the downtrend may indeed have been broken. If so, Gold is in for one mammoth leg up in the coming weeks. Silver would do well to quickly regain control of it's 65 week moving average at 12.59. It would appear that the times are indeed a changin.

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