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    MARKET EDGES

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This note was originally published at 8am on June 28, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Go ahead, yank.”

-Margaret Hastings

So, I’m bearish. And I really want to know why the bulls are still bullish. If the bull case at  the Q1 top was ‘growth is back, earnings are good, and stocks are cheap’, their entire thesis has to have changed.

Sadly, with Growth Slowing, earnings at risk (73 of the S&P’s 500 companies have already guided lower), and “cheap” getting cheaper, we all know what the bull case is now – bailouts. When centrally planned, those are bearish long-term, too.

If you are like me, publically admitting you are bearish on both the immediate and long-term durations, why wouldn’t you have a big Cash position here? Even for central planners in the post 49BC era, economic gravity has proven to be hard to stop.

Back to the Global Macro Grind

On the morning of the 19th European Bailout Summit, Global Equity and Commodity markets are red and the Euro is getting yanked right back to $1.24.

Imagine that, after 18 attempts these people think we are all dumb enough to believe that this is going to be resolved. *Long-term Risk Manager Note: piling more debt and leverage on top of this sick puppy is only going to prolong the pain.

That’s what she said.

Corporal Margaret Hastings is one of the American heroes in the book I am finishing this week, Lost in Shangri-La – “The True Story of Survival, Adventure, and The Most Incredible Rescue Mission of World War II.”

The aforementioned quote comes from the point in the story where she was down to weighing about 90lbs, badly burned, and dealing with life threatening gangrene. The paratrooper medic was babying her wounds and she promptly reminded him that “If I were back at Fee-Ask, the GI medic would yank the bandages off and then scrub my legs with a brush.”

God Bless America’s bravest.

The world can learn a lot from realists who aren’t trying to prolong the inevitable. If you can’t handle the idea of letting free-market prices clear, the market’s underlying wounds do not care. Eventually, they need to be addressed. At this point, doing more of the same to perpetuate debt mounting and Growth Slowing has reached the height of political cowardice.

Stock, Commodity, Currency, and Fixed Income markets get that. That’s why, when I take a step back and look at the context of these no-volume rallies like we had yesterday, I get more concerned, not less.

Looking at the internals of the SP500 yesterday, here are the key points:

  1. PRICE – both TRADE (1336) and TREND (1365) lines of resistance remained intact
  2. VOLATILITY – both TREND (18.22) and TAIL (14.26) lines of support remained intact
  3. VOLUME – yesterday’s volume was one of the worst (on up days) of the year

On that last point, I have been measuring average down day volume versus up day volume in Q2 as a proxy for both conviction and money flows. Yesterday’s volume was down a shocking -28% versus the average down day volume of the last 6 weeks.

The other obvious point about yesterday’s rally was that the nasty stuff was up the most. In other words, the worst performing Sector (Energy is down -7.4% YTD) led low-volume gainers, whereas one of the best performing Sectors (Consumer Discretionary is +10.5% YTD) led decliners.

This daily observation is very short-term, but it certainly rhymes with my basic long-term conclusion that bailouts will only structurally slow growth at an accelerating rate. Up Energy/Food price days slow real (inflation adjusted) economic growth.

Whether central planners targeting “asset price inflation” get that or not yet remains the most obvious question Romney should be asking Obama, repeatedly, during the Presidential Debate. If I were Romney, I’d label Bernanke as Obama (and Bush’s) guy. I’d also constantly pound on the point that the Europeans are now behaving like Hank Paulson and Bernanke did.

What happens when the Europeans eventually release their Paulson/Geithner “bazooka” anyway?

  1. The Euro could easily snap $1.22 and put “parity” back in play
  2. On that, the US Dollar is going to rip – say $84-85 on the US Dollar Index
  3. Commodity prices (and the equity markets priced off their top-line assumptions) will keep getting rocked

Maybe we get that at the 23rd Summit?

This folks is what Paulson/Geithner/Bush didn’t understand about free market prices in 2008, so don’t expect Geithner/Hollande/Obama to get it now. After the 2008 $800B Bazooka was deployed, that’s why Paulson yanked himself towards a garbage can for immediate-term relief.

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Germany’s DAX, and the SP500 are now $1545-1593, $88.16-93.39, $82.23-82.91, $1.24-1.26, 6085-6259, and 1320-1336, respectively.

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

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