Courtesy of The Pragmatic Capitalist

I’ve made some fairly good calls over the last few years, but I don’t attribute a single one of them to any sort of prescience, brilliance or great knowledge.  Most of these cases are simply due to the fact that I’ve studied a great deal of market history.

When I said the housing bubble was the greatest risk to the equity markets in 2006 it was largely due to the fact that the price action in U.S. real estate was almost perfectly identical to residential real estate in Japan in the 80′s.  When I said the banks were likely a buy on March 10th 2009 it was almost entirely because I had studied the history of past asset class declines (Nasdaq had declined 93% from its peak in 2001 – the same exact percentage decline at the bank sector’s low).  When I said the bailouts were likely to have a muted impact on the Main Street recovery it was almost entirely due to the fact that the Japanese had implemented a similar plan in the 90′s with poor results.  This isn’t brilliance.  It’s just research.  Anyone can do it.  But here we all are pondering the impacts of quantitative easing when we have historical precedent and despite poor results most investors and policymakers seem to be saying “this time is different”.

Of course, the whole theory behind QE revolves around the idea that the Central Bank can reduce long-term interest rates.  If they can reduce rates they can make other assets more attractive, they can create a refinancing effect, they can entice borrowing/lending and they can alleviate the pressure on debtors.  All of this will theoretically help boost aggregate demand and result in sustained recovery.  There is only one problem with all of this.  There is no historical evidence that QE actually works to lower interest rates.  I’ve already highlighted the two most famous cases – the USA and Japan where interest rates rose throughout the programs, borrowing remained weak and the economies remained weak.

One instance that is less well documented, however, is the case of quantitative easing in the UK.  The following chart shows the duration of the program and the interest rate effect:

The conclusion is obvious.  Interest rates do not decline during a program of quantitative easing.  In fact, in all three cases I’ve highlighted interest rates rose throughout the program.  This is extremely important to understand because without the intended interest rate decline there is simply no argument in favor of this policy.  There is no refinancing effect, there is no reduced rates to borrow at, there is no fundamental change in the economy.  This is why, after all three instances, the economies remain(ed) very weak.  QE is merely an asset swap.  It doesn’t alter net private sector financial assets.  It does not reduce rates.  It does not create jobs.  It does not boost aggregate demand.

Thus far, the only thing QE appears to do is drive asset prices higher without being supported by any underlying fundamental change.  This is largely due to the psychological impact of QE and the falsehood that QE = “money printing”.  Thus far, this psychological impact of QE has backfired on the Fed as input costs have surged and the Fed has inadvertently begun to reduce corporate margins.  If the goal here is to keep “asset prices higher than they otherwise would be” then the Fed appears to be winning their battle.  Unfortunately, there is no evidence showing that there is a fundamental reason why QE would justify such a move.  In fact, the market collapses following the end of all three major historical QE programs appears to prove that this is bordering on ponzi Central Banking and nothing more.

Mr. Bernanke appears to be ignoring the simple historical facts.  And those who ignore history are destined to repeat it.

(Excerpted from the most recent issue of the BullBear Weekend Report and updated on Friday, October 22, 2010)

Although the current market dialogue between Bulls and Bears is focused on the Inflation vs. Deflation dichotomy, it’s possible that a dynamic between Risk vs. Safety is the better framework for analysis.

The possible transition from Safety to Risk took a big leap forward recently as the most favored repository of investor fears, the US Treasury market, showed significant signs of breaking down and putting in a long term top. SPX:USB, the ratio of Risk to Safety as measured by the S&P 500 / US Treasury 30 Year Bond price, closed well above its 200 day EMA after having broken out of a declining wedge pattern. After the breakout the EMA was successfully retested:

This came even as market participants were given cause for renewed alarm as all 50 States Attorney Generals sued the major banks for mortgage load fraud. It also came as Ben Bernanke (along with other key policy makers) raised doubts about the size and scope of any future monetary easing. Many markets–precious metals in particular– owe recent gains almost exclusively to the anticipation of substantial future monetary and price inflation. There is cause to believe that that assumption may be at least partially disappointed at the November 3rd Federal Reserve meeting.

The long term monthly chart of this ratio also shows that as the 200 day EMA was taken out, the long term uptrend was recaptured.

The daily chart of the long bond ETF, TLT, shows that a Wave iii of 3 decline may have begun.

It’s possible that market conditions may converge to cause a final retest of the key 104 level, setting up a (iii) of iii of 3 decline making any such move an ideal shorting opportunity. The drop from there could be fast and dramatic as bond holders decide that there is potential downside risk in bonds and opportunity cost in staying out of risk assets like equities.

Another ratio of Risk to Safety, the Junk Bond ETF to the US Treasury 30 Year Bond (JNK:$USB), is also showing some very bullish technical action this week with a 50/200 bullish EMA cross.

On the short end of the yield curve, the 2 Year Treasury is showing signs of bottoming out. In 2003 the next leg up in the stock market was signaled by a breakout in this market. Traders should keep their eyes here for confirmation that a big move of parked funds from safety to risk is underway.

The long term chart of the 30 Year Treasury Bond price shows that in late August it once again reached the upper rail of its long term trend channel. In every prior case this market has sold back down to its long term 360 week EMA.

In the short term, the Treasuries market may be the beneficiary of flight to safety as doubt about QE2 and fears of a mortgage related banking crash grow. In my opinion at this time if this were to occur it would probably represent a great setup for a long term shorting opportunity.

Tim Iacono

Here’s a chart from the current issue of the investment newsletter at Iacono Research. It’s been quite a ride for gold, silver, and mining stocks in recent months, their future direction now uncertain as the world waits to see what Ben Bernanke and the crew at the Federal Reserve do in ten days after the most highly anticipated Fed meeting in quite some time.

I continue to think that the junior gold miners ETF would be a nice addition to anyone’s investment portfolio and it is the star performer in the 2010 model portfolio with a gain of 39 percent, however, as should be clear in the upper right portion of the chart above, it can go down as fast as it goes up. At this point, it’s all about investors’ appetite for risk and, last week, some of that appetite disappeared, the silver price being similarly affected.

Scott Redler of T3Live

Yesterday I came in with a little short on the brain after Tuesday’s harsh sell-off. I was short overnight, added to spy on the open around 117.25- by 11:00 and I was stopped out around 117.50-117.60. It’s okay to have a contrarian-type idea, but you can’t be stubborn if you are wrong. Take your loss and move on. The market bounced back hard and is now near the 1185 resistance area. Banks finally bounced which gave the market a lift. Stocks are still acting well, holding support and working through some upper levels. Earnings season continues and there seems to be some sneaky, but steady bids under the S&P futures markets.

Tech
Apple Inc. (AAPL) is still working off the earnings, creating a new upper range. It seems like in time Apple Inc. (AAPL) will trade above the new 314-315 pivot, then 319 and finally new highs. Support is around 306-308 with lower area around 300.

Google Inc. (GOOG) is still holding the new upper range after monster earnings. Seems like this one has more upside as well. I will try some Google Inc. (GOOG) if it triggers above 617-620 for a cash flow trade.
Baidu.com, Inc. (BIDU) is still holding its upper range into this afternoon’s earnings report. I continue to be tier one long Baidu.com, Inc. (BIDU) with average around 101.50. I will talk about a strategy again around 3:30 for the earnings report tonight. FREE BIDU STOCK ANALYSIS HERE
Netflix, Inc. (NFLX) was a monster after beating estimates yesterday’s earnings estimates. The stock is up more than 10%, and bucked the growing trend of selling off strong tech earnings (besides GOOG). Our community bought the Netflix, Inc. (NFLX) 150 and 155 November calls, and most guys are already hedging up here around 170-175.
Amazon.com, Inc. (AMZN) is still holding its upper level and was upgraded today. Amazon.com, Inc. (AMZN) is back near highs ahead of earnings tonight, and I probably will stay away from this one.

Casinos
Wynn Resorts Limited (WYNN) made a quick snap back to repair its chart and put us in game for a momentum move above 102.50-103.
Las Vegas Sands Corp. (LVS) also snapped back after a quick short. We got a little greedy trying to catch continuation to the downside yesterday, but this leader showed tremendous strength. Las Vegas Sands Corp. (LVS) feels like it wants to continue higher.
MGM Resorts International (MGM) has been the dog in the casino group, but is worth a look here around 11. I went long yesterday and will add to my MGM Resorts International (MGM). I think we can see 11.55-12 easily.

Banks
Goldman Sachs Group, Inc. (GS) is flexing muscles as the leader in the financial sector and is above 160. Our guys have been trading this well. Goldman Sachs Group, Inc. (GS) doesn’t have heavy exposure to the foreclosure mess that is currently weighing on Bank of America Corp. (BAC, Wells Fargo & Company (WFC) and JP Morgan Chase & Co. (JPM).
Bank of America Corp. (BAC) did an 80-20 bottom yesterday, trading through 11.71 and back above. I did buy some Bank of America Corp (BAC) in the hole around 11.50 and added at 11.71, and now think we can see 12.25-12.40ish soon. FREE BAC STOCK ANALYSIS HERE
Wells Fargo & Company (WFC) and Morgan Stanley (MS) are both bouncing as well.

Rare Earth Resources Limited (REE) has been an absolute monster, but is a dangerous speculative trade if you are not extremely quick and nimble (like Jack). We traded it well from 8.60 to 12ish, now it could use a rest, and perhaps a short for those with that type of time horizon. Also watch Molycorp, Inc. (MCP) in the rare earth sector.

SouFun Holdings Limited American Depositary Shares (SFUN) and MakeMyTrip Limited (MMYT) are on my radar as well for a set up to new highs at some point. These hot Chinese IPO’s must be on your radar.

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