A "Put" on the Market
Research for Online Investors

by John Dalt

9/27/10

Which way is the market headed this week?  We don’t know.  We have been on a three week run higher since August 31.  The S&P 500 kissed 1040 that day and has gained almost 10.5% since.  What has changed since August that creates so much enthusiasm?

It really isn’t enthusiasm, as volume has remained low through the month of September.  The biggest change we can see is the perception that the Fed is now more willing to flood the market with money in QE2 than they were in the middle of the summer.

David Tepper of Appaloosa Management was on CNBC last Friday morning and described the Fed’s actions as a “Put” on the stock market. “Either the economy is going to get better by itself in the next three months—what assets are going to do well? Stocks are going to do well, bonds won’t do so well, gold won’t do as well,” Tepper said. “Or the economy is not going to pick up in the next three months and the Fed is going to come in with” quantitative easing. In this case everything does well except bonds.

Tepper is a respected voice, as Appaloosa’s flagship fund rose 132% last year.  As the market gapped up and finished Friday with a mini-rally, I thought Tepper just moved the market!

Friday broke through the one billion shares traded on the NYSE for the first time since a week before on option expiration Friday.  Tepper’s observation that the Fed had made higher equity prices a no-brainer bet hit us on the side of the head.  We have been shorting the market in the SwingTrader since 8/31.  At every point of resistance, we put on another position.  Wow.  Tepper didn’t say the market can’t go back down, and we think it will.

We are sure enough of it; we put on another short this morning as the market hesitates just under the 1150 resistance.  We don’t want to bet the farm going short anymore than we would going long.  At each one of these steps, we have made a decision that the market would visit the lower levels we saw earlier, and wanted to be aboard for the ride down.

But…we think Tepper is right.  The Fed is going to print money and buy more treasuries.  They are going to flood the market until they get some inflation, and that is good for equities and precious metals.  We needed to hear it from a ‘guru’ like Tepper to have it sink in.  We made the connection with bond yields on Aug. 11 in Fed Fumbles, when we said “the Fed has an endless supply of money to exert their will on the market.”  We did not extend our analysis to the equities market.

The contrarian in us wonders, ‘Is Tepper shorting the market now?  Is he talking his book so he can get out?’  As we check the 10-year treasuries this morning, it looks like money keeps flooding into fixed assets, interest rates are down big time.  We have been using this as a leading indicator of where the market is headed.  We don’t see a large volume market rally while money continues to flow into fixed assets.

The mailbag:
If "trickle down" economics and tax cuts for the rich work so well, how come Between May 1999 and May 2009, employment in the private sector only rose by 1.1%, by far the lowest 10-year increase in the post-depression period.—subscriber P.P.

John’s reply:  Is it fair to remind you of the recession in 2000, the attack of 2001, democratic majorities in 2006, the credit crisis of 2008, and two overseas wars?  I would prefer to let everyone keep their money, with only a small necessary amount going to fund the government we need, not the government some want.  Have you ever gotten a job from someone on welfare?  The ultimate trickledown, a job.  I can tell you from personal experience, I sold my company and put 30 people out of work.  Why fight government at every level to be in business?

Quote:
Larry Summers, President Obama's top economic adviser, is stepping down. So finally some good economic news, I'll tell ya, Summers didn't want to leave, but apparently he was out of bad ideas.--- Jay Leno

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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