Central Bank Rally?
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6/19/12

The market is rallying today on Higher Building Permits and lower Housing Starts last month.  Greek politicians have agreed to form a government which should be in place by tomorrow.  Spain is slowly spinning down the drain in the bathtub of bad credit.  Spain auctioned 12-month Treasury bills this morning at 5.07% and 18-month notes at 5.11%.

Leaders at the G-20 meeting pressed Germany’s Chancellor Angela Merkel to agree to issue “Eurobonds” or take other measures to ease the pressure for eurozone countries experiencing lack of growth and high credit demands because of deficit spending.

The Moscow negotiations between Iran and the P5+1 look to end in a stalemate.  Both sides blame the other.  Russia is sending marines to Syria along with attack helicopters.  Russia operates a naval base at Tartus, Syria.  The Iranian news agency Fars reports Iran is participating in a joint military exercise with Russia and China on Syrian soil.

The operation is described as “the biggest of its kind in the Middle East.”  Fars states there will be 90,000 personnel, 400 airplanes and 900 tanks taking part in the exercise.  The exercise was announced yesterday before the Moscow Iranian Nuclear negotiations and meeting between Russian President Putin and President Obama in Los Cabos.

President Obama used the two hour meeting with Putin to press the Russian leader to work with the U.S. to remove Syria’s President Bashar al-Assad.  Putin balked at supporting the U.S. in dealing with Assad.  The New York Times reports Syria is Russia’s toehold in the Middle East.  Russia considers Syria a ‘strategic ally’ and their ‘last bastion of influence in the region.’

Catch the body language of the two leaders on their first date.

We are perplexed by the rally today.  We are always glad to have a rally for our Long-Term portfolio subscribers and the Covered Call portfolio, but what gives?  We are short the market in many of our SwingTrader positions.

The euro is rallying, crude oil is up and precious metals are down.  We wrote our Long-Term subscribers over the weekend that some of the “coordinated” market action the world’s central banks are prepared to take may have started last Thursday.

There is no better way to allay market fears than to rally equity markets.  We all know the Federal Reserve is active in the bond markets.  It has been widely reported the Fed is the largest buyer in long term U.S. Treasuries.  We also suspect, and there is a lot of evidence, that Central Banks use proxies to manipulate precious metals.

J.P. Morgan said they do not trade commodities except for their clients.  As the largest owner of short contracts (16,000) on the COMEX, who is their client if not the Federal Reserve?  The Fed has never admitted to manipulating equity markets, but do you think they don’t?

The protectors of civilization (and their own balance sheets) want low interest rates so retirees cannot live off their interest but have to put money at risk in the economy, they don’t mind precious metals going higher, but not too fast, and a rising stock market creates a “wealth effect” that keeps public opinion in favor of the current system.

We are not doom and gloomers, but any sentient person knows the present situation cannot continue.  We don’t know when European debt finally washes over the bureaucrats, but we know it will happen.  We don’t know when the bond vigilantes will finally turn their attention to the U.S., but we know they will.

We don’t know when the FOMC will announce another round of QE, but we know they will have to, because they cannot continue buying 75% of all U.S. Treasuries with maturities over seven years if they don’t expand their balance sheet.  We just don’t think it will be tomorrow.  Operation Twist ends this month, and the Fed has never announced one program until after the current operation ends.

Tomorrow sets up a big day of disappointment.  The market acts like all is wine and roses, we think the wine is about to go bad and the roses wilt.  The only reason we can see for the rally is Central Bank intervention.  Could it be the Plunge Protection Team is at work?

Quote:
The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks.---Lord Action

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