Friday – 5 New Trade Ideas That Can Make 500% If The Market Falls

Up and up the markets go, where they stop….

Stop?  Markets don’t stop going up, do they?  Certainly not when the Fed can toss $2.7Bn onto the bonfire to keep things warm for another day and, at $65Bn a month, that’s just an “average” day’s work.  

The worse the economic news is, the more likely the Fed will keep giving us FREE MONEY and the more the markets can go up.  

That’s the standard theory but, as we discussed in our Member Chat early this morning, that theory has a gaping hole in it:

Taper/ZZ – To me, it’s not about whether or not they taper.  1,850 on the S&P was the result of $85Bn a month.  Now it’s $65Bn a month so subtract 20 S&P points.  Just keeping it going doesn’t get us higher – higher we already hit and now there is LESS FREE MONEY than we needed to get to 1,850.  Remember my car-lot model – you have to have constant inflows of new cash into the market or you simply run out of people who can afford the pumped-up prices at which point ANY selling pressure ends up finding no buyers.  

Every day, 600,000 shares of PCLN are bought AND SOLD for $1,300.  That’s $780M per day – just to maintain $1,300.  When there’s an influx of new money (10% is a rule of thumb) the stock can rise about 1%, so it’s not that hard to pop the price but, once you do – you then need 1% more money every day to sustain it.  

This is twice as much as we needed last year already and, despite the fact that there are mutual funds and ETFs and even hedge funds that are forced to buy it because it’s in an index or group they track – you still need $780M a day to keep those plates spinning. 

Now, consider the cost of keeping the whole market 30% higher than it was last year.   To some extent, money was re-allocated from other investment classes (gold, TBills, wages) and, of course, some money is printed (lots, in fact) but still, every day, the market needs 30% more than last year to keep up appearances.  So, where does this money come from every day?  Corporations are a big source of it because they are buying back their own stocks and buying out competitors and decreasing the total supply of shares available – that’s a big help.  The top 1% have much, MUCH more money (the Forbes 400’s net worth climbed from $1.7Tn in 2012 to over $2Tn in 2013 – up $300Bn or an average gain of $750M per Billionaire – yet no lynch mobs will be formed) so we can assume much of that goes back into the market but it’s peanuts compared to the Fed’s now $65Bn per day pump job.  

Then we have stimulus from the BOJ (now more than the Fed at $75Bn/day) and the PBOC and the ECB – all helping to keep those plates spinning each day but where does NEW money come from?  Wages aren’t up, people aren’t saving and there’s no inflation so money isn’t flowing from the Banks and multiplying.  This is all how the supply of money “suddenly” dries up and we end up in a crisis, that no one could see coming….