Is It Really Possible to Ignore the Fed?

Brian Hicks

Updated September 21, 2011

I really didn’t want write about the Fed, the dollar, and gold again.

Because, to be frank, I suspect we are all sick to death of waiting around for one guy to step up to a podium and announce how he is going to save the world by giving away money. I certainly know I am.

We are supposed to live in a capitalist democracy where every man’s opinion is heard and his dollar equal. (At least, that’s what they taught me in public school civics class. You private school goodfellas probably heard a slightly less egalitarian version of that lecture.)

Some News that ISN’T About the Fed

I thought maybe I would write instead about the new iPhone 5 that’s due out at any moment. Apple (NasdaqGS: AAPL) engineers supposedly “lost” one in a bar… again. Once is an accident. Twice is either a real security problem — or a deliberate leak.

This is not a side issue: As I look to today’s charts, AAPL is just about the only thing holding the markets up. Seriously, AAPL is weighted at 14.87% of the Tech SPDR (NYSE: XLK).

The second player on the list, International Business Machines (NYSE: IBM), comes in at about half that at some 8.41%. And Intel (Nasdaq: INTC) is half that again at 3.99%.

Let’s face it: The tech sector is nothing more than one big toy store these days. Seems like the grownups have all left the building.

Arrogance and an Epic Tech Fail

Or maybe we could chat about Netflix (Nasdaq:GS: NFLX) CEO Reed Hastings’ epic fail. You might have read as to how they lost a million customers when they raised prices. And as of last week, NFLX shares had lost some 30% of their value since mid-July.

Hasting’ just wrote an open letter promising to explain it all away. But rather than a return to lower prices (or conversely, somehow improving user experience), he announced instead that he was changing the mail-in service’s DVD name to “Qwikster.”

I do have to agree with one part of Hastings’ letter: He is indeed one arrogant S.O.B. Stupid, too. Post Hastings’ letter, investors extended NFLX downside run to -50%. I suspect there is still more downside for NFLX.

My charts show the strong possibility of an additional -$50, and that’s just short-term support at the 200-day moving average. A well-played put option could probably pick up 50% to 100% gains in short order.

From Micro(chip) to Macro Market Moves

However, there are interesting “macro” reasons to dwell on Apple’s supposed good fortune and Netflix’s sudden downfall.

Both companies are in the entertainment biz. Oh, don’t even tell me that iCrap gets used for biz. There is nothing genuinely useful I can do on an iPhone or iPad that I can’t do better on a PC…

These are toys, plain and simple. And they cost $700. (Seriously, look up what an iPhone will run you when your kid drops it and you are NOT in line for an upgrade.)

Life Without Angry Birds?

And consumers are really, really depressed right now, scared out of their wits that we might be entering another recession — or maybe even lodged in gen-YOO-ine depression.

They have already demonstrated that they will abandon Netflix over a few bucks a month. How long can it possibly be before they decide they can live without a glorified cell phone that plays Angry Birds?

And if you were to take away Apple’s insanely overpriced toys, you would be back to a boutique computer company with some 15% market share.

The Next Dell?

If you are looking for a model of a fall like this, you might take a gander at Dell (NasdaqGS), currently trading for $15/share — roughly a fourth of their 2000 high.

Wow. Just for the sake of argument, I ran the numbers on an at-the-money Apple put: a 75% drop in AAPL would drive it to 530% gains. But don’t go buying them just yet. Because this whole argument depends on the herd recognizing that we are tipping over the edge into depression — which, I suppose brings us back to…

The Fed, the dollar, and gold. Damn it.

Twisting in the Wind

So we now we are back to sitting and waiting for the Fed to announce its latest “twist,” wherein it will sell some $400 billion of its bloated inventory of shorter-dated Treasuries and then buy longer-dated bonds off the market.

The idea here is that lowering long-term bond yields will enable existing homeowners to cut their monthly payments and maybe even pick up some spending cash. And these new lower rates might even spur a jump in the moribund real estate market.

Meanwhile, on the investing side, this move would further destroy the value and attraction of treasuries in the hope that folks might plunk down some change on “higher-risk assets,” i.e. stocks, instead.

Before I go any further, I have a question for you fine folks…

Is It Really About Rates?

You could probably get a 30-year note right now for just over 4%. You could get an ARM (God forbid!) for little more than half that. These are some of the lowest rates I have EVER seen.

So I ask you: Are mortgage rates stopping you from buying right now? Or is it the fact that you can’t unload your current house without taking a massive loss?

Let’s broaden that question a tad: Does anyone think American industry isn’t hiring because it is cash shy?

$256 Billion Stashed in the Bunker

As of the late summer round of regulatory filings, 24 of the Dow Industrial 30 had jacked their average cash and short-term investments by some 18% over the year-ago period.

Some examples:

  • Caterpillar (NYSE: CAT) reported $10.7 billion in cash — triple a year earlier
  • Microsoft (NASDAQ: MSFT) is up 43%, reporting $52 billion
  • Johnson & Johnson (NYSE: JNJ) is sitting on $30 billion in cash (up 57%)
  • Coca-Cola (NYSE: KO) reports $14 billion in cash — up 38%
  • Chevron (NYSE: CVX) has hoarded some $18 billion in cash, up 36% year over year

We’re talking roughly $256 billion in stashed cash and (very) short-term assets for the Dow 30 alone.


Except maybe tank the dollar (again), and jack up gold (again)…

Adding Gold Gains (Again)

Sorry about shouting like that.

But I did say that this whole Fed-dollar-gold roundelay was really getting on my nerves.

And yet, gold remains the best long bet right now.

A recent Schwab survey asked 911 registered investment advisors what asset classes they were telling their clients to heavy up compared to this time six months ago…

They weren’t adding tech shares (despite all of Apple’s crazy gains). And they weren’t doubling down on “solid blue chips,” despite all the pontificating about record-low PE ratios and such. There really was only one category these guys were adding: gold.

And so it comes as no shock that gold is the one asset that looks to be building real strength going into the Fed meeting.

If you don’t know the drill by now, well, you just aren’t paying attention…

A mere $100 bump in gold (a mere 5.54%) would push at-the-money Gold SPDR (NYSE: GLD) calls up some 87%. A genuine gold breakout to, say, $2,000 would see those gains rise to 170% in short order.

Adam Lass
Editor, Wealth Daily

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