Don’t Bet Against the U.S.

Before May, there were plenty of investors wondering if the stock market had gotten too far ahead of the economy. Sure, stock valuations themselves have stayed within historic norms, supported by strong earnings growth.

But with unemployment stuck at persistently high levels, ongoing imbalances in the economy, and record high budget deficits, it’s reasonable to wonder how long earnings growth can continue. Now, after the debt issues with Greece have revealed some serious dissension in the European Union and questions about the future of the euro as a currency, we’ve seen an abrupt reversal. 

At last week’s lows, the S&P 500 was down 9.6% from its highs. Oil prices are down 20%. 

Now that prices have sold off sharply, I expect we’ll hear investors wonder if the stock market has dropped too much, given the pace of the economic recovery and earnings growth.   

One thing is certain: the weakness in the euro has been good news for Treasury bonds. Investors bought $140 billion in T-bills in March, nearly triple February $47 billion. Investors will almost certainly have continued to seek out the safe-haven of T-bills in April as well.   

Yes, the U.S. dollar has once again showed why it is the world’s reserve currency. The real irony here is that those who are bearish on the U.S. economy point to rising interest rates and falling demand for U.S. debt as serious problems.   

Now, I realize that the U.S. dollar is strong mainly because the euro is weak. But that doesn’t change the fact that it doesn’t pay to bet against the U.S.   

On Friday, TradeMaster Daily Stock Alerts Jason Cimpl made a very interesting observation in his daily letter to his readers that I’d like to share with you. It was titled “Remember when banks were lenders”.   

Over the past year our Government, and the U.S. tax payer, has given banks billions of dollars so that each could survive the economic downturn and provide lending to people and businesses. Given that generosity, one would believe that the banks would cease abnormally risky activities that brought about peril in 2008/2009 and focus on lending again.   

The biggest U.S. banks one year after the crisis still refuse to lend. Instead they focus on trading to make a profit. The strategy has worked to their benefit, but recent results are eye-opening. I am not a big conspiracy guy, but even this information had me scratching my head for a likely alternative – besides conspiracy.   

In the last quarter, Goldman Sachs, JPMorgan, B of A and Citi reported a positive trading day, every day. The gains were not just a couple hundred bucks either – most days were over $100 million in profit. Seriously, do you have any idea how hard it is to profit every day trading?   

Let’s put some perspective on it. My idea of a great trader is one who profits 67 percent of the time. Of the 63 or so days in each quarter, that ‘great’ trader would make money 44 of those days, which is fantastic indeed. The odds that this same trader could make 63 consecutive profitable trades is 90 billion to 1. That’s how hard it is for a trader with a 67% win rate to make 63 consecutive trades (1/ 67% raised to 63rd power).   

Now please consider that four of the biggest tax payer funded banks just cranked out 63 consecutive wins. Clearly, these institutions have an advantage. I continue to stress caution in this market. With the game clearly tipped in big money’s favor let’s be patient and not speculate the market’s direction. If the market wants to defy gravity and go higher, we’ll play it. If the market decides to take the "red pill" and come back to reality we’ll join. Big money controls the direction, we can only come along for the ride.   

Jason’s done a terrific job positioning his readers for profits. And he also protects his readers’ profits with trailing stops. During the so-called “flash-crash”, trailing stops were triggered for 5 positions in the TradeMaster Daily Stock Alerts trading portfolio.   

3 of those positions were sold for gains (+19%, +15%, +1%) and two were losers (-11%, -5%).   

Jason’s win percent so far in May is 66.6%, or two out of three. Nice work, Jason. Consistent profits and minimizing risk, that’s   TradeMaster Daily Stock Alerts