U.S. equities have experienced a nice little ramp the past few days and stocks do truly seem to be range-bound. It’s hard to make money when the indices are stuck in neutral. The trick is to pick your spots and recognize that opportunities are going to be limited.

The August employment report was just released and it shows that government workers are still being shed at a rapid clip. A lot of the cuts are state and local government jobs and the data highlights the importance of the U.S. government’s ability to borrow tremendous sums of money. If government at the national level operated with the same fiscal constraints as the state and local governments, the U.S. economy would truly be a smoking crater in the ground at this point.

The employment report is better than expected, but keep in mind that at this point in a typical economic recovery, employers would be adding jobs quickly. The global financial system implosion has left lasting scars on the U.S. workforce.

In other news, there is a good story on Bloomberg this morning which covers Nouriel Roubini’s opinion on gold relative to fiat currencies. Roubini believes that a new global recession will cause the U.S. dollar to outperform the price of gold because of liquidity issues. I believe that further global economic weakness would cause an increase in the price of gold because of the increased strain it would place on the U.S. Treasury market not to mention the debasement of the dollar due to the inevitable round of QE that would accompany another world slowdown.

In any event, the piece is worth reading but keep in mind that Roubini has been wrong on the gold market for some time now.

Once again, the stock market proves its unpredictability by exploding higher on the August ISM number, which came in higher than expected at 56.3. The consensus forecast was 53.3. Fortunately, I am not short equities and the current trade that I have on is making money. If you want to find out what I am trading you have to sign up for email notification by contacting me at bustedinvestor@gmail.com.

Today is a perfect illustration of why I am not all that bearish on the stock market as I noted in my post of a few days ago. Everyone already hates equities, so it doesn’t take much to get them to move higher. I’m still forecasting lower prices as we move through September, but for now, due to a combination of technicals and slightly better fundamentals, it appears that the trading range we have been experiencing over the summer is still intact.

What will it take to break out of the trading range? I think it depends on the global economy. (We can simply take the U.S. economy out of the equation as it probably will remain on life support for another couple of years.) If growth in the emerging markets starts to slow, then it’s likely U.S. equities grind lower. The reaction of equities to the ISM number, even though manufacturing makes up just 10% of the U.S. economy, tells me that stocks have already discounted a recession and equities have finally become cheap. We’ve had a decade-long secular bear market, so this is not all that surprising.

The market reaction puts the Fed in an interesting position. I think today’s slaughter in the bond market reflects the fact that the Fed might not have to intervene to support equities like everyone thought they would (including me.) At the same time, they’ve kind of set the expectation they are going to be very active, so I’m curious to see if they can disentangle themselves from buying Treasuries without another party being blown up and carried out? I think it is going to be difficult with moves this huge. It’s a good illustration of why the government shouldn’t actively interfere with markets.

Even CNBC is running segments with traders who are scratching their heads about the price of oil given the current monster inventory levels. Here is a little story about it. I noted the same thing a couple of days ago in a post. Read it here.

Of course, CNBC won’t come out and say that the high prices are the direct result of reckless monetary policy. Instead, the trader featured in the story, Peter Beutel, blames the situation on speculators, or investors as he puts it. That is disingenuous of course, but Peter’s willingness to find scapegoats illustrates the corrosive social effects of too much base money floating around in the economy. The authorities will do whatever they can to keep the public confused about the true source of high prices.

I’m watching a little CNBC this morning (always hazardous to your investment health) and they had a segment on this morning where the gang was sitting around the table wondering what the trigger would be for the next round of QE that Bernanke promised would come if it was needed? It is times like this when I think that CNBC gives all TV journalists a bad name because I know there are (were) some good TV journalists – Ed Bradley comes to mind.

There is NO mystery as to what is going to trigger the next round of QE. It is going to be the stock market cratering another 15%. That should provide plenty of deflationary ammo. After that silly bounce on Friday, the stock market is now going to tank and test Bernanke’s promise. As it is written and shall be……

Have a nice day and happy trading.

All the headlines Friday were over Bernanke’s speech from Jackon Hole, but because another round of QE is already baked into the capital markets at this point (witness the annihilation of the Treasury market after Ben’s announcement), the true story of the day was INTC’s revenue warning (here’s a little story from marketwatch) that third quarter sales are collapsing and current estimates are wildly optimistic.

INTC’s warning is important for two reasons. First, the weakness out of the company casts doubt on the strength of the global – we know the U.S. is in the toilet – economic recovery because INTC is truly a multinational enterprise . And second, the announcement of crap sales so soon in the third quarter is a sign that the entire summer stock market rally is built entirely on a foundation of bullshit.

For good reason, equity trader’s memories can be literally measured in hours because, in general, yesterday’s news doesn’t make market participants any money. However, I have to bring up the fact that just a scant five weeks ago INTC was trumpeting its “best quarter ever” in the earnings press release and their management was making noises about how great business was going to be for the rest of the year. To illustrate INTC’s deception, I’ve included a link to a Motley Fool “analysis” from Aug. 17 that gushes about the chip maker’s prospects based on the second quarter earnings report.

There are some interesting lines in the Motley Fool piece – “Looking ahead, grab the salsa, because Intel’s chip party continues.” ??? I would suggest: “Looking ahead, grab the xanax and 151″ because the author is going to want to forget that he ever wrote that piece of fluff.

I can’t truly blame the Motley Fool author for believing INTC management. They are supposed to tell the truth. I’m sure that technically INTC didn’t lie. However, it seems like INTC expects me to believe that they are incapable of forecasting business conditions just a month in advance? We all know they aren’t that stupid. If they are, they should be fired. To me, the entire episode illustrates exactly why the individual investor believes the stock market is rigged and cannot be trusted. We shouldn’t be shocked that retail has fled equities and the only market participants left are HFT shops trading against each other for fractions of a penny. U.S. equities have become a national embarrassment.

Embarrassment or not, stock prices are likely to decline further as the key to the bull case for the stock market – solid corporate earnings – is being shredded. The secular bear market doesn’t seem to be over quite yet.

Gonzalo Lira hits the nail on the head in this piece (hat tip to Jesse for bringing this to my attention) in which he theorizes a process by which the velocity of money increases in a dead U.S. economy to close the circle of a hyperinflationary cycle. Lira’s premise is that a collapse in the U.S. Treasury market causes a spike in commodity prices. This drives the cost of basic necessities so far through the roof that the only option the U.S. authorities are left with to feed and clothe the country’s citizens is yet another tremendous round of money printing. That money is immediately spent obviously and “presto”, the velocity of money satisfies the requirements needed for hyperinflation.

Though Lira’s scenario is a little dramatic for my taste (I think the situation will unfold more slowly), I think he, more than anyone else so far, has provided a plausible case for how events could develop. For me, the key is energy and specifically, oil. Even now, the price of oil in the United States is remarkably high given the swollen inventory levels being carried. Here’s a report from Dow Jones detailing crude and distillates. Doesn’t it seem odd to everyone that oil prices remain so elevated given the fact that inventories are well above their five year average? The U.S. is mired in recession and oil use is unlikely to accelerate any time soon, so why pay a premium to store product?

If you bring up a chart of West Texas Intermediate Crude, you will see an incredible price spike back between March and June of 2009 in which the price of oil doubled. That run coincided nicely with the announcement of QE by the Fed and also during the subsequent two month period when they were considering expanding the U.S. government debt monetization portion of the initial QE program. One could argue that the data shows that the Fed effectively doubled oil prices with the first QE program. If that same pattern holds true during QE2, we could be looking at a boatload of trouble quicker than anyone thinks possible.

I have to stress that I don’t believe that the situation will unfold at such speed. I don’t truly believe cash will get vaporized at any moment, but I do think that the possibility might occur and it is something that I am prepared for. This is the primary reason that I don’t hold any bonds and is the motivation behind my reluctance to hold a lot of cash relative to the size of my total portfolio.

I’ve thought a lot about my next trade and plan to put the position on tomorrow. I’m not posting trades on the blog anymore so you’ll need to contact me via email if you are interested in the idea and the timing.

Well, the results of my informal poll are in and it turns out that NO ONE wants to be notified of busted investor trading ideas in real time via email. Which is fine. Actually, it’s a little odd to me because my last trade was a home run (QQQQ puts up 100% in three days), and I thought that at least one person might be interested in the timing of the next position?

Well guess what? If you want to find out what the next trade is, you have to sign up for email notification. I’m not posting any more trades on the blog. I will, however, continue to engage in my usual witty banter and macro economic commentary. Lucky you…..

I’m toying with the idea of creating an email list for folks who want trading ideas in real time. I would love devote more energy to the blog and make it a full time endeavor, but when I look at the traffic figures, that might be a dicey proposition. (I’m fully aware that this is the age of the interweb and trading opinions are a dime a dozen.)

This is more of an informal survey – if an email service sounds like it might interest you, email me at bustedinvestor@gmail.com

Thanks.

One of the hardest things to do in trading is to successfully nurse a winning position to a point where one can sell it for maximum profit. In my experience, a profitable trade can literally drive a trader insane to the point where the only reasonable course of action seems to be closing the position. That is exactly the wrong reason to close out a trade, but these QQQQ puts that I purchased a few days ago are up nearly 100%. I am happy with that profit and am having trouble focusing on anything else so I’m selling them.

The other factor in my decision is that you never really want to hold options that are in the money. These QQQQ September 43 puts are nearly in the money. If a trader is betting directionally with puts or calls, it is much better to purchase out of the money options. Anyway, I’m going to sell here and look to reload after the Fed gives us more direction at the end of the week.

I’m still holding long precious metals though and I’ve got plenty of gold miners to boot. Gold is putting in a solid run. This is not surprising as cash could be vaporized at any moment…..

Considering how crappy the economy is here in the U.S., I have to admit that I am not all that bearish on the stock market. Granted, I am currently holding index puts on the nasdaq 100, but how can I truly hate stocks when every retail investor already absolutely despises equities? I think that it’s important at this juncture to emphasize that I am currently holding many stocks in long term accounts and I believe that if you have an investment horizon of more than a year, I don’t think you are going to see significant losses in your equity portfolio.

Now, on the flip side, the other characteristic of this environment is that most investors are not going to see massive appreciation in their stock holdings. Unless we drop into hyperinflation in the next few months (always a possibility), there is absolutely no chance that the stock market is going to run away from us any time soon.

And speaking of hyperinflation, U.S. large cap stocks are a good hedge against that potential outcome. Another hedge against very high rates of inflation is to buy TIPS from the U.S. Treasury. I know that I must come across as a slightly unhinged, wild-eyed gold bug sometimes, but I don’t think that a hyperinflationary environment would spell the end for the U.S. It would probably be good for us, as it seems to be the only way we can possibly restructure all of our debt. Until that $50T debt load is dealt with, there is absolutely no way the U.S. will be able to truly recover. Because there is ZERO political will to address humongous deficits and massive national debts, it is probably safe to say that the financial markets will sort things out for us in a manner that is likely to be quite violent.

But the timing of such an event is impossible to know. The current deflationary environment could last for another five years or another five weeks. It will be interesting to see how it all plays out.