What the Fed Shocker Means; Plus Two New Recommendations …

Issue #43

Dear Member,

Over 90% of analysts and investment bankers polled thought the Fed would begin tapering its bond purchases this month, myself included.

Instead, Ben Bernanke and his cohorts threw one mighty curve ball at all of us, shocking the entire financial globe.

So why did the Fed leave its $85-billion-a-month in bond buying in place?

The clear-cut reason is obvious: The Fed thinks the economy is not sound enough to withdraw any stimulus.

But the not-so-obvious reasons are more important. Those reasons are:

1. The Fed will not tolerate interest rates moving up too much, too quickly, in the free markets. So the Fed wanted to fire a shot across the bow to bond traders and investors. A shot that said loud and clear, “We’re in charge of the bond market, not you.”

In the end, the Fed will lose that battle. The free markets always win out. But there’s no doubt in my mind that the Fed has now taken the first shot in an epic battle with the Fed in one corner of the ring, and the bond market in the other.

That battle will ultimately prove very dangerous, and probably very inflationary. But right now, it’s a battle that is going to cause tremendous volatility in nearly all markets.

2. The Fed is also placating our overseas creditors. They own 40% of our debt. If bond prices continued to fall as they have been, it would be a disaster for our foreign creditors. So instead, the Fed stepped in to reassure those creditors that the Fed is still in charge.

3. The Fed is also very worried about the upcoming budget battle and debt ceiling negotiations. I believe that’s another reason the Fed decided not to taper its bond purchases. It needs to continue to finance the government just in case the budget battle gets nasty.

And lastly …

4. The Fed is worried about Europe. If Europe’s crisis flares up anew, which I believe it will, the Fed wants to stand ready to support our economy.

Had it tapered yesterday, and then Europe melts down, the Fed would have had to reverse its tapering and come back in to further support our bond market and provide additional stimulus.

Such back and forth by the Fed would be considered more difficult and wishy-washy than simply standing pat with its current purchases.

I don’t agree with the Fed’s decision. It had the opportunity to test the waters and trim its bond buying ― to start withdrawing some drugs, some stimulus from the economy, but instead, it chose to continue to prop it up and more importantly, battle the free markets like never before.

That’s a problem. It’s going to lead to a brand new round in the financial crisis. Yet ironically, it will NOT change any of the trends that are currently in motion!

Yes, it stinks that the volatility yesterday stopped you out of your positions in ZSL and DUST. You had nice open gains coming into the day, but the Fed decision shocked the markets, sending gold and silver soaring, along with the stock market.

I know it’s frustrating, to say the least. It’s also easy to second guess the trades, and Monday morning “quarterback them,” if you will. But everything pointed to lower prices for gold and silver, and it could have just as easily gone that way as well, doubling and tripling the open profits, turning them into grand slams.

If you received a lousy fill on ZSL or DUST, be sure to complain to your broker, per the issue I just sent you on this matter.

But don’t let it get in the way of the new recommendations in this issue. As I just mentioned, yesterday’s Fed decision will not change the intermediate-term trends that are in motion.

Gold remains bearish, as does silver.

Hard to believe? Simply take a look at this chart of gold. First, even after gold’s spike higher yesterday, gold is still $80 below its late August, Syrian crisis rally high.

Second, gold is still within the confines of a cyclical declining trend channel.

Third, gold is now trading (10:33 pm EST) at a major resistance level at $1,366. Further resistance lies at $1,385 followed by $1,416.

If gold fails at any of the above levels, which I believe is likely based on my other indicators, then gold will turn right back to the downside, with new lows still possible for this cyclical time period.

The silver chart (not shown) shows a similar setup, with resistance at the $23.25 and $24.19 levels.

What about mining shares? They are a tough call right now. Should gold and silver turn back down, mining shares will also come under pressure. However, much depends on what the stock market does here. If it can sustain its gains, mining shares may rally further, even if gold and silver turn back down.

However, I am deeply skeptical of a further rally in the broad stock markets. They are extremely overbought, and the Dow has MASSIVE overhead resistance at the 16,000 mark.

My recommendation: Stand aside mining shares until we get further clarification and some of yesterday’s dust settles.

But for gold and silver, I recommend re-entering
bearish positions, per the above instructions.

First, let me address the open position in the DB Gold Double Short ETN (DZZ). You were not stopped out of that position yesterday. But this morning, in premarket trading, DZZ is trading at $6.03, one penny below my stop at $6.04.

Odds are you will be stopped out. If so, stand aside and act on the above two new recommendations. If you are not stopped out of DZZ, hold the position with your stop in place at $6.04.

Second, go ahead and act on the two new recommendations in this issue, pronto.

Note that I am not providing you with stops for these two new recommendations. Reason: I do not want the markets to know where our stops are.

I could recommend a protective stop order with a limit, but in my opinion, that would make matters worse. Imagine if everyone tried to get out within the same price range. Only a handful of you would get filled, if at all, and the majority would get stuck in a position that should be exited promptly.

So with today’s recommendations, I will monitor the stops and issue a recommendation immediately if it is time to exit.

Lastly, please see some important subscriber questions below, and my answers:

Q: Should we be using limits on our stop orders?

A: Keep in mind that limit orders, while possibly reducing market slippage, would likely instead create additional risk. If the limit is not fillable, you could be in a position that loses further ground than if you had used a regular stop order. So instead, right now I am opting to monitor the stops for you so as to avoid advertising them to the markets.

Q: It seems to me that one of your subscribers decided to dump all of their positions. How can you help protect us, the subscribers, from this type of action by one big shot in the future?

A: I am not aware of one or two or even a few subscribers with very big positions that could have impacted the markets yesterday in such a way.

That said, there are indeed many subscribers to this service and my recommendations are widely followed. That also means I may have to take further steps to disguise my recommendations. I’ll keep you apprised.

Q: I placed my stop at $72.09 on ZSL and $30.59 on DUST. I was stopped out at $61.60 on ZLS and $30.37 on DUST.

A: It was a violent day in all markets, due to the Fed’s actions. Your fill on DUST is good. Your fill on ZSL is lousy, and you should complain to your broker and seek compensation, or find another broker. See the previous issue I sent this morning for details.

Stay tuned and best wishes,

Larry