Crash of 2011 Could Come as Early as Next Week!

This weekend will set the tone for the next month and to a certain extent, the rest of the year. Here is the scenario we are monitoring, this weekend Ben Bernanke will meet in Jackson Hole, Wyoming, with other bankers and global elites to decide the near term and long term fate of the stock market. Yesterday, the Dow Jones rallied 322 points despite economic numbers that came out in the morning that confirmed the U.S. is indeed in the second down leg of a very long depression. U.S. sales of new homes declined for the 3rd straight month, in fact, they are on pace for the worst year on record. According to the Commerce Department, sales fell to a seasonally adjusted annual rate of 298,000, this is 25% lower than 2 years ago during the “official recession” and 70% lower than in the bubble (Keynesian Normalcy) years.

Jackson Hole Meeting This Weekend

The reason the market rallied on this and other bad news is because Wall Street believes that the FED will soon step in with a major quantitative easing #3 (QE3) announcement, more than likely this weekend. Investors are hoping for deja vu, if you recall it was last year at the Jackson Hole meeting that Bernanke announced QE2. If the FED does not announce QE3 this weekend, this could put the markets into a nose dive as early as this weekend. Not knowing what the FED is going to do or say this weekend makes this a complete gamble for investors going into the weekend, so we expect the FED to set the tone early on Friday.

Remember, 2 weeks ago when the FED put out a statement regarding keeping interest rates near zero for at least the next 2 years, the market acted very bipolar and then rallied 400 points. Only to continue to fall in the days to follow. believes that if the FED doesn’t announce QE3, but sends a strong signal that it is willing to step in if needed, this could provide a temporary rally on Friday and possibly Monday, but will eventually fade away as reality starts to get priced in with the markets absent of QE from the FED. To put it simply, any rally on Wall Street that comes without the full announcement of QE3 this weekend is a head fake in our opinion. Without any new QE, does not believe the market has seen its 2011 lows.

Why we believe the FED will NOT announce more QE this weekend

First of all let’s be clear, does believe that eventually in the next 3 to 9 months the FED will announce and begin a new round of quantitative easing, something larger than imagination, something that will put Bernanke in the money printing “hall of fame.” However, we give an announcement this weekend only a 20% chance, here is why we believe there is an 80% chance Wall Street will be disappointed by the FED.

  • $1,850 Gold- gold is just too high right now to announce another round of money printing, an announcement of more QE would more than likely push gold over $2,000 and silver over $50 per ounce.
  •     $85 Oil- oil is still too high in our opinion from the last round of QE, oil at $85 is just too close to jumping back over $100 harming global economies and adding even more pressure on food prices.
  •     Price inflation- just last week the government reported that PPI rose 0.2% in July, higher than economist and market expectations. CPI also increased 0.5% in July, with all items increasing 3.6% in the last year.
  •     Politics- the Republican presidential field and some members in both parties in congress are putting a lot of heat on the FED right now. Just last week Rick Perry said for the FED to do more QE would be treason.
  •     Lack of crisis- even with the markets declining in the past month, they have been declining because they are in a post QE world. Let’s be real, the economy is just as shitty as it was a month ago or even 6 months ago, the only thing that has changed is QE2 ended in June.

In our opinion, the FED needs the perma-bulls to feel a little more pain, maybe $50 oil and Dow 8,000, or better yet, a late Sunday night Bank of America surprise, perhaps a European bank or full blown sovereign default. “Crisis” is the key word, the FED needs a good crisis, one that will make politicians who are entering into an election year beg the FED to do the dirty work of banker bailouts. The FED itself could actually spark a crisis this weekend by avoiding a strong statement positive to future easing. Without any hints or winks to Wall St. about the future of QE3, we believe a market crash would be imminent.

Trading in a Centrally Planned Market is going into this weekend with Bank of America (BAC) JAN12 $6 puts, the same ones we told you about in our email last week on August 18th, so far since that email our BAC put options are up 52%. Our Citigroup C JAN12 $30 puts are up 33% respectively in the last week as well. We plan to hold only these two options going into this weekend, our concern with holding precious metal options is that if no help is hinted towards the market, a broad sell off could hit the metals as well. Remember, even without the FED doing QE, they could come out with a strong statement sparking a manic rally that we believe would be a short term head fake. Options are for professionals only, you can get wiped out in the option market, they are bets, not investments. Though we buy ourselves a lot of time when trading options, you can still lose everything, so please do not gamble your hard earned money unless you are willing to risk losing it all.