The market may be wrong, but you can still make 691% gains off it.

I’ve been out of town again, but this time around, it was pure unadulterated pleasure. I took the wife and kids so far up into the Allegheny Mountains, we were utterly out of touch with the modern world.

We’re talking no Internet whatsoever and no bars on the cell phone. No A/C or running water either. I know I’ve said I don’t like to travel. The deep Appalachians are the exception to that rule. They are not traveling; they are just going home.

But now I’m “back in the real world” of faxes and traffic jams again. I’ve spent the past few hours playing the usual game of catch up: Reading piles of wire service reports, updating charts and deleting spam from my inbox.

Held Together With Spit and Bailing Wire

I see that in my absence, Justice has been doing his darnedest to make the world make sense for you for the past few days… to give you the macroeconomic view of what’s going on and where it ought to lead.

For the most part, I agree with him. Left unmolested, the market ought to be headed to hell in a handbasket. There is simply so much overhang yet to be worked off: The dollar is strangely overpriced considering current fiscal policy… American banks continue to fail almost daily… Europe is being held together with spit and bailing wire.

It seems like the markets are flying on little more than a wing and a prayer, a consensual hallucination of value masking the approach to a gaping pit.

And yet, when I look to the charts, I do not see an L, U or W. For now, I just see the very V that most of us thought – heck, still think – to be impossible.

There Are Worse Things Than Socialism

I have explained why this is true in great detail both here and in my own WOW columns. Simply put, the market is not “being left unmolested.” Rather it is being grossly manipulated by the most “visible of hands.”

Washington has dedicated itself utterly to controlling the economy and stock market, in a fashion undreamt of even by such grand centralists as FDR and LBJ. I am loath to bandy about such extreme terms as “fascist,” but Washington’s hunger to consolidate power may actually be moving through mere socialist on a headlong voyage to some rather dark places.

We must always remember the lessons of Rome. The Senate begged Augustus to save them from their own indecision. But in the end, they begged the gods themselves to relieve them of his awful children.

The Visible Hand

When the market is subject to massive manipulation like this, it can seem for a time like the very laws of physics have been abrogated. Any astute student of history knows that this isn’t true, that all we are really doing is forestalling – indeed perhaps even intensifying – an eventual reckoning day.

But for now, we have to respect the effect that $9 trillion in deficit spending will have on the market. Dark distortion though it may, Washington remains intent on mortgaging the future to buy a boom in 2010.

Dump trillions into the car market, and folks on the margin who most probably ought not to be loading up with another time payment right now rush in to trade in their paid-off “clunkers” for shiny new $20,000 Toyotas.

Do you feel the awful shiver of déjà vu? Perhaps, but it bought Washington a 4.9% spike in durable goods sales in July.

Dump trillions onto the mortgage market, and you should expect to read that July new home sales rose almost 10%, or that builders are buying property again for the first time in three years.

It’s Never “the End of History”

Each and every time they cry “this time it’s different, this time we will take away the punchbowl before we overshoot,” my lunch threatens to rebel.

Folks we have already overshot the mark. Will someone please tell me why we should be celebrating crude oil “falling” to $70/bbl? The last time oil hit these levels, even the most growth-happy economists began to fret, and rightly so.

And that was close to the top of a boom. Does anyone recall that we started that run somewhere around $30 a barrel?

Suffer in Silence – or Ride the Awful Beast?

I can only offer two choices. You can do something to stop this headlong rush toward the pit. Or you can knowingly – some might even say cynically – use Washington’s truculence to arm yourself against future misfortune.

If you know for a fact that certain sectors such as auto manufacturing and housing are being manipulated higher, you ought to at least buy some call options against these sectors. These will enable you to harvest substantial gains off this artificially imposed upside action without actually investing in it.

Many who have held their nose have seen gains as high as 691% off calls on such players as Ford (F:NYSE) and Arcelor Mittal (MT:NYSE). More gains such as these will be had before this mirage of a recovery evaporates. And when the time comes to reverse and deploy puts, well, we’ll be there too, and with a vengeance.

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