Washington may talk about pulling in all those dollars, but it will never actually happen. Here’s how to protect yourself from all the blather.

It’s all about talk versus action, what a body does, as against what they actually do. As I sit to write to you today, the markets have been stalemated for the past few days because investors just can’t seem to sort out that critical difference.

The Federal Reserve has been meeting for two days now. Word on the street has them in deep debate as to how they might start sopping up the amazing gobs of excess liquidity currently sloshing about the system.

Guesstimates like this used to be based on which hand Alan Greenspan used to carry his briefcase. This round of rumors is based on something a tad more substantial – Mr. Bernanke’s statements to various congressional panels over the past few weeks that the economy is not only back from the brink but genuinely on the mend.

The Worst Good News Ever

Perversely enough, this is considered by many to be really bad news. While a recovering economy would of course mean rising sales pretty much across the board, the wags are concerned that a cascading increase in the cost of capital would stymie profits.

“Good Lord, man! How can you expect us to make money if borrowing costs spike to such precipitous heights! This is a disaster in the making!”

Oh, there’s a disaster in the making, all right. But these guys don’t have a clue where it’s coming from.

It all comes back to talk versus action…

61 Million Voters Say “Fergedaboudit!”

For example, all this talk about the Fed taking away the punchbowl: it’s pure bunk! Seriously, un/underemployment is somewhere around 20% – and still climbing! That’s one out every five citizens coming up shy, paycheck wise.

In a country where presidential elections have been decided by a few hundred votes, the idea of 61 million ticked-off voters is a horror Washington cannot face. Maybe Paul Volcker had the stones to cutback on specie-in-circ. at such a moment (and maybe that’s just a myth). But certainly not a one of his successors has been willing to buck his political masters like that.

You see the same dichotomy all over the Capitol: President Obama wants to haul back on spending, but he also wants to ramp up his war effort and create millions of new jobs. (Come to think of it, they may not be entirely separate ideas. Wasn’t ramping up an intractable foreign war pretty much the same employment solution LBJ came up with?)

In the end, all the talk about sopping up liquidity will be just that: talk. In reality, Washington will probably toss two dollars out the back door for each one it takes in the front door.

Returning to the Long Trend

 

This will have both immediate and long-term results.

First, the dollar will rejoin its long-term falling trend, and the stock and commodity markets will resume their rising trends. That’s not to say that either will be worth any more in any sort of real sense. Just that the dollar metric on the left side of their charts will be sliding down in much the same fashion as during the ‘95-‘00 and ‘03-‘07 run-ups.

 

Long term (and by that I mean a matter of nine to 15 months), we will see inflation raise its ugly little head, and eventually doom this rising cycle, just as it did the two previous cycles. This is not a guess. Despite denials out of Washington, this is already happening. Note that the producer price index has put in a new high five out of the past nine reporting months.

What to Do About It Now

The trick now is simple (if a tad cynical): make as much dough as possible, before the next down cycle commences. In recent columns, I promised to show you how to do that with assets keyed to the energy sector.

I have chosen energy because it is probably one of the last groups of stocks with some really explosive growth potential. Retail and industrial stocks have already nearly doubled over the past 10 months or so.

But drillers, refiners and energy retailers have put on less than half that gain (despite crude oil’s 89% move over the same period).

XLE to Climb 24%

 

View Larger Chart

Here we have a chart of the S&P’s Oil Patch ETF, the Energy Select SPDR (XLE). I’ve mapped out both the next high probability arc – a 24% increase to resistance at $68.93 – and a “Black Swan” style spike to $84.28.

The former is pretty much a lock over the next eight to 12 weeks. Inflation and demand will conspire to push prices that high by and of themselves. The latter 52% spike would require a major speculative run. While these sorts of moves are a bit harder to predict via pure technical analysis, they have happened often enough at this stage of the cycle to be worth at least pondering their possibility.

But we don’t need that sort of extreme activity to make the coin we are looking for. If you were to purchase select call options on the XLE, you might make as much as 220% off the smaller of my two predicated moves.

Beating the Heavy Hitters

 

But there are even more interesting ways to play this rise in energy stocks. The XLE ETF is greatly weighted toward larger companies. Shares of the top six players make up more than half the fund. Problem is, they are most probably the slowest movers going forward. Exxon Mobil (XOM:NYSE), for example, stands to make billions in profit during the next portion of the rising cycle. But with a P/E 15.18, much of XOM’s profit is already figured into share price.

 

View Larger Chart

If you were to shift your focus down the list to some of the smaller players on the list, you would see potential growth of as much as 133% while the group as a whole picks up a mere 24%. Better yet: select calls here could gain 440%.

And as sizable as that gain might be, a real “oil spike” could more than double it. But gains like that are mere speculation.

What we know for a historical fact is that energy prices are climbing, and will eventually poison the well.

Other Related Topics: Adam Lass , Barack Obama , Government Issues , U.S. Dollar , WaveStrength Options Weekly

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