Yesterday the Aussie stock market put in a 1.5% turnaround from the low of the day. You can see the rally on the intraday chart below:

Source: CMC Markets Stockbroking

What can explain the rally? No idea. Buyers willing to pay higher prices for stocks, and sellers demanding a higher price before they’ll sell, is one obvious answer.

Another guess is that the rally was nothing more than automated buying from institutional investors whose job it is to buy stocks. They buy stocks when the market is going up and they buy stocks when the market is going down.

Perhaps that helps to explain the high volumes that went through on the close on the major stocks yesterday. Buyers willing to buy at any price, because well, that’s their job.

The index hit a level during the day which told the computers to buy, and they kept buying through to the close.

Or maybe there was a big institutional seller and the institutions brokers were just out there ramping up the stock price telling suckers it was a great time to buy… at the same time their big institutional client was selling out.

It wouldn’t surprise us.

So what happened this morning? In early trade, the market is down. Why?

Because the programme trading bought all the stock they needed yesterday. Now the automated systems will wait for the next buy signal.

Or the brokers had no stock left to pump and dump to unsuspecting clients, now that the big institutional client has sold out.

That’s how it works.

And that’s how it has worked for the past year. You can see on the chart below that the Aussie index has moved within a range for twelve months:

Source: CMC Markets Stockbroking

No one in their right mind is buying this market on fundamentals.

Institutional investors who buy when they want to buy – not when a computer tells them to or because they just track an index, have been sat on the sidelines. Apart from those that have been selling out of course!

As I’ve mentioned several times here and in Australian Small-Cap Investigator, after the drubbing many institutional investors took during 2008, the last thing they’re going to do is give away the 50%-plus gains they made on the market during 2009.

That’s why index investors are no better off today than they were one year ago when the Aussie market was trading at roughly the same level.

Not that the share spruikers haven’t tried to talk the market up during that time. We were looking through some back issues of the Australian Small-Cap Investigator weekly updates this morning and came across something we wrote on August 5th 2009:

“Will the blue chip index ever stop rising? Not according to Credit Suisse and Macquarie Group. In Tuesday’s Australian Financial Review they both stated a 6,000 point target for the S&P/ASX200 was possible…

“By July 2010 no less.

“Is that likely? We doubt it. I’m guessing the massive reflation of the stock market bubble will take a little longer than that. But maybe there’s a chance it could get to 6,000 points by July 2011. That would be nearly a 50% rise from today’s price.”

Today the index is at 4600. Right now 6,000 points by July 2011 looks overly optimistic. Quite frankly we’d be very surprised if it got anywhere near it. The index would need to rise by 30% from today in order to get there.

We’re struggling to see – even with central bank manipulation – how that’s gonna happen. Hence why we’ve been reluctant to go all-in and tip a load of stocks right now.

But it should make you wonder how and why big multi-billion dollar firms like Macquarie Group and Credit Suisse can get their forecast so wrong.

It’s simple. Just as the real estate guys are property spruikers, always talking up house prices, the likes of Credit Suisse and Macquarie Group are share spruikers – always talking up the stock market.

They’re the firms whose job it is to churn stock from a big institution and into the hands of sucker investors without pushing the price down too much.

Of course, they aren’t alone. 99% of mainstream analysts and broking firms are stock spruikers. Whatever the day, whatever the time, in their view, it’s always a good time to buy stocks.

The funny thing is, on more than one occasion your editor has even been accused of being a share spruiker. The fact is nothing could be further from the truth. But it’s a clever diversionary tactic by those who don’t like what we say and how we say it.

You only have to read a couple of editions of Money Morning or Australian Small-Cap Investigator to realise this.

But anyway, I mentioned above how we’re struggling to see how the index can add another 30% in just over seven months, “even with central bank manipulation”.

The reason I mention the central bankers is due to – what can only be described as – an amazing coincidence on US markets overnight.

During this morning’s trade on Wall Street the benchmark S&P 500 index dropped lower on the open, traded sideways for most of the day before rallying strongly into the close.

What’s so significant about this? Well, as you can see from the chart below, the S&P 500 is trading near what our in-house technical analyst, Slipstream Trader Murray Dawes calls a key level of 1,174:

Source: Google Finance

It’s a level Murray has highlighted on his charts as the key point where the market could crack if it trades lower.

Murray Says, “It could spell the end of the rally since Bernanke’s speech and a return to the intermediate downtrend. It’s a similar set up to the price action just prior to the May ‘flash crash.’”

In other words the market is trending downwards and has only been propped up thanks to central bank intervention.

You remember the ‘flash crash’ don’t you? It was when stocks rapidly headed south on what many claimed was a glitch or a trade error. The cry from Wall Street was that it couldn’t possibly have been genuine selling because stock prices were cheap.

I’ve circled the ‘flash crash’ on the chart below. Two months later and the index had dropped even lower than the low of the ‘flash crash’:

Source: Google Finance

Sure, the market has recovered since then, but is the global economy fundamentally better off today than it was then? In my opinion, no.

And from what we can see, real investors are of the same opinion. Why do we say that? Because the only reason the US market took off late in the day this morning was due to an unexpected dip into the market by the US Federal Reserve to buy $7 billion worth of US Treasury securities:

Source: US Federal Reserve

But what’s really interesting about this intervention is that previous Fed action has taken place much earlier in the day, around 10:15am. Whereas this Fed action happened at 1.15pm.

And this was on top of action earlier on in the day where the Fed had gone to the market and snapped up over $2 billion of US Treasury securities.

So, now you know, it costs the Fed $9 billion to stop the market from crashing.

Don’t forget, this is all part of the Fed’s quantitative easing (QE) programme.

The Fed’s aim is to keep markets propped up. And now, thanks to this action – the first time it has acted in the afternoon from what we can see – the Fed is directly intervening to boost stock prices.

It’s apparent that the Fed looked at today’s action on the markets and saw something they didn’t like. Maybe they’re focused on the same level of 1174 as Murray.

Maybe they can see what will happen to the market when it crumbles through this level. And so with $600 billion of newly printed money stuffed in their sack, they decided to put it to work.

Of course, the Fed isn’t buying stocks directly – not that we know of anyway – but it is creating money from thin air. And it’s that money which many investors believe will ultimately flow through to the economy and lead to higher company profits and higher stock prices.

And don’t forget about higher price inflation too.

Look, I’m not saying stock prices won’t go higher, because I’ve long said there’s a good chance they will. But make no mistake, just because the stock market is moving higher, doesn’t mean the economy is fundamentally sound.

And it doesn’t mean it’ll make you any wealthier.

The stock market is being manipulated on a massive scale by central bankers, and because the market has risen due to manipulation rather than due to fundamental reasons, it isn’t sustainable and will likely head lower.

But that may not happen straight away. Central bankers are playing a dangerous game with this market right now and you should be aware of this. You shouldn’t be fooled into thinking the rally is genuine.

As we wrote last week, there’s an old saying that you shouldn’t bet against the Fed because it has the printing presses at its disposal. But as we pointed out then, the Fed shouldn’t think it can bet against the market.

Because the market ultimately always wins.

The Fed, unlike most investors has laid all its cards on the table. The market is getting a clearer idea by the day what the Fed is doing. At some point punters will stop trying to front run the Fed and will instead start looking to bet against the Fed.

That’s when it’ll turn nasty, because then the Fed will discover that as much money as it can print, it won’t be enough to hold back the market. The Bank of England discovered that in the early 1990s, the Europeans are finding that out now…

And soon enough the US Federal Reserve will realise it too.

Cheers.

Kris Sayce
For Money Morning Australia

Spruiker extraordinaire Christopher Joye has written a blog for Business Spectator criticising our comments on property. You can read it here. However, in typical spruiker fashion it completely ignores our questions and instead trots out the same tired claims.

We’ve got plenty more to write on property over the next few weeks. But until then, how about they answer the simple questions we’ve put to them:

• Proof that there is a housing shortage.
• Proof that the Australian property market didn’t crash because 64% of the Australian population lives in a handful of cities.
• Proof that property prices double every 7-10 years.
• Proof that rising immigration causes house prices to rise.
• A genuine worked example of the Hedonic Index.

Property spruikers can leave answers to these questions on the Money Morning website under this article (when it’s posted) or any of the recent articles.

If the spruikers are that certain over their claims they shouldn’t have any trouble providing the evidence. Saying that, four months after we first asked, we’ve still not received an answer to point four.

Anyway, enough of the property malarkey for today. Back to our…

It’s harder to be a contrarian investor than you’d think. At first glance, you’d think being a contrarian just involves doing the opposite to everyone else.

It’s a nice idea, unfortunately it’s also a quick way to the poor house.

As any swimmer will tell you, it’s tough to swim against a rip. Rather than swim against it you should swim across it until you’re back in calmer water.

That’s almost the idea with contrarian investing. You don’t try to resist the hoards that are following the crowd, instead you calmly and carefully work your way into a position so that you’re ready to go in the opposite direction when the time is right.

Depending on the investment, the idea is to set yourself up for the turning point. So it’s not so much that you’re constantly betting against everyone else, but rather that you’re one of the leaders as the market turns.

For instance, if you had started to bet against the stock market in mid 2006 as the index fell by 10%, you may have picked up some short term gains, but in little over a year later you’d have racked up over a 30% loss.

Unless you had enough capital to keep your position open you could have missed out by the time your bet would have started to pay dividends.

That said, there is one contrarian investment where you don’t have to sit back and wait. You know the one I’m referring to – Gold.

Yes that’s right, despite what the mainstream press are telling you, gold is still a contrarian investment.

Sure, the price of gold has skyrocketed over the last year or so, and sure the price of gold could be in a mini bubble, but the fact remains that the investment buyers of gold are still in the extreme minority.

The mainstream press thinks that gold is in a price bubble because of gold parties and because of the gold merchants opening up stalls in shopping malls.

The only problem is they’ve got their bubbles in a twist. All this proves is that people are selling gold, not buying it.

And you only have to look at those stories again to see that’s what makes it a ‘buyers market.’ Because sellers are dumping valuable gold in exchange for devalued cash at well below market prices.

I would agree that gold is in a bubble if these merchants were paying market or above market prices. I would agree gold is in a bubble if these merchants were falling over themselves to pay the best rate on the market, bidding the gold price higher and higher.

But they’re not. It’s hardly a bubble when punters are selling below market price.

That’s because the fact is very few average punters know the real value of gold. They are happy to sell gold when it is at AUD$1,200 per ounce, fearful that it could fall to AUD$900 per ounce.

They then use their AUD$1,200 to buy a plasma television, or a new piece of furniture, or spend it on a holiday, all of which will have either no value or almost no value in five years time. Compared with gold which has retained its value over thousands of years and will do so for another five years and even better than that, for thousands more years.

Go to an average investment adviser and you’ll get less than average advice on gold. They’ll probably tell you not to touch it because “you can’t eat it and you can’t wear it, so it’s not worth anything.”

We love that argument from the gold bears. We simply respond with, “So I take it you’re fond of eating and wearing $50 notes are you?”

It soon has them blubbering, searching for a sensible reply.

Anyway, I’ve got no idea what the price of gold will be in six months or one year’s time. But what I do know, is that as an unleveraged ‘wealth insurance’ policy there’s little around that beats it.

The important point is not to necessarily look at gold as a method of getting rich. Although you can certainly do that if you consistently buy at the right price. The way I prefer to look at it is as a wealth protector.

Buying up small amounts at regular intervals. Swapping out of devalued paper money in exchange for an asset with real value makes a lot of sense to me. And because it’s unleveraged and because you’re using surplus funds you shouldn’t feel the pressure to sell if the price does take a dip.

Now, let’s take a look at our second contrarian investment idea for 2010. In some ways this is another wealth protector rather than a wealth generator. It’s to sell the Australian dollar.

As you can see from the AUD/USD chart below, the Australian dollar has put in a tremendous run during the past year:

And just as there was talk of the Aussie dollar reaching parity with the US dollar in 2008, so the same claims are being made now.

Will that happen? We can’t know for sure, but we can guess that if enough big FX players have enough interest in making it happen in the short term then there’s certainly a chance it could happen.

But to my mind, there’s much more profit on the downside than there is for profit on the upside.

The trouble is, if you’re selling the Australian dollar what are you going to buy? After all, a currency trade has two sides. If you’re selling out of Australian dollars you have to buy another currency.

And do you really want to put your cash into US dollars? For a start you’re not getting a yield (or not much of one anyway), so it will actually cost you to buy US dollars – simply because you’re giving up the opportunity of earning interest on Aussie dollars.

Also, there is an argument that because the US is still a dominant world economy, should the worst happen and the global economy melts down again, investors will naturally flow towards economies that are perceived as being lower risk.

Despite the mountain of debt the US is weighed down by, there is still a perception among investors that the US is a safe haven investment.

But perhaps a better option is to look at an economy that while it isn’t perfect, would seem to hold less risk than a US dollar investment – Japan.

So your second contrarian investment idea for 2010 is to sell Australian dollars and buy Japanese Yen.

When you look at the five-year chart above it goes without saying there’s plenty of risk to this idea. The Aussie dollar has gained by 50% during 2009, but it is still about another 20% from the high reached in late 2007.

The Aussie dollar could go either way against the Yen. It could in fact reach the ¥100 level from 2007.

So for this contrarian idea you’ve got two options. If you’re convinced the Aussie dollar is over-valued and that it will eventually retreat well below this level then you could tuck in now. However, if you’re using leverage then you should be prepared to take some pain if the Aussie dollar strengthens further.

Or you could take the cautious approach and look for a breakdown in the trend. As I mentioned above, being contrarian isn’t just about taking the opposite bet to everyone else.

To be a successful contrarian you need to watch your timing. So although selling the Aussie dollar and buying the Japanese Yen is a contrarian idea for 2010, as of today it’s a super high risk trade.

If you don’t have the stomach for that kind of risk then you should stay clear for now and bide your time.

The third contrarian investment idea for 2010 would be to short sell the Australian property market. Although I’ll admit this isn’t easy.

The best way would be to short sell an index or to buy put options on an index. That way you can spread your exposure across a number of stocks and property types.

An alternative to that is to pick a property related ASX stock that can be short sold. Here you’ve got two choices. Either you plump for an actual property stock or you go for the banks.

Either way you’re getting as close as you’re going to get to an exposure to the property market.

But again, this isn’t a risk free trade. We’ve seen how much effort the property industry, financial services sector and the government have put in to propping up the housing market. And we know that betting against property is not in the psyche of most Australians.

But we know the bubble can’t last, it’s just a question of when it pops, not if. But if you’re relying on our advice for timing, just remember we thought the Aussie housing market would collapse in a heap last year! But it hasn’t happened yet.

This is most definitely a punters trade. And it’s definitely one that you don’t want to be betting against the combined might of the banks and the property industry. So the timing is important here.

So rather than short selling, a less risky way but which involves a higher upfront cost is to look at longer dated put options on the banks and property stocks – such as Westfield Group [ASX: WDC].

The advantage with put options is that your downside risk is known up front. If the trade moves against you then the most you can possibly lose is the premium you’ve paid.

But the longer away the expiry date and the closer the exercise price is to the current price, the more you’ll pay for the premium.

In that case – as an example, and just remember this isn’t personal advice – you could look at taking out a long dated put option with a strike price of $10 on a stock like Westfield Group. Westfield is currently trading at $12.63 so you’d need it to fall a fair way to be assured of making any money. But as an out and out longer term punt it’s not a bad idea.

The theoretical price of the option is 31 cents per share – or $310 for one contract, but the actual price is likely to be a bit higher than that. You should check with your broker to be sure.

As I said, you shouldn’t take this as personal financial advice. But it certainly fits in with our big picture view of what could happen to the Australian market and economy over the next twelve months.

But as I mentioned above, for the Aussie dollar and property trade it’s all about timing.

Whereas for gold, it’s an investment you could make almost any day of the week without having to worry.

Anyway, that’s our three contrarian ideas for 2010. If you’ve any better ideas then just wait for this article to be posted to the Money Morning website later on this afternoon and then you can let other readers know how you’d play it as a contrarian in 2010.

Cheers.
Kris.

60-Second Market Round Up
by Shae Smith

The S&P/ASX 200 ended the trading day up by 12 points to close at 4,912.10. The Australian market has opened up higher this morning. Keep an eye out this week for the November lending finance data from the Australian Bureau of Statistics. The report is due out on Wednesday.

The Dow Jones Industrial Average finished the day higher, up by 11 points to close at 10,618.19.

The American jobless report was released on Friday morning their time. The report noted that 85,000 jobs were cut in December, but the jobless rate has remained steady at 10%. Read more from the report here.

Overnight in the UK, the FTSE was up by 7 points, closing at 5,534.24

The Nikkei hit a 15 month high on Friday. The index closed at 10,798.32, higher by 1.09%. Overall for the week the Nikkei had gained 2.4%.

Gold was up as a result of the weak jobless data coming from the US. Read more here.

The price of spot gold in Australian dollars is trading at $1,231.05 while in US Dollars it is trading at $1,138.30. The price of silver in Aussie dollars is $19.94 and in US Dollars it is $18.44.

The Aussie dollar versus the US dollar is trading at USD$0.9284, and against the Japanese Yen JPY86.02

Crude Oil was up slightly, closing at USD$82.75

For the biggest movers on the market yesterday click here…