When Nothing Makes Sense

Gigantic bets are being made irrespective of other bets, something I have never seen in 31 years.

When we speak of the confusion out there, when we speak of hedge funds being stymied and mutual funds unsure of themselves, when we try to rationalize what the heck is going on by looking at all of the various bets out there, we have to conclude one thing: no one knows what the heck he or she is doing!

Consider, just today, how rampant the seeming irrationality is and try to address these six glaring inconsistencies.

1. If Europe is so weak then why does oil continue to climb? Sure, it is possible that China is grabbing all of the oil it can. At the same time, the world is awash with oil even without Libya. Iraq is pumping much more than a year ago and is taking up the slack for Libya. The United States is pumping a phenomenal amount of oil vs. a year ago. So is Brazil. I know that there is some manipulation going on, as there always seems to be, but you can't get this kind of performance unless the world (particularly Europe, where Brent trades) isn't just stabilizing, but actually accelerating (as nutty as that is).

   What might be happening, and the more likely case, is that financial firms are betting that China is going to stop tightening and that Europe isn't going into recession so they are buying up ships of oil -- because the day rates are so, so low -- and storing them. It is possible, we know from Herbjorn Hansson who is the CEO of the largest oil shipper at Nordic American Tanker, that oil is being stored worldwide in his giant fleet for later delivery. In other words, it's for speculation. Either way, there is a tremendous opportunity in all of the oil service stocks as they were priced for a breakdown of oil and we are getting the opposite.

2. The euro seems to have stabilized here and is acting better. How can that be if Greece is failing and Italy is next? You should be selling this thing faster than a fistful of spent radioactive uranium. But it holds in at $1.37. Kind of Stonewall-like. Preposterous, unless you figure that people feel the worst is over for Europe, something I don't know a soul feels. We have seen the euro plummet before. It isn't plummeting now. Another hedge fund bet gone wrong? Certainly a possibility. Two weeks ago we wanted stable governments in Europe. Now we want a change in governments? Can we be that fickle? How can that be justified?
3. The European banks are selling sovereign bonds like mad and their stocks are staying higher even as (in the case of SOcGen, which told us things were going great not that long ago) the dividend gets cancelled. Shouldn't these banks be swooning as our American banks did in 2008, since this is surely their 2008 moment? Not happening, perhaps because they are taking action. Perhaps because you can't short them because of rules that were put in place to avoid the rampant shorting that we saw in our country that contributed to the speed of the collapse of so many institutions?
4. Gold's going higher. Isn't that supposed to signal pure chaos? Isn't that the ticket? Isn't that supposed to signal that Italy is going to fail and the euro split apart, so gold is becoming a substitute currency? But the euro is strong. Could it mean that gold's going up because of the Europeans are going to have to inflate? Maybe, but again, the euro isn't going down, which is what would be happening if gold is going higher. Perhaps this is a signal that the Chinese are buying, which is something that the Hong Kong data showed yesterday?
5. Copper seems to have stabilized, but China is weaker. How can that be? Last night we got Chinese one-year bill yields lowered ever so slightly. Could that mean the Chinese are starting their easing because property rates are falling so fast? Could this be the signal of the soft landing, which is making so many industrial stocks act better? How can that counteract a European recession?
6. American companies doing business in Europe, like Rockwell Automation (ROK) today, simply haven't seen much weakness in Europe at all. I would lump in Eaton (EV) and Parker Hannifen (PH) and Caterpillar (CAT) as not seeing much weakness. Same with Honeywell (HON) and Oracle (ORCL). How in heck is that possible if Europe is already in or going into a recession? How can only a few, like IBM (IBM) that saw a slight decline, and PPG  (PPG), which saw a slowdown in its optical business courtesy an aggressive German competitor, be among the very few to see some softening in Europe? Oh, and let's throw into the mix Vodaphone (VOD), the giant European phone company that's doing quite well as we learned this morning. How bizarre can you get?

How to explain these inconsistencies? I think that hedge funds are making huge bets that move the market contrarily. These bets distort the actual markets they play in. They affect the line, so to speak, and these different instruments, from stocks to oil to gold to bonds, can't correlate. The idea is that, ultimately, someone is wrong. But right now you have no patterns that make sense, hence the confusion.

So, what happens when nothing makes sense? Hedge funds rarely like to admit it, but they tend to default to the charts, which creates even more confusion, but can also explain even more chaos.

Just today, for example, I was presented with two charts, one showing the S&P about to rally in a way that would make it so we have an amazing end of the year rally. Another chart shows catastrophe about to occur. This dichotomy is nothing new because, with all the volatility we have had, we have seen intraday charts show in the morning that we could lose 5-8% and the evening gain 5-8%.

It is not just the S&P. Last week, we had downgrade after downgrade and short bet after short bet made against oil. We had companies be downgraded because if oil keeps going down they will have immense funding gaps. Now, a week later, oil just crossed its 200-day moving average, causing those short bets to be unwound and oil to burst higher. Now, the funding gaps turn into surpluses and the stocks we were concerned about, particularly the drillers, are all set to buy.

To sum it all up, what we are seeing is gigantic bets being made irrespective of other bets, something I have never seen in 31 years and would have told you can't happen, but are clearly happening simply because the pools of money are so great in size they can take the instruments where they want. It is like there is a series upsets that aren't supposed to happen all over the place and the underdogs keep winning because the line is being set wrongly each day.

With all of these cross currents, stocks are like that big island of rubber ducks congregated in the South Seas somewhere, just flotsam and jetsam to be blown about and with the whims of charts and errant bets and ETFs that accentuate and distort those bets.

In short, the bets themselves are too big, the instruments too small, and the directions add up to being nonsensical, the only constant being the misery of being wrong on an hourly basis unless you rely on stock yield, which, in this world of low interest rates for all except those who can't afford to pay them anyway, maybe the one method that can still make money in all of this madness.

Action Alerts PLUS,  which Cramer co-manages as a charitable trust, is long IBM and ORCL.