Archive - Oct 4, 2010

This month we want to address canaries, coal mines, and the whole issue of yet another round of Fed quantitative easing. As you may remember, when the Fed stopped its last official QE effort, our comment at the time was that there was absolutely no way this was the grand finale of money printing for the current cycle. Not a chance. Our thoughts were that QE would resume either later this year or early next at the very latest due specifically to continued lack of meaningful money growth. At the time, we did not have a whole lot of company with this line of thinking as very few other folks were calling for this, especially in the mainstream. As of now, it has become consensus thinking as we survey the landscape. In fact broker after broker have been putting out research pieces over the last few months handicapping just when and why QE will begin anew. A few comments and then maybe some curveball thinking, as we at least need to consider the next round of QE being sparked by a source the Street is not looking for and has not discussed at all up to this point as far as we can tell. Question being, would QE sparked by a left field source elicit the positive response most anticipate as per consensus thinking of the moment?

Paulson's largest Advantage fund, which managed $16.6 billion as of the end of Q2, and which was down 11% as of the end of August, has managed to ride the beta wave, which we expected in the beginning of September would miraculously come and rescue thousands of underwater hedge funds, and prevent tens of billions in redemption requests. As a result, Advantage pulled off a 12.5% return in September, outperforming the broader market 8.8% bounce over the same time period. Yet even with a gain of over $1 billion, the billionaire investor is just about breakeven for the year (in dollar-denominated terms), which taking high water marks and all that, likely means bonuses for all those analysts on the 50th floor of 1251 Ave of the Americas will be certainly subpar unless somehow the beta wave continues into the end of the year even as additional tens of billions in capital is pulled out by retail investors.

This sure sounds like a perfect set up for a reversal to me. On that note, I expect this week we’ll probably see a final impulse high on stocks, but that stocks will end the week down, creating a reversal week. This in turn I believe will be the beginning of a larger, VIOLENT collapse that will take stocks back to 1,040 on the S&P 500 in a matter of weeks. And ultimately, I believe we're heading to 875 by year-end.

• As predicted 2 months ago: S&P 500 profits cut for first time in year in analyst forecasts (Bloomberg)
• Irish Central Bank revises down recovery forecasts (Irish Independent)
• Wall Street Sees World Economy Decoupling From U.S. (Bloomberg)
• IMF admits to near-depression (Telegraph)
• Swiss to impose tougher standards on banks (FT)
• Fed Bond Buying's Unintended Consequences May Push Up Rates (Bloomberg)
• Was TARP Worth It? (Forbes)
• Morgensen: Count on Sequels to TARP (NYT)
• Decepticon Tradebots (Reformed Broker)
• Why some housing bubbles remain (FT)
• Jobs Report Could Spoil QE Party (WSJ)

Monday is not shaping up to be a pretty day for owners of the company that was once the modern-day equivalent of Apple, Amazon and Netflix. Oddly enough, that leveraged dividend appears not to be doing it for the "value" investors. Stock is red after Goldman, of all banks, decides to tell the truth: "We are downgrading Microsoft to Neutral and lowering our EPS estimates by 4%, 3% and 4% in FY2011, FY2012 and FY2013, and therefore our price target to $28 from $32, which suggests more upside in other Buy-rated names in our coverage. We believe the intrinsic value of shares cannot be unlocked if the status quo remains, and we have increased caution near term on a more elongated PC refresh cycle, combined with the newer threat of notebook cannibalization from tablets, where Windows does not yet have a presence." Here Goldman appears to have grown a little sense of humor: "Since added to the Americas Buy list on 8/12/08, MSFT shares have returned -13%, compared to -11% for the S&P 500."

• Asian stock mostly higher on Monday with investors inspired by US gains on Friday.
• China: Will continue to buy Greek govt debt when the country reintroduces open sale.
• Dubai's Cityscape realty exhibition to start Monday amid oversupply fears.
• Europe put on terror raid alert; US & UK issue warnings to public and travellers.
• Greece's 2011 budget seeks reduction in deficit, return to bond markets.
• Silver advances to $22.21, highest level since 1980, on investor demand.
• Wen says China to boost local demand, maintain holdings of European bonds.

Earlier today, Thomas Jordan of the Swiss National Bank stated that banks may need to triple their current common equity level, essentially undoing all the carefully prepared propaganda of Basel III, and validating just how undercapitalized banks throughout the world truly are. And while the regulators will likely completely ignore his message, the market appears to have noticed: the USDCHF fell to a fresh 2.5 year low of 0.9702, which is making Swiss exporters very, very unhappy. Additionally, the dollar weakness of recent days has reversed this morning especially on continuing Irish sovereign fears (especially after the whole Irish PM Citi conference circus), even as the Dollar-Yen continues to attack that critical 83 level which was the barrier for the BOJ's last intervention on September 15. It seems all the Chinese posturing of bailing out Europe is now completely priced in - oddly enough nobody seems to care that China is willing to provide vendor financing to broke European countries.All of this has driven the 2 Year UST to a fresh all time low yield of 0.3987%, as the Fed's finger salute to the saving middle class becomes ever more distinct.

We start with pending home sales and factory orders, then hear from the Fed, including twice from Chairman Bernanke, as well as Open Market Committee Portfolio Manager and Dark Pool master Brian Sack.

European Morning Briefing - Stocks, Bonds, FX – 04/10/10

Things are much worse than the Case Shiller index, and the media that quotes it ad nauseum, are leading many to believe...

Retail Traders as a herd are wrong…most of the time (sorry guys its true).

This daily report is designed to help traders find opportunities to trade against this group. The premise is very simple we are looking for 66% of retail traders to be trading either long or short a currency pair, we then look for opportunities to fade (trade against) this group.