Archive - Dec 13, 2010

News is scarce these days; really, it’s hard to come by just plain, vanilla news. Almost everything we listen to carries some form of an opinion based on the experiences of the author and it in no way excludes our work on this site. Everyone has an opinion to the point where our opinions in and of themselves become the news (thank you Fran Lebowitz).

Watch this story. It will prove to be the story of 2011.

Remember BABs - the state stimulus that shockingly refuses to be included in the latest example of infinite government largesse? Just in case you have forgotten the program that could soon expose a gaping quater trillion funding hole in state budgets oddly enough refuses to go away. Judging by the chart below, someone is paying attention. But who cares: the full impact of the BABs subsidy will not be felt for at least another 18 days so why worry: it's not like the market even pretends to discount anything anymore.

And now for some woefully overdue attempts at regaining credibility from farce agency Moody's, which after realizing that US debt may soon hit $16 trillion has noted that the US tax package increases the likelihood of negative outlook on the US AAA rating in next 2 years. What is worrisome, is that Moody's apparently did not get their Christmas bribe from Wall Street/the Administration, and actually dares to speak the truth: "From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth." As the announcement has pushed the DXY even lower, expect semi-formal validation that America will soon be insolvent to result in yet another surge in stocks.

The big story this morning is that Treasury yields continue their grind higher - this despite the strong 30 Year auction last week which many expected had put a bottom on bond prices at least for the short-term. As can be seen on the attached chart, the 10 Year has resumed its drift lower, with yields once again touching multi-month highs, not to mention the 10s30s continue to flatten and is about to hit 100 bps. The move prompted an early wake up call for David Ader, head of government bond strategy at CRT who sent out the following note earlier: "Just when we thought it was safe to say something nice about the market, we get a sharp move lower (alas in price, not yield) in an active overnight session. We say active as volumes were 114% of the average, but to be sure it’s harder to find a new reason for the weakness other than the price action itself. Thus we’ll caution that the weakness is in part a function of liquidity and fear." There are two schools of thought as to what is causing the gap lower: i) the realization by various bondholders that nobody is concerned about US funding levels and that the next target of the bond vigilantes will be the US itself, and ii) that courtesy of the latest round of fiscal stimulus, the economy may have bought itself a short-term bounce and it is time to fade the deflationary move in bonds which was the prevalent trade of 2010. Either way, the inflationary threat is now all too real, and with rates jumping and mortgages surging, it is difficult to envision a nascent recovery in which the prevailing price of housing just dropped yet again courtesy of higher rates. So what does this mean for stocks? Once again, courtesy of some historical perspectives by Sentiment Trader, we look at what happened in the past to stock prices when bond yields started a gap move wider.

With the gold price hitting nominal highs last month, there is a lot of “mania” and “bubble” ranting going on in the gold community. Should we start selling? A bull market typically progresses through 3 phases: the Stealth Phase, in which early adopters start buying; the Wall of Worry Phase (or Awareness Phase), when institutions begin buying and every significant fluctuation makes investors worry that the bull market is over; and the Mania Phase when the general public piles on, driving prices beyond reason or sustainability. This is followed by the Blow-off Phase, when the bear takes over from the bull and the herd gets slaughtered. Judging by the volume on the TSX Venture Exchange (TSX-V), where a lot of gold juniors are listed, we conclude that the next phase of our current gold bull market, the Mania, still lies ahead.

The key events moving the markets this morning

• Asian stocks, Dollar, copper climb as China refrains from increasing rates.
• Australia overhauls banking rules; said it would improve banking competition.
• China pledges to change growth model in 2011, tackle prices, grow quickly.
• Chinese Premier Wen to visit India in bid to build mutual trust amid disputes over territory, trade.
• China risks 'rush' to tighten in 2011 after inflation accelerates past 5%.
• EU leaders set to focus on debt crisis facility as ECB grapples with banks.
• Euro falls to $1.3202 in morning European trading as EU nations to meet amid debt crisis.

• Must read: The eurozone is in bad need of an undertaker (Ambrose Evans-Pritchard)
• If China Blows Up, So Will Every Other Market (Forbes)
• China Risks `Rush' to Tighten in 2011 After Inflation Surges (Bloomberg)
• China Said to Plan for at Least $1.1 Trillion of New Lending (Bloomberg)
• Spotlight On Banks' Exposure in Europe (WSJ)
• Backers and critics see passage of Obama tax deal (Reuters)
• Irish Sovereign Debt Default Would Be Far From Armageddon (Bloomberg)
• Paul Myners Op-Ed: Break up Britain’s uncompetitive big banks (FT)
• No New Normal for 2011 in Forecasts for 11% S&P 500 Gain (Bloomberg)

European Morning Briefing - Stocks, Bonds, FX – 13/12/10

Retail traders are notoriously wrong at picking market direction/tops and bottoms. Most retail traders very naturally seem to adopt a counter-trend stance and this offers very accurate signals for individuals looking to trade against this group. This daily report is designed to help traders focus their efforts on higher probability pairs.