Archive - Apr 12, 2010

There is one signal we have been pushing consistently when it comes to picking equity tops and that it buying (selling) on bearish (bullish) reversal candles in the Vix outside the upper (lower) Bollinger band. The Vix daily chart attached shows recent history and how any such signal has generated at least a 5% percent move in S&P. As the Bollinger bands for the Vix have been narrowing of late we have been beating that drum impatiently. Today marks the first day we have an outside candle below the lower bollinger. Ideally we would close today above this morning's open at 15.67. If that is the case then no doubt it is time to sell equities without much hesitation. I have attached for confirmation the charts of the Dax using 3-hours and daily intervals. We see we have a potential 5-count on the Dax completed calling for reversal, and there is strong Stochastic and RSI divergence on the 3-hour chart. On the daily chart we see we should technically at least retest the 100-dma envelope, currently at 5,836, and the daily stochastic is showing a lot of saturation on the upside. - Nic Lenoir

Tomorrow Greece is issuing €600 million of 3 Month and 6 Month Bills each. The latest curve from Bloomberg shows that absent some new bailout between today and tomorrow, Greece will likely be forced to offer a stunning ~6% yield for both issues (assuming these go off at market rates). Without having checked historical records, we are confident that never in its post-EU history has Greece had to issue short-term debt at such record levels. And with the bulk of Greek debt rolling over in 2-3 years, the country will gradually become bogged down in untenable interest expense, even as its overall output is decimated thanks to real (as opposed to imaginary) austerity measures. There is no way that this curve is indicative of a sustainable situation or a situation where a liquidity crisis can be avoided. Greece thought the loaded fire extinguisher of this weekend's announcement would be sufficient to generate a far more aggressive steepening of the curve. It was wrong. It is now forced to activate the EU/IMF rescue plan. Each day it delays results in one day closer to certain sovereign bankruptcy.

The same old song - market melt up, no volume. The algos are sticking to the program: if no volume, then buy. The last particular uptick occured on less low volume than usual. Funds, realizing that the government will never allow anyone to fail ever, see no reason to sell anything. Volume shaping up to be one of lowest for the year. There is no participation in the rally, as has been the case for 2010. There is also increasingly less liquidity in the SPY where smaller and smaller blocks get to push the market in any one direction. Furthermore, the market has once again decoupled from any asset correlations: be it currencies, or commodities.

For today's dose of Alice In Wonderland capital markets, ICI just reported that the week ending March 31 saw outflow, this time -$61 million. Year To Date domestic equity flows are ($3.6) bilion, the same as from the February lows. The S&P has gone parabolic with no retail participation, and in fact, with capital withdrawal by investors. We are confident the Federal Reserve has some good explanations for this rotation out of equities and ever more into bonds.

While the market cheers on the fantastic job “growth” of March 2010, the more astute of us are concerned with a growing tide of personal bankruptcies. March 2010 saw 158,000 bankruptcy filings. David Rosenberg of Gluskin-Sheff notes that this is an astounding 6,900 filings per day.

This latest filing is up 19% from March 2009’s number which occurred at the absolute nadir of the economic decline, when everyone thought the world was ending. It’s also up 35% from last month’s (February 2010) number.

Given the significance of this, I thought today we’d spend some time delving into numbers for the “median” American’s experience in the US today.

The just closed auction of 3 and 6 Month Bill saw highs of 0.157% and 0.244%. This was a substantial inflection point in the increase in rates over the past 3 months for the short end of the curve, as both auctions closed higher last week, at 0.175% and 0.265%, respectively. Direct Bidders once again came to save the day, as well as the Primary Dealer backup bid. Direct Bidder take down surged from 11.46% to 18.18% for the 3 month over the prior week, while in the 6 month it remained at a very much elevated 15.7%, even after submitting a massive $12.7 billion in bid, resulting in one of the lowest hit rates ever of 31.6%. Primary Dealer hit rates also were close to record lows, with 13.5% for the 3 Month and 15.7% for the 6 Month.Whether the strong turn out is a function of Greek spookage, of less concerns about imminent hikes by the Fed, or by the Fed itself, continuing its shell game, is unclear. We hope to find out in 25 years when Fed manipulation records are declassified.

Delinquency rates up, Cap rates up, Macro outlook down, CRE REIT equity prices up. Sounds about right!

RANsquawk 12th April US Afternoon Briefing - Stocks, Bonds, FX etc.

The Fitch full court press on Greece continues, now downgrading the Covered Bonds of the National Bank Of Greece from AA to A+, as well as those of Alpha and Marfin Egnatia Bank. Moody's is still evaluating whether the best time to come out with its AAAAA++*** upgrade is just before Buffett sells his entire stake, or just after. In themeantime, the Greek depositor bank run is certainly [not] getting much better. You decide.

There is a real Bill issuance fest coming in the next week, as the US Treasury does everything but what it promised in regard to extending average Treasury maturities. After all, someone must let banks repo newly auctioned assets at zero rates so they can keep pushing the market ever higher into dot.com levels and far, far beyond.

Here is the listing of upcoming Bill auctions over the next week:

• April 12, $26 billion 3 Month Bills
• April 12, $27 billion 6 Month Bills
• April 13, $26 billion 4 Week Bills
• April 14, $25 Billion 56-Day Cash Management Bills
• April 22, $TBD billion, 3 Month Bills (likely $26 billion)
• April 22, $TBD, 6 Month Bills (likely $27 billion)

The news out of Europe had a lot of overnight commentaries pointing towards increased risk appetite, but the fervor has already dissipated it seems. Most people had been expecting guaranties to be the form adopted for the bailout. Guaranties present the advantage of not requiring any disbursement of money up front and are the easiest way to provide assistance. In the case of Greece where market access could have been a problem the fact the weekend's resolution came in the form of loans provides a bit more certitude. However beyond this technical convenience there are major hurdles associated. - Nic Lenoir

As SentimenTrader points out, we are now approaching uncharted territory when it comes to speculative activity, and are back to 2000 bubble levels. "The heavy concentration on bullish strategies, among all classes of traders, pushed the Options Speculation Index to another recent high, beyond anything we saw at the January peak or in recent weeks. The only comparison in the history that we have are the weeks around the peak in the spring of 2000. It seems we've entered a whole new realm from anything we've seen over the past nine years, so who knows how much longer - or more extreme - this can go." The last time we were here, the tech bubble was about to pop and result in 50%+ losses for the Nasdaq virtually overnight. This time around, this is not a tech-isolated bubble. This is a global bubble fueled by the endless money printing insanity of the Central Bankers. When it pops it will take down every asset class with it. But for the smart and dumb money, one must stay invested to have a job on January 1, 2011, not to mention bonus - look for the peaks from 2000 to be soon taken out as now everyone jumps on the same side of the boat.

A great overview of the arguments on either side of the great Treasury bull-bear debate, courtesy of David Rosenberg. Rosie juxtaposes the perspectives of two of the most respect yields strategists currently: MS' Jim Caron, and Goldman's Jan Hatzius. A dose of Jim Grant is also thrown in for good measure. Must read summary for bond bulls and bears alike.

The VIX has just hit the lowest level since July of 2007 as Sentiment Trader reports that "speculation in the options market has spiked to its highest levels since the spring of 2000." The government's endorsed moral hazard policy has now lead to the worst of both the dot.com and the housing bubbles. There is nothing that can ever again default or lose money: Uncle Sam is there with your money to guarantee it. Ben Bernanke sees no bubble anywhere.

While the press and pundits hype the 11,000 level, the real resistance levels are up around 11,100. That’s where lots of Fibonacci targets and moving averages converge. Friday, the napkins suggested S&P resistance at 1194/1197. Friday’s high was 1194.66. Today’s numbers look like: resistance 1199/1202 and support 1182/1185. - Art Cashin