Archive - Jan 2011

Markets bulled up in the AM as they await their QE and low rates ‘morphine’ from the FOMC meeting statement later today (recall our comparison that QE is like morphine – it feels good in the short term, but you are only getting it because you are in severe pain – see QE Morphine published November 4, 2010). The tone of the statement will be key as a more bullish stance might shift the market to consider stimulus withdrawal impacts, while a continuation of the dour tone so popular as of late might cause a further USD slide. Yesterday’s slightly bullish performance in equities was topped by a strong Treasury rally that seemed to be more stimulus driven than fear hoarding. Case/Shiller showed no significant surprises, other than the continued home price spiral being slightly slower than expected. Today is all about the Fed, with MBA Apps and New Home Sales a meager appetizer before the afternoon main course. State of the Union last night was also supportive of a more fiscally conservative White House stance.

The MBA reported the results of its weekly mortgage applications survey earlier and the leading indicators for the housing price collapse continue coming fast and weak. After rising by 5% in the prior week, the market composite index plummeted by 12.9%, a major reversal, which confirms that as we have been saying, no matter the record 2s10s spread, few if any are taking "advantage" of surging mortgage yields and refinancing. Indeed, the Refinance index decreased by 15.3%, hitting the lowest level since January 2010, while the Purchase Index is at the lowest since October 2010. And so, in addition to global rioting, add the complete collapse in the housing market as the natural offset to a market meltup inducing QE 2. As such, the tradeoff becomes: debt monetization and Russell 2000 at 36,000 (bankers win) or a complete housing market wipe out and accelerating global food price revolutions (middle class is not eradicated). We take the former any day.

After this morning's sobering news on mortgage applications, we have new home sales, CBO budget update, and the FOMC statement….There is no POMO today.

Thomas Stolper's Goldman FX team, who a little over a week ago put on a tactical target of 1.37 on the EURUSD, refuses to take profits on the EURUSD, and instead has extended the target from 1.37 to 1.40 (with a 1.33 stop). Since this is the first time we have seen the firm continue selling into the close, we wonder just how big the pain for the prop side of GS is if it must be hoping to cut its losses on a reversal. With the pair trading well north of 1.37 Goldman may be forced to keep pushing the target ever higher on Asia's ongoing rescue of Europe.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 26/01/11

The proper decision now regarding your child's education may be the difference in whether you set your child up for a life of failure or a life of success. Yes I really do believe that the decision on whether to send your child to university now or to forgo that traditional route is a “make or break your child’s life" type of decision.

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.

Naming names ...

Does all of this rhetoric mean anything or is all this just another batch of empty promises to add to the long list of empty promises that Barack Obama has already made and broken?

Another implication (particularly in the Dow’s outperformance vs the S&P) is the ratios’ correlations to Treasury yields, which suggests yields may selloff soon, while risk looks heavy with overhead resistance, which implies a return to the in-tandem movement of UST’s and USD, aka safe haven risk aversion. This is what characterized the top back in April 2010, and indeed the JPY surged ahead of and leading the May 6 Flash Crash in risk assets across the board.

Richard Koo's just released note has the usual set of insightful observations into the fringe Keynesianism which we all suffer on a daily basis, where one false move will lead to a systemic collapse, and as usual deals exclusively with the aftermath (and concurrent-math) of the Fed's QE. First, he brings forward the "ketchup declaration" which is a sad harbinger of what may soon happen to the US. "The “ketchup declaration” was made about a decade ago in the context of an argument between the Bank of Japan and a group of overseas economists that included Paul Krugman and Ben Bernanke. The BOJ’s position was that quantitative easing could have no impact as long as there was no demand for loans among businesses and households." What has happened, is that the BOJ adopted precisely what Bernanke espoused in the beginning of the last decade... to an abysmal failure. But that won't stop the Chair from repeating Japan's faults here. The scarier thought is that it is precisely Bernanke who will next proceed to monetize all equity-related assets: ETFs, REITs, and everything else. Yet the most notable argument, and the one which even Bernanke does not get in his push for reflation whose only hope is to get consumers to purchase on credit instead of just cash, is what happens if the US consumer is consuming, but is content to do so without leveraging again. That is by far the weakest link in Bernanke's argument. A link which will be broken soon enough by his relentless exporting of inflation, until such a point is reached that the entire world takes America aside, and tells them to get rid of the Chaircreature, or else.

Source: Banzai7 News

The SEC is conducting an inquiry into Illinois' projected pension savings and looking into California's as well...

"Most commodities are continuing their up move into deeply overvalued. As with other assets it does not really matter in the short-term (as long as the trend is positive) but it is paramount for longer-term projections. We have little doubts that commodity long-only who buy to hold are going to experience a >50% drawdown (from current levels) on their industrial metals, crude oil and agricultural positions sometimes in the next 24 months. Demand has been artificially boosted by China strategic reserve building, infrastructure intensive fiscal stimulus, booming demand from the rest of emerging economies and, as the trend persisted, by trend followers and money managers new attraction to the sector (you know it is not correlated so you should buy them to diversify your portfolio... sorry it WAS not correlated...). The introduction of physically-based ETFs is not helping in this matter as it represents a big short-term increase in marginal demand especially when the Fed is busy implementing QE2." Damien Cleusix

In this issue of The Institutional Risk Analyst, we return to the zombie dance party to check in on the queen of the prom, American International Group ("AIG"). First a question: Vampires are all the rage now in popular culture, so allow us to offer a macabre metaphor for AIG. Do you know what a "blood doll" is? A girl who craves to be the regular victim of or willing donor to a vampire. But hold that thought.