Archive - Aug 2011

Do not attempt this at home kids

All we get is that the meeting in September will be 2 days instead of 1? With Europe being so weak and the market having been so resilient in the face of bad news this week and exuberant about good news, I think we have room to sell off. I really think we have to head towards the lows. Weirdly enough, AAPL, is once again outperforming the rest of the Nasdaq. I don't see that lasting forever. For the shorts, there is now no obvious event to be scared of. Obama's 212th jobs in the future speech? I find it hard to believe that will be anything more than a yawn. Scared that Ben will intimidate Washington into doing something? Yeah, we saw their reaction to S&P - raid the offices and get the CEO fired.

Complete summary of the market response.

Bottom line: nothing now, QE3 now expected to be delivered Sept. 20? or not...

• BERNANKE SAYS FED HAS LIMITED ABILITY TO ENSURE LONG-RUN GROWTH
• BERNANKE DOESN'T SIGNAL NEW STEPS FOR PROMOTING U.S. GROWTH
• BERNANKE SAYS EXTRA DAY TO ALLOW `FULLER DISCUSSION' OF TOOLS
• BERNANKE SAYS FED TO EXTEND SEPT. FOMC MEETING TO TWO DAYS
• BERNANKE SAYS FED HAS `RANGE OF TOOLS' FOR STIMULATING GROWTH
• BERNANKE SAYS `FINANCIAL STRESS' WILL BE A `DRAG' ON RECOVERY

What is it that the successful in the investment community see that policy makers in the US and Europe don't? Let's walk through the evidentiary building blocks of a US balance sheet recession and query why everyone has forgotten about the very real real estate depression.

Sino Forest: date of death - August 26, 2011.

The soundbite response from Wall Street on the latest GDP disappointment is, as expected, decidedly not bullish.

The first revision to Q1 GDP printed at 1.0%, down from the preliminary Q2 GDP print of 1.3%, and as expected was worse than Wall Street consensus of -1.1%, although it was certainly not as bad as the miss to the preliminary number. Stone McCarthy's forecast of 0.7% is not necessarily wrong: it is probably just early: the final revision to Q2 GDP will come on September 29, one week after the next FOMC meeting, and will be the last sub 1% GDP growth number before we see a negative GDP print for Q3. Personal Consumption printed a little better than expected at 0.4%, higher than consensus of 0.2%. Alas, this number will be whacked massively in Q3. Core PCE was also slightly higher than expectations of 2.1%, coming at 2.2%. The components of the 1.0% revised GDP were: PCE: 0.3%; Fixed Investment: 1.01%, Change in Private Inventories: -0.23%; Exports: 0.41%; Imports -0.31%; and Government consumption -0.18%. This is the third consecutive quarter in which the government has taken away from growth.

For what it's worth, the DAX is almost back to yesterday's "flash" crash lows.  I'm not sure what is going on there (Greece, sovereign debt in general, slowing economy) but it is unlikely that yesterday's move was solely related to a fat finger or rumors of a downgrade.  The Dax is now down over 20% for the year.  I think the weakening economy and horrible stock performance will further impact Germany's willingness to fund bailouts across Europe.  Yes, maybe it would help their market, but I suspect the average German is going to be more worried about sending money out the door at a time of weakness, than what is the "right" decision longer term. 

• Markets focus on Fed Bernanke’s Jackson Hole speech in anticipation of getting a glimpse into the Fed’s monetary policy stance going forward
• S&P sovereign ratings head, David Beers, said that the AAA rating for the US is not likely in the near term, and S&P is looking very carefully at France’s evolving fiscal strategy
• Speculation that the German Chancellor Merkel may be ousted as early as September weighed on the DAX future
• RBA’s chief Stevens said that the central bank may act to lessen the upward pressure on inflation, which helped AUD
• CHF weakened on the back of market talk that the SNB may announce further measures to curb the currency's strength

Gold is set to finish the week lower as it is 3.7% lower so far on the week. This will embolden the momentum traders on the COMEX. There is also the risk of another margin increase from the CME. Although it is hard to know how they could justify this as gold’s leverage is now in line with most commodities and less than that on US Treasuries. The correction was primarily due to the Shanghai and COMEX margin increases. Profit taking and short selling also took place due to gold’s short term very overbought status. Sharps Pixley’s respected Ross Norman noted that the furious nature of the selling could be motivated by Jackson Hole: "I have never been a fan of conspiracy theories but I do wonder about the manner and timing of the sell-off. Much of the selling was conducted through the London p.m. fixing (when New York was active) which is a favored route for official (central bank) selling rather than being finessed into the market as a fund might prefer. It was, if you like, a statement - and quite a handy and effective one just in advance of the Jackson Hole meeting." Our conversations with people in the industry and our own experience makes us confident that this is a paper driven sell off drive primarily by speculative, leverage interests on Wall Street.

• Bernanke: A Chance To Talk About Fiscal Policy? (Hilsenrath)
• Bernanke seen stopping short of pledge for QE3 (Reuters)
• Fed Policymaker Says QE is ‘Most Potent Weapon’ (FT)
• El-Erian: Bernanke Must not Push QE3 at Jackson Hole (FT)
• Bernanke Scholar Advises Bernanke Fed Chief to Be Bold on Policy (Bloomberg)
• Bailout for Greece Falters Over Demand for Collateral (WSJ)
• Japan’s Kan Resigns as Party Leader (WSJ)
• European shorting ban extended (FT)

While all eyes will be on Bernanke at around 10 am, the first GDP revision will be quite a stressful number too should it come below 1% as many (but not the Wall Street consensus) predict. Elsewhere, millions of East Coasters will be feverishly hitting F5 on weather.com to see how much closer they are with insurance company busting destiny.

Below, for those who are still undecided we present RanSquawk's preview of what to expect, or as the case may be, not expect, from the Chairman in about 3 hours, when the embargo on his speech is lifted. Also attached is the final summary of Citi's Steven Englander of what the Chairman's thoughts would mean for the dollar, as well as various third party takes on implications for gold and other general asset prices. The consensus, as noted yesterday, is one of no immediate escalation in the push for QE3 as the stock plunge has been contained for the time being - a factor that has always been the primary catalyst for Fed decisionmaking. Granted should the S&P drop to around 1,000, everything will change. In terms of catalysts, the next FOMC meeting will be September 20, so at best silence from the Fed today will mean the market is on its own for 4 weeks, with an ugly NFP number inbetween. In other words, the next month is shaping up for yet more abnormal volatility, "as usual" for 2011.