Archive - Oct 2014

It appears some of the 'fundamental' legs of the face-ripping ramp in stocks are fading. Broken Markets - nope; Fed Speakers - nope (blackout period); Crude rising - nope (WTI back under $81)

From Tepper's "Short The Euro," call (which he hopes does better than his "bond bull is over" call) to Icahn's "HY credit is in a bubble... and I am short" warning, The 2-day Robin Hood conference in NYC had something for everyone. Paul Tudor Jones thinks US equities will outperform the rest of the world this year but "the piper will be paid one day," and Larry Fink says "equities are health" after last week's correction... and Whitney Tilson is short Lumber Liquidators (trade accordingly).

Congress gave the Fed a mandate to “promote maximum employment, production, and price stability”; it never explicitly authorized propping up stocks. Yet through a remarkable theoretical stretch called the “wealth effect,” that’s exactly what the Fed is doing.

If you wondered why "The Fed turned the market around" last week, acting so sensitively aggressive to act with stocks only down modestly from record highs, one glance at the following chart might answer the question. During last week's turbulence, ICSC-Goldman Chain Store Sales growth plunged to a mere 2.1% YoY - the weakest in 5 months and worst for this time of year since 2010. Does this seem like a nation of consumers willing to take up the animal spirits, confident-about-the-future, torch of escape velocity spending from The Fed?

Who are they trying to fool? (again)

Once upon a time, one of the best sell-side analysts in the MBS space was Merrill Lynch's "Convexity Maven" Harley Bassman: he was so good, in fact, he was quickly soaked up to the buyside, or at least the prop-trading side, when several years ago he left Merrill to join Credit Suisse as a prop trader. It was here that he provided some insightful trade ideas such as "The "Anti-Widowmaker" Trade: Get Paid To Wait For The Japanese House Of Card To Collapse" and previewed the "Inevitable 'Taper'" at a time when most still didn't think the Fed was running out of paper to monetize. Then, about a year ago, Bassman disappeared again, only to reappear in a new capacity at recently-troubled bond manager Pimco. It is from here that following a year-long silences, he has just sent out his latest letter, in which he picks up on his favorite topic: implied volatility in rates, and the arbitrage opportunities it provides courtesy of epic risk mispricing in the current quote-unquote market, courtesy of the Fed's 6 year+ centrally-planned manipulation of, well, everything. 

From the "most transparent and open administration ever"...

Last Wednesday the markets plunged on a vague recognition that the central bank promoted recovery story might not be on the level. But that tremor didn’t last long. Right on cue the next day, one of the very dimmest Fed heads - James Dullard of St Louis - mumbled incoherently about a possible QE extension, causing the robo-traders to erupt with buy orders. And its no different anywhere else in the central bank besotted financial markets around the world. Everywhere state action, not business enterprise, is believed to be the source of wealth creation - at least the stock market’s paper wealth version and even if for just a few more hours or days. The job of the monetary politburo is apparently to sift noise out of the in-coming data noise - even when it is a feedback loop from the Fed’s own manipulation and interventions.

Because after doing the math, we find that the biggest stock market surge in 2014 was over what boils down to be a central bank injection of... $5 billion per month?

Saxo Bank's Chief Economist Steen Jakobsen is predicting another 'shock drop' in the markets within a few weeks. With debt and low inflation continuing to create a nervous atmosphere behind most markets, Steen argues that we will hit fresh lows in mid-November. Steen takes the view that central bank policy is creating a 'fantasy land' for investors and he points out that the recent 'day dive' in markets was a closer reflection of reality. Steen outlines his suggestions for trading ahead of another dip in mid November with targets for the S&P 500 around 1810 and the Dax at 8000 - 7800. Be long fixed income as it is "a free put on the equity market.. and the economic cycle is not yet ready to adapt to a rising interest rate."

What a difference a day makes...

The seemingly insatiable appetite of the growing Indian middle class for gold is causing the government in India to again consider imposing sanctions on the importing of gold. 

Having just engaged in QE for TWO SOLID YEARS STRAIGHT the Fed would totally destroy any and all credibility in its monetary policies to engage in QE anytime within the next three to six months.

• BULGARIA CENTRAL BANK CORPBANK PRE-JUNE REPORTS 'MISLEADING'
• BULGARIA CENTRAL BANK SAYS CORPBANK ASSETS ARE 6.7B LEV
• BULGARIA CENTRAL BANK SAYS CORPBANK AUDIT SHOWED ONLY 13 PERCENT OF LOANS HAD VALID COLLATERAL

What a difference 24 hours makes. Yesterday, ECB rumors sparked precious metal buying on heavy volume. Today, more denials of ECB corporate bond buying combined with a slightly-hotter-than-expected inflation print (i.e. lower odds of Fed unleashing QE4) has sent silver (and gold) tumbling... on very heavy volume...