Archive - Sep 17, 2010 - Story

Developing news that the SEC is proposing a rule that will make EOQ window dressing, along the lines of the Repo 105 transactions that made so many headlines yet resulted in absolutely no criminal convictions, more difficult. We will bring you more some time in 2394 when this proposal actually becomes enforced, but in the meantime here is our chart that shows just how much of a pervasive phenomenon this is among the Primary Dealer community. Readers can find out more about this here: End Of Quarter Primary Dealer Asset Window Dressing Games Continue. We will update this chart in the first week of October when the Q3 window dreassing game is complete. We expect another 30 billion up and down swing as banks "fix" their capitalization ratios just in time for their 10-Q filings.

"The market stands on the banks of the Rubicon. The technical picture is unusually complex. There are various aspects that are normally associated with topping patterns. Yesterday, it was announced by the American Association of Individual Investors that the percentage of bullish investors had suddenly soared to 51%. That’s usually a big warning signal. Also, on the shelf for the bears remain the series of Hindenburg Omens and the recent VIX sell signal. The bulls are working on an inverse head and shoulders in the S&P. Interestingly, the “neckline” is very near the 1131/1133 level that marks the top of the three month trading range. Thus, a move above that level could suggest a new up-leg in the S&P with a target count of about 1240. That set-up leads traders to believe that a move up through that band might spark a frenzy of algorithmic short covering. That would certify the importance and validity of a breakout." - Art Cashin

The latest ECRI Leading Indicators data printed at -9.2, as it continues straddling the -10 level which is indicative of a double dip, improving modestly from last week's unrevised -10.1. At this point the Leading Indicator is merely feeding from market signals, and if the market jumps, so does the ECRI, and vice versa. Presumably a concurrent market is somehow supposed to predict the economic direction. Yet if one listens to Alan Greenspan, that is precisely what happens, proving that anything having ever come out of the Chicago School of Voodoo should be forever banned from actual practical implementation. Here is the overarching thesis of the Zero Hedge School For Non Robotic Trades who Wish To Learn To Trade Good: "The real EMT is really all about market manipulation higher, higher, higher. Any questions."

Markets and more generally the world are at a very interesting juncture. In physics, every system basically attempts to find a state of equilibrium. If a system that is in a state of equilibrium receives or loses energy from/to another system it can lead to a change in the state of equilibrium. Transitions at the micro level happen in steps even though looking at the world it seems like continuous evolution because what we witness is all the different systems that compose the universe in constant interaction. When a system is pulled with extreme force into two different directions it could appear like it is in a state of equilibrium, but the most minute change could lead to a drastic change in the system's state. An anecdotal example of this was offered to us a little over a decade ago when a group of illuminated brain surgeons decided to break the tug of war world record. For those like me who really don't understand what the world record of tug of war can be, it's just putting a record number of people pulling on each side. The experiment went wrong when after a few seconds of stand-still the tension in the rope exceeded capacity... the rope gave and sadly a few people lost their lives as each side of the rope backfired into the people pulling with extreme power. Why am I babbling about tug of war? Because the current state of the world economy is very similar to that world record attempt. The system is stretched in a lot of different directions: demand for resources, unemployment, conflicting stimulus policies chasing the same demand for goods, unsustainable amounts of debt... - Nic Lenoir

And thus QE2 is right back on the table... Sigh. The prior print was 68.9, and it was hoped it would move higher to 70.0. No such luck as we get the lowest print since August 2009. And probably the scariest indicator: the outlook is at the lowest since March 2009.

• Expectations: 59.1 vs. Exp. 64.2 (Prev. 62.9)
• Conditions: 78.4 vs. Exp. 79.0 (Prev. 78.3)
• 5-year Inflation: 2.8% vs. Prev. 2.8%
• 1-year Inflation: 2.2% vs. Prev. 2.7%

Earlier, we disclosed that concerns that the IMF could be called in shortly to rescue Ireland was the reason for Irish CDS to hit new records. It now turns out that another of the PIIGS may be in need of an imminent IMF rescue, namely, Portugal whose CDS is also surging. According to Diario de Noticias, "Portugal may be required to seek assistance from the International Monetary Fund (IMF) to address the problems of external financing." At least Tim Giethner's little Scam Test diversion bought Europe a quiet summer, full of vacations that would not be bothered with a stark reminder of just how ugly things are about to turn.

Core inflation kept flat thanks to....tobacco prices? Aside from that, deflation rules. The only question is: does Bernanke take secret smoke breaks inbetween think tank sessions on how to destroy the US middle class quickly and clinically.

With gold hitting a historic high this past Tuesday only to have it taken out yesterday, I thought it might be timely to take a look at another precious metal on the move: silver. Specifically, do the charts and the basic fundamentals support the sense that silver is set to continue its recent run as well? And perhaps more tantalizing, is there any evidence that points to the idea that silver can take out its more than thirty-year-old record high of roughly $50 per ounce? Based on a scrubbing of the charts and the fundamentals, I am more inclined than not to believe that silver’s future may look like gold.

Below is an updated visualization of the economic surprise tracker via the SocGen Policy Watch and Data monitor, which shows how since Jackson Hole, when Bernanke made it abundantly clear that QE2 is certainly on the table, the data has notably picked up. Which means that a green light for further monetary intervention will most certainly require a major gamble by the Census and BEA guys to report data materially closer to where it is in reality, and hope the market does not puke enough to offset any subsequent QE2 benefits. Of course, the market being "efficient" and "forward looking" has already foreseen all this. The bottom line here, however, as we pointed out previously: Bill Gross does not expect a September QE2 announcement. Which means one is not coming. All robots who are still confused, and trading with that expectation in Gallium Arsenide mind, will be disappointed.

• Defaulting on Anglo debts now on agenda (Indepentent)
• Government perilously close to calling in IMF, report warns (Independent)
• Japan to Seek Global Understanding on FX (Reuters)
• US Banks Braced for Further Bad News (FT)... seems so deja vu (Zero Hedge)
• China Central Bank Warns of Risks Ahead For Banks (Reuters)
• Geithner vows to take China currency dispute to G20. (Reuters)... But, didn't he do that already?
• Yuan Completes Best Week in 28 Months on U.S. Calls for Gains (BusinessWeek)
• Impact of Bank Rules Likely to be 30% Tougher (FT)
• Japan PM Rejigs Cabinet and Eyes Economy (Reuters)

Overall a boring release, as the CPI print came in just as expected, with energy and gas contributing to the increase. Of course, with biflation now the topic du jour, where things needed are surging in price, and thing unneeded are plunging, it is only expected that the average won't change much. Overall, CPI came in at 0.3%, as expected, compared to 0.3% previously. Core CPI was at 0.0%, just below expectations of 0.1%... At least it was not outright deflation. Regardless, whatever the result would have been, it is bullish for the 4 people passing hot potatoes.

And the euro seemed so happy after its recent surge, that it completely forgot it is backed by an insolvent continent. Luckily, here's Ireland to remind us stuff is much, much worse than expected. According to the Irish Independent the Labour Party, Eamon Gilmore, came very close to suggesting that Ireland is considering defaulting on its debts "when he talked about the Government "negotiating'' with bondholders in Anglo Irish Bank." Additionally, the same newspaper also reported that Ireland is on the verge of calling in the IMF for a bailout, citing "a report from Barclays, one of Europe's largest banks, said Ireland may yet need financial help from the IMF or the EU if conditions got any worse. But a spokesman for Finance Minister Brian Lenihan said last night: "The Government's strategy for dealing with the economic and financial challenges has been commended by the EU Commission, the European Central Bank and many other international experts." In other words, domino #2 has at most a few more days. Net result of all this: Irish-Bund spread explode, and gold hits a new all time high of $1,282.

• Asian stocks gain as Oracle, RIM earnings boost tech stocks.
• BoJ facing pressure to do even more to prop up the economy.
• China approves 4 Taiwan banks to set up mainland branches.
• European governments approved a free trade agreement with South Korea.
• International Monetary Fund hasn't ruled out putting together more aid for Greece.
• Oil rises above $75 in Asia as traders look for demand clues from US economic data.
• U.S. jobless claims declined last week to their lowest level in two months.

CPI and the Reuters/Michigan survey…

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 17/09/10