Archive - Sep 28, 2010 - Story

Who the hell knows what is going on with the EURUSD - the only thing that matters now is which central banks will get away with more debasing of its own middle-class. Since Germany still recalls Weimar, the Fed may win this round. Yet, Brown Brothers sees som increasing short-term strength in the EURUSD, then a gradual decline as the increasing weakness in Europe unravels: "After rallying about 6.25% since September 10, the euro may enter a consolidative phase before advancing into the $1.38-$1.40 area in the first half of Q4. However, the euro may then surrender those gains in the second half of the quarter, as QEII is discounted (or not delivered at all), and the loss of economic momentum in Europe, ahead of a 2011 fiscal contraction, keeps debt restructuring fears elevated. The increased possibility that the EFSF has to be drawn upon may also spur speculation that the ECB may not be in a position to remove its emergency liquidity provisions; and indeed may have to actually embark on either more bond purchases or take some additional measures. All this may leave the euro trading around $1.30, if not lower, by year's end."

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 28/09/10

The last stat arb desk has just turned off the lights. Stocks are on their own, as all correlations between bonds and stocks are no longer meaningful, even as the carry trade holds on to some semblance of meaning, but even that is collapsing fast. In this most manipulated market we have ever seen, in which only the Fed is the catalyst for any buying action any more, only those with an investment horizon of 5-10 milliseconds are advised to trade. Everyone else, stay away, or else enjoy waking up to an Apple that is down between 5% and 50% as it (and who knows what else) goes bidless.

Goldman's Investment Strategy Group has just circulated the most bearish 2011 outlook presentation, detailing why the US economy in 2011 will likely stall and post negative growth. As the chart below demonstrates, the current case, where ongoing QE will likely persist through 2011 and even into 2012, and thus make any discussion of raising rates irrelevant (likely forever, as the Fed will not be able to absorb all the excess slack before it is forcefully removed after 2-3 sequential dollar devaluations) lead Goldman to a GDP expectation of well under half of the Fed's greenshooty outlook of 3%.

We hope Brian Sack at least hands out a free Kindle, iPad, and DVD rental to all US taxpayers, after all it was all their money that just got these stocks back to unchanged, and prevented a rout in the Nasdaq, nearly 25% of which is determined by just these three stocks (AAPL, AMZN and NFLX). Your taxpayer money in use. And now the question is who frontruns the other frontrunners in taking profits ahead of the next POMO on Thursday.

Recently, there has been much euphoria to define all those who believe that gold will outperform as goldbugs. We in turn are fairly confident that pretty soon all those who have faith that the central banks will somehow get it right this time, instead of causing all out war again, will be labeled as "paper bugs." What however, surprises us is that all the so called "gold bugs" continue to be invested in the best performing asset class over the past day, 5 days, 1 month, 6 months, 5 years, and 10 years: on a relative basis gold has outperformed stocks in all these time categories, yet it continues to be more hated than even Ben Bernanke, whose stealthy destruction of middle class purchasing power is in fact cheered by the "paper bugs" - we will not bore you with the chart that shows how the dollar has lost almost 100% of its purchasing power since the creation of the Fed. Anyway, here is David Rosenberg, who several months ago joined the gold bandwagon, and presents one of the better defenses to all those who blame gold bugs for not catching the "bungee jump" in the most manipulated stock market in history. "We continue to field criticism that we “missed the call” on the equity market. Well, no doubt we did not see the 1930-style bungee jump last year, but: (i) it’s over, and (ii) there were many other asset classes we liked that did very well: what has done better than gold, which is up more than 30% in the last 12 months." We obviously agree both now, and about 50% back, at the time of the creation of this blog, when we said that the only natural response to Fed insanity is the otherwise useless shiny metal.

The Fed thinks it can destroy the dollar? Sure they can. Too bad fewer and fewer give a rat's ass anymore. Gold just took out the $1,300 psychological barrier. Next stop, as predicted earlier today by BofA's Widmer: $1,500.

POMO has started and the ramp is now in full force. We expect Brian Sack to give the green light to the PDs to take stocks into the green. About $3-4 billion in TIPS to be put to the Fed, and will be used to buy AAPL, AMZN, NFLX and BIDU. Full results of today's FRBNY market manipulation episode at the usual time and place.

And risk off. 7 out of 8 Richmond Fed indicators declined, with just Vendor Lead-Time remaining flat at 0. Number of Employees plunged from 12 to -3. And w/r/t the now almost certainly sub 50 print, Shipments, Volume and Backlog all plunged by 10 or more points. In a word, total diffusion index massacre. As for consumer confidence: somehow the record September surge in stocks did nothing to make people forget juw how broken the US economy is, and that they do not enjoy being lied to about recessions being over. The Conference Board printed at 48.5, compared to 53.2 revised in July, on expectations of 52.4.

The company that determines the market, AAPL, by accounting for 20% of Nasdaq weighing, just gave the nearly 200 hedge fund managers who own it a heart attack. While the early swoon in the stock by $15 is not (yet) attributed to some fat finger, or flash crash, the move wiped out billions in market cap. The reason, according to FOTW, is that the COO may move to HPQ (up 2% on the day), or some such narrative which seeks to explain why the world's most overvalued company may dare to have a down day. Either way, this has now solidly broken the +/- 2 std dev upchannel seen for pretty much one full month. The entire market is now down as a result of one stock being responsible for overall direction and momentum. The issue is that who knows how many HFTs are now underwater on their daily cost averaging in the name, which may potentially spark a material selloff. Watch for comparable action in the four horsemen of the tech apocalypse: AMZN, NFLX and BIDU.

All is fair in love and central bank war. Which is why we see the following headlines from England, showing just how important it is in the global game theory, which has now turned to outright war, how important it is to defect first.

• BOE's Posen: I think further monetary easing should be undertaken in UK, subject to debate
• BOE's Posen: If QE does not work, then time for further fiscal stimulus, corporate debt purchases
• BOE's Posen: Additional monetary stimulus should begin in the form of addition QE gilt buying

As argued over the past few weeks and first introduced in my piece "Catfight: it's on!" central banks are now engaged in modern monetary warfare. This was acknowledged just about that bluntly by the Brazilian central bank yesterday. There are two ways to play the game. The Swiss way, meaning traders front-run the central bank when their favorite FX dealer tells them the SNB is checking offers in EURCHF at which point you buy ahead of them and sell 2 hours later, leaving sell stops below the indicated support level the SNB is defending to get short when they give up. That's the easy one. What will the BCB be like? Should people buy 1.7050 banking on them being tenacious and waiting for a return of risk aversion to squeeze the shorts? Should they leave stop sells at 1.6900 to get short on a break? Probably a bit of both. As for the BOJ I reiterate my conviction that it should not be messed with at this point and I would much rather play alongside their bid. Indeed they have not only committed to an open period of intervention and have quite a few bullets left, but more importantly they have not sterilized their interventions. That to me means business: they print and they buy, they make the rules, don't challenge them under those conditions. In that environment, my belief is that relative monetary policies will drive FX moves. Currently there is 98% dollar bears based on the assumption the Fed will print at will. That to me is a simplistic view and I will be looking for mispricing to take the other side of the bet. The reason is that this argument does not factor in what other central banks are doing. Sellers beware: there is more to the picture than just selling the USD to play the Fed. I will send out a detailed analysis of my findings as I make progress in this domain. - Nic Lenoir

July's three month backward looking, and thus irrelevant, Case Shiller Composite-20 index came at 147.81 SA (0.3% increase), and 148.91 NSA (up 0.6%). The Y/Y change was 3.18%, in line with expectations of 3.10%. From the report: "Data through July 2010, released today by Standard & Poor’s for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, show that the annual growth rates in 16 of the 20 MSAs and the 10- and 20-City Composites slowed in July compared to June 2010. The 10-City Composite is up 4.1% and the 20-City Composite is up 3.2% from where they were in July 2009. For June they were reported as +5.0% and +4.2%, respectively. Although home prices increased in most markets in July versus June, 15 MSAs and both Composites saw these monthly rates moderate in July." The Y/Y rate of change has now peaked and is declining: last month the change was revised to 4.21%, and as the chart below shows, there is only downside in store. And from the report: "While we could still see some residual support from the homebuyers’ tax credit, which covers purchases closing through September 30th, anyone looking for home price to return to the lofty 2005-2006 might be disappointed."

Some very troubling observations from Bill Gross. In summary: "What the U.S. economy needs to do in order to return to the “old” normal is to recreate nominal GDP growth of 5%, the majority of which likely comes from inflation. Inflation is the classic “coin shaving” technique of government since the Roman Empire. In modern parlance, you print money faster than required, pray that the private sector will spend it to generate investment and consumption, and then worry about the consequences in a later decade. Ditto for deficits and fiscal policy. It’s that prayer, however, which the financial markets are now doubting, resembling circumstances which in part are reminiscent of the lost decades in Japan since the early 1990s. If the private sector – through undue caution and braking demographic influences –refuses to take the bait, the reflationary trap will never snap shut. Investors will likely not know whether the mouse has grabbed for the cheese for several years forward...The most likely consequence of stimulative government policies that strain to get us there will be a declining dollar and a lower standard of living. Stan Druckenmiller is leaving, and with good reason. A future of low investment returns, and a heap of trouble for those expecting more, is what lies ahead."

• Anglo Irish Cost May Exceed 35 Billion Euros, S&P Says (Bloomberg)
• Ireland, Portugal Stir European Fears (WSJ)
• Mundell Says U.S. Action on Yuan Rate Would Be a 'Disaster' (Bloomberg)
• Ambrose Evans-Pritchard: Shut Down the Fed, Part II (Telegraph)
• Is the Fed Mulling 'Qualitative' Easing? (Barrons)
• Have no fear - the next leg up in US GDP and the stock market comes in June 2011: Apple May Unveil Next iPad by June 2011, Goldman Says (Bloomberg), in other news, Apple fanatics may delay purchase by a few weeks to get next, next iPad
• China, Japan Take New Jabs at Each Other (WSJ)
• Medvedev Fires Moscow Mayor, icon Yuri Luzhkov (WSJ)
• Kan Asks to Meet Wen in Belgium to Repair Strained China Ties (Bloomberg) Kyodo denies
• Kudlow: TARP II: Banks and Business Don't Want It (RCM)