Monday Market Movement - Dollar Dive Masks Market Weakness
Another day another falling dollar.
Good thing too or we'd be heading for the toilet this morning. They did what they could to prop up the Nikkei in early trading, even triggering our 3am trade early by jamming the Yen down from 83.2 to the Dollar at the start of Sunday trading (5pm) all the way to 83.867 at 9:45 (the Nikkei opens at 9) after which it fell right off the cliff again and back to 83.2. Traders did not like that one bit and the Nikkei fell 140 points after lunch but that was net down just 23 for the day as the market had gotten all excited about the totally fake downturn in the Yen in pre-market trading.
How can Japanese traders be so dumb that they fall for the same trade day after day after day? Don't flatter yourself, we fall for the same nonsense every day ourselves - it's just more obvious when viewed from the other end of the Earth. It does amaze me, however, that I can point out our "3am Trade" for what is now 3 years in a row and it still works (shorting the USD/JPY on Forex into the early morning spikes), which shows you just how much money must be thrown at the other side of this farce.
Of course the Japanese are purely amateur-hour manipulators when compared to our Chinese Masters, who made a big deal about creating a $5Bn fund to help Greek shipping companies buy Chinese ships. "We hope that by intensifying cooperation with you, we can be of some help in your endeavor to tide over difficulties at an early date," Mr. Wen said Sunday in a speech to the Greek parliament. "China will not reduce its euro-bond holdings and China supports a stable euro." (not the Dollar)
"These agreements and the announcement of China's intent to continue to invest in Greek bonds are seen as a vote of confidence for our economy, which is going through a difficult time," said Greek Prime Minister George Papandreou. "As we say in both Greece and China, it is in the tough times that you know who your friends are." (not America)
Mr. Wen also said China is encouraging its companies to invest in Greece, and predicted that trade between China and Greece likely will double in five years to $8 billion annually. Last year, China's exports to Greece totaled €3.04 billion ($4.19 billion), compared with €93 million of Greek imports to the country, according to EU data. "We hope the EU recognizes as soon as possible China's full market-economy status, and will relax restriction on high-technology exports to China and oppose trade protectionism." (like America)
China will be making a lot of new friends in Europe as record bond refinancing needs outweigh even the most austere spending programs and more and more countries follow Greece - falling almost like dominoes at China's feet.
Euro-region governments have to repay 582 billion euros ($803 billion) of debt in 2011, up from 521 billion euros this year, according to estimates from ING Groep NV. Spain has to roll over almost 20 percent of its outstanding loans, government figures show. Portugal has 23 billion euros of debt coming due and Ireland has more than 10 billion euros, according to data compiled by Bloomberg.
A 750 billion-euro backstop arranged by the European Union and the International Monetary Fund has failed to allay investor concern that some of the so-called euro-peripheral countries may buckle under the weight of their debt. Klaus Regling, chief executive officer of the newly established European Financial Stability Facility, said last week he doesn’t expect his group’s 440 billion-euro rescue fund to ever be tapped. “My central scenario of expectation is that we won’t have to make any loans available in the coming years,” Regling said during a Sept. 28 speech in Frankfurt. Terms for gaining access to the fund are “unattractive” as “the safety net isn’t supposed to be a safe haven, which is easy to reach,” he said.
Meanwhile, for those very few who still like to "Buy American," A second round of bond purchases by the Federal Reserve may have the unintended consequence of pushing borrowing costs HIGHER. This is according to a growing number of U.S. government securities dealers, strategists and economists. Based on what the Fed bought in 2009, yields are trading as if it has already acquired an additional $315 billion to $670 billion of securities, according to Deutsche Bank AG, one of the 18 primary dealers that trade with the central bank. Policy makers will announce plans buy $100 billion to $1 trillion in Treasuries before the year is out, a survey of 12 of the 18 dealers show. Three don’t expect the Fed to buy additional debt. “A lot of quantitative easing is already priced into the market,” said Joseph Leary, an interest-rate strategist in New York at Citigroup Inc.
Based on what happened when the Fed began purchasing $1.725 trillion of government debt and mortgage securities in 2009, lower yields are not a foregone conclusion. Treasuries lost 3.72 percent last year as a drop in bond prices drove the yield on the 10-year note to 3.84 percent from 2.22 percent. “Quantitative easing is priced into the picture,” said Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “When the market does turn, as we’ve seen in the past, it will turn sharply and very swiftly.”
As the Wall Streeet Journal observes: "Politicians think they can (1) fight markets, (2) inflict infinite pain on voters in democratic countries, and (3) whip the profligate into line. They can do none of these. Markets set borrowing rates, voters turn out politicians who push them too far, and plans to land with hobnailed boots on profligate debtor nations founder on two facts. First, no action was taken when Germany and France pierced the 3% ceiling on deficits, and sauce for the big geese should be sauce for the smaller gander. Second, fining countries that are broke might not be sensible, even if feasible."
So let's consider the "D" word, or if default sounds harsh, call it restructuring. Frederico Sturzenegger and Jeromin Zettelmeyer, in their scholarly work on the subject of debt crises and defaults, note, "All lending booms so far have ended in busts in which some of the beneficiaries of the preceding debt inflows defaulted or rescheduled their debts." Their list of defaulters in the 19th and 20th centuries includes Turkey, Bulgaria, Italy, Japan, Mexico, Russia, China, Spain, Czechoslovakia, Portugal, and several Latin American countries—an incomplete list, but you get the idea. As Don Luskin points out, we are simply repeating the same exact behavior that the World went through in the early 1930s - so who is to say the results will be different?
The same wave of right-wing, third-party mania is sweeping the US and Europe with leaders calling for austerity in the midst of a Depression (or REALLY big Recession) and an end to "hand-outs" at precisely the time we need them the most. Should the elections be handed over to the boot-strap brigade - we are well on the way to the next wave of economic collapse because only a fool would believe that REMOVING government stimulus (except for the wealthy, of course, who MUST keep their tax breaks) is going to revive this economy and create jobs. We tried that once - it ended in disaster with 25% of America out of work...
Charles Schwab came out strongly opposed to the Fed's zero-interest policy this weekend, saying (as I have been): "The negative impact of current policy is clear. The near-zero interest rate experiment is weighing on consumer and investor confidence, and the Fed signals its lack of confidence with each "extended period" proclamation. It is providing banks with low-interest financing that can be used to create modest returns through a carry-trade in U.S. Treasurys but is adding nothing to the velocity of money, which is what actually generates economic growth...The extreme monetary policy is also having no positive impact on the availability of consumer or business credit, job growth or consumer and business spending."
Even the Wall Street Journal noticed the plight of the poor this weekend (rumor is Murdoch tripped over one this weekend and asked why there were people sleeping on his steps) and ran an article (on Friday, of course) about the now 41.2M Americans (up 58% since 2007) who are on Food Stamps and how it is affecting their shopping habits. Will this finally be enough to make Uncle Rupert understand the connection between poverty and the economy? Don't hold your breath, even with 2,840 Millionaires now collecting unemployment!
Nobel-winning Economist, Joe Stiglitz says that the banking sector has gone back to "business as usual" too quickly and that there are still risks of another financial crisis despite some improvements in regulation. He also fears that governments around the world will attempt to cut their deficits too quickly and risk a double dip recession.
"The worry is that there is a wave of austerity building throughout Europe and even hitting America's shores," Mr Stiglitz said. "As so many countries cut back on spending prematurely, global aggregate demand will be lowered and growth will slow – even perhaps leading to a double-dip recession." Mr Stiglitz warned that Spain, similarly to Greece, was now in the speculators' sights. Turning to the euro, Mr Stiglitz said that the different needs of countries with high trade surpluses, particularly Germany, and those running deficits such as Ireland, Portugal and Greece, meant that the single currency was under intense pressure and may not survive. He suggests that one way to save the euro would be for Germany to leave the eurozone, so allowing the currency to devalue and help struggling countries with exports.
Paul Krugman, another Nobel winner who is vilified by the right, says recent events have amounted to a fairly clear test of Keynesian versus classical economics - "and Keynesian economics won, hands down." Krugman continues: "Classical economics was all wrong in a liquidity trap. Government borrowing did not confront a fixed supply of funds: we were in a paradox of thrift world, where desired savings (at full employment) exceeded desired investment, and hence savings would expand to meet the demand, and interest rates need not rise. As for inflation, increases in the monetary base would have no effect in a liquidity trap; deflation, not inflation, was the risk."
So, how has it turned out? The 10-year bond rate is about 2.5 percent, lower than it was when Ferguson made that prediction in mid 2009. Inflation keeps falling. The attacks on Keynesianism now come down to “but unemployment has stayed high!” which proves nothing — especially because if you took a Keynesian view seriously, it suggested even given what we knew in early 2009 that the stimulus was much too small to restore full employment.
We will be driven this week by early earnings reports, global news and the election cycle. I don't expect us to make it over 1,155 on the S&P, which is the 10% line and I do expect us to pull back 20% of the run up, back to retest the 5% Rule at 1,123. Members should note we have a new October's Overbought Eight list and we are fortunate to have avoided a gap down so we'll have an opportunity to get back to cash on our Turning $10K to $50K by Jan 21st project, up 160% with 3 months left to go! Cash is king as we continue to test our 7.5% lines. Keep in mind that 5% is just 2.5% away and we fully expect that pullback but not with the dollar in the toilet - like it is today.
Be patient and BE CAREFUL!
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