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Morning Musings From Art Cashin
Art Cashin's early morning thoughts, via UBS Fin Services
Stocks Sleepwalk Into Resistance As Gold Stalls – Stocks and oil moved higher yesterday as the dollar (DXY) seemed to stall around 80.75 for the third time in a couple of weeks. The reaction was especially evident shortly after 2:00 when the DXY accelerated its fade and stocks spiked.
Gold temporarily dropped out of the reverse dollar troika. Traders attributed the stall by the yellow metal to comments from the IMF that it was contemplating a large sale from its bullion reserves.
The low volume levitation in stocks took the S&P right up to the upper end of the 1103/1108 resistance band that we wrote about in Thursday’s Comments. The intraday high of 1108 was right at the 50 day moving average.
Traders were fascinated by the fact that the dollar influence clearly outweighed some “less than glowing” data and headlines. From Initial Claims through Iranian warheads, the stock bulls seemed unfazed.
The continuing lackluster volume on up days remains a concern. We will know a good deal more in coming days as we see how the averages address the resistance.
A Near Plenary Session Of The Friends Of Fermentation Gets A Message From The Fed – The FoF was musing and marinating ice cubes, post close, when conversation was suddenly interrupted. Blackberries and Iphones lit up with the flash that the Fed had raised the Discount Rate by a quarter point.
The immediate response was a scramble to establish that it was the Discount Rate only. The second move was to gauge market reaction.
Once they were sure that it was only the Discount, or “emergency”, rate the muted market response was understandable.
The buzz about the rate hike drew questions from some none Wall Street types on the periphery. A quick lesson in central bank money mechanics ensued. It was explained that the Discount Rate only related to the Discount Window. It was further explained that the Discount Window was where banks came when they couldn’t borrow from other banks. The Discount Rate was traditionally higher than the Fed Funds rate and borrowing at the window usually carried a stigma since it indicated that other banks saw you as a weakened credit. During the banking crisis, the Fed took pains to eliminate both the stigma and the premium. So, to some degree, the hike in the Discount Rate was a signal that the crisis phase is over and banking was returning to “normal”.
The FoF then discussed the timing of the move. The general feel was that it might be an attempt to keep the bond vigilantes at bay in the wake of the surprise spike in the PPI. It was felt that a Discount Rate hike was in the Fed’s pocket since Bernanke said in his February 10th testimony when he said the Discount Rate would be hiked “before long”. The FoF felt the PPI, and similar inflationary data in Britain and elsewhere, prompted the Fed to announce the already agreed upon rate hike.
The thinking at the FoF is reflected to large degree by an essay on the website “Seeking Alpha” from someone writing under the pseudonym of The Inflation Trader:
I suppose that we ought to deal with the last things, first. Yesterday afternoon, the Federal Reserve hiked the discount rate to 0.75%, prompting a further selloff in Treasuries after what had already been a less-than-stellar day (TYH0 closed down 15/32nds, and another 5 ticks after the announcement). What is the Fed up to? The discount rate increase has no practical, economic significance. Although use of the discount rate window no longer carries quite the stigma it once did (partly because the Fed, during the crisis, tried hard to encourage banks to use it), it is still a fairly unattractive source of funds when uncollateralized 3-month rates (LIBOR) are lower.
The hike in the rate also has no signaling significance, since the FOMC can be (and has been) very vocal about what their plans are for removal of accommodation: to wit, they have no plans to remove it any time soon. The Fed itself confirmed these two points in the press release announcing the change, which said in part The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy.
It is hard to get clearer than that.
The initial reaction in the markets has become a bit more muted as folks come to see the move as more symbolic than strategic. The discussion of the timing continues. Our friend, David Kotok, hit squarely on the paradoxes in the move in his opening paragraph on the topic:
Let’s see. The Fed hiked a rate even though it wasn’t the policy rate. The Fed shortened a term even though it wasn’t the “normal” term. The Fed announced it as a surprise even though they have been saying they want to be transparent and prepare markets for changes in advance. And the Fed speakers then spent effort trying to explain why a discount rate hike at an inter-meeting move with a reduction in term is not a tightening action.
As always, David is spot on in the anomalies in the timing and process.
Cocktail Napkin Charting – As previously noted, the low volume levitation took the S&P into the initial resistance at 1103/1108 (anchored on the 50 DMA). Today’s Expiration may offer an opportunity to clarify the napkins even more.
For today, the napkins see first support at 1095/1098 with backup at 1087/1092. Resistance looks like 1106/1109 and then 1113/1118.
Consensus – Expiration could bring a surprise or two. If the 8:30 CPI looks inflationary, it will prompt a lot more discussion of the rate hike. Stay very nimble.
Trivia Corner: Today's Question - You have a piece of wood 13 inches long. If you marked it at 4 points: 1 inch, 2 inch, 6 inch and 10 inch, you could measure any number of whole inches from 1 to 13. If the piece of wood is 36 inches long, what is the smallest number of marks needed to measure any whole inch from 1 to 36 (and where do you put the marks)?
And some history:
On this day in 1872, "society" in America took a great leap forward. It was natural, of course. This year was the fulcrum of America's "Gilded Age". Ward McAllister was in the process of inventing "the 400", a crème de la crème of American society. (The number was 400 because that was the capacity of the Grand Ballroom at the mansion of Mrs. Astor, McAllister's patron.)
Now, if you're going to be looking down your Lorgnette at the Irish serving girl between courses and find something stuck in your teeth - - what shall you do. Fear Not! Necessity is truly the mother of invention. Ballrooms filled with the delicate but dentally challenged would soon get help.
Enter Messrs. Silas Nobel and James P. Cooley. These paragons of good taste arrived at the patent office on this day and got a patent on - - the toothpick.
To celebrate, stop by the "Hoi Polloi Lounge" and try to think of something common that you could standardize; patent; and make a fortune on. But try not to gum things up.
Markets were not particularly picky Thursday. Stocks floated higher, once again in reaction to moves in the dollar.
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Crisis stage over? How can that be when the Fed's balance sheet keeps hitting new highs???
The Fed did a magnificent job buying the futures market last nite and this morning.
Looks like another green day.
MEMO
TO: LB, Jamie
FROM: Ben
Now that you hit the discount window late yesterday before the rate increase, I respectully request an SPX closing over 1100 today to confirm that the economy is super duper fantastic and our banking system is stronger than the smell from a D.C. sewage plant.
deadhead,
I'm assuming you are assuming that the DC sewage plant stinks. Of course, you would be correct, as anyone traveling near the stinking cesspool of crud would attest. I commuted by it daily for a few years and old friends tell me (without any understanding why) that over the past year or so, it's gotten much worse.
My plumber stepfather knew the Golden rule. Sh*t flows down hill and payday is Friday. It seems my stepfather learned his trade in DC.
+1
Kudos again on your brilliant piece from the other day...keep up the writing, you are excellent at it!
So the sudden "symbolic" move was actually meant to juice the market higher? Blatant market manipulation is meant to instill confidence?
"the 400", a crème de la crème of American society.
According to the 2007 IRS data (latest available), the top 400 households reported an average income of $345 million. That's $138 Billion shared by "la creme de la creme."
Let them eat cake!
Cake? Au contraire, mon frère, let them eat debt!
http://anonymousmonetarist.blogspot.com/2009/11/insouciance-of-elites-and-antoinette.html
The news is a blip.
as if everyone hasn't already eaten enough of that pie.
Equities will sell off soon because they are overbought and have risen on low volume vapors for months, not becuase the Fed raises the discount rate.
What a joke.
Two issues with the point of view in the article:
First: the allegation that this was a surprise, when Bernanke did warn us that this discount rate tightening was coming 'before long'. Now it's here.
[snark] By the way, to look down one's nose at the non-stock market folks might miss the forest for the trees: the bond market has been telling you that tightening is coming, the tightening we just did is a form of tightening, and most Americans probably 'get it' that Bernanke is signaling more tightening to come.
Second: the idea that PPI inflation was a surprise when we're looking at the 'easy compares' to a year ago is sort of weird. When we're seeing consistent 3-5% inflation (CPI or PPI) with GDP growth at 6%, of course the Fed will have to keep raising rates -- and Mr. Market has been telling you that for a while now.
Todd
www.hedgeye.com
is this move aimed to save UST? The TLT has been dropping to a critical point and TNX has been rising, they must do anything to intervene this trend?
Trivia corner seems wrong - if I have a 1 inch mark I can measure any length in whole inches...
Oftentimes an IQ test is about determining the question rather than determining the answer.
Here the question is really, "Where do you put the marks so that any distance between 1 and X can be measured as the distance between two marks or the distance between one mark and one end of the ruler."
In the example given: 1 inch = distance from end to 1 inch mark; 2 inch = distance from end to 2 inch mark; 3 inch = distance from (other end) to 10 inch mark (it's a 13 inch ruler); 4 inch = distance between 2 inch and 6 inch marks; 7 inch = distance from (other) end to 6 inch mark; etc.
9 marks at 1,2,6,10,19,22,25,29,33
thats my best guess, worked out thru trial and error
There's a single 8-mark solution (and its inverse), but good luck finding it without writing a computer program.
In chaos theory outliers are 'first movers'... think outside the cave
http://anonymousmonetarist.blogspot.com/2010/02/repost-think-outside-cave-in-chaos.html
Plato? Who the fuck did he trade for?
Heraclitus
Benny wants to disprove Heraclitus....'You can not step twice into the same river'
Platonic models are what helped get us so deep in the muck....
The models that they have built show no chance of fail when the money is easy and free. It is merely a matter of scale not design. These models rate the probability as 100% that they can manufacture the economic consent of consumers by getting them to add more debt because same consumer will believe that prices will be higher in the future.
These models and the besotted following are both trading without respect to fundamentals.
Inflation expectations were well anchored in the Great Depression.
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