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"In Your Face" Market

Submitted by Bruce Krasting on 09/14/2010 00:13 -0400

Think about it. We have a gagiillion of money going into fixed income
over the past three months. A big chunk of that comes from equity mutual
fund redemptions. Seventeen weeks of outflows. What happens? Stocks
catch a bid and bonds take a tumble. Two observations come to mind. (1) Retail is dumb money and (2) the buy and hold is just a dead concept.

The “Risk On” trade was a convergence of a number of forces. Stocks were
oversold, bonds overbought and as it turns out the economy was doing a
tad better in August than was expected on a number of fronts. So once
again the market flushes out weak hands. It must be tough on the folks
managing their own 401k’s. No sooner than they get invested in long term
fixed income (at the lowest yield in 40 years) it starts to look
like a bad idea. A lot of money is now tied up in yields that after
taxes and inflation are just going to produce losses. Oh well. That is
the ‘In your face’ market (AKA the FU market) we have.

For me this could be just a head fake. So what if the odds for a double
dip have fallen from 40% to 30% in the last month? That whole debate
has been a waste of time. That may be a good excuse for a snap back
reaction to an oversold/bought market. But it is a dumb reason to get
excited that stocks will never have another down day for the rest of the
year. There are plenty of down days in front of us.

Absent something very big from DC the economy is going to slow. We are
going to see GDP in Q3 at around 1.5% it will be lower than that in Q4.
That is a given folks. And that is the good news. All of 2011 will be a
struggle to get GDP over 1.5% on average. That forecast assumes there
are no downside shocks or upside surprises. As it stacks up I think the
bet is better for downside news than upside. We shall see.

I look at a number of barometers for evaluating where we are in the risk
on/risk off cycle. I like the DLR/YEN and the EUR/CHF. When they are
trading lower I am very suspicious of the Risk On trade. Both those
rates are down big from Friday’s close.

As I write the DLR/YEN is breaking down based on some political news. If
Mr. Kan is the winner tonight then the Yen has to be stronger. The
EUR/CHF is going to take a dip should the Yen break to new to new highs.

My secondary sources to confirm Risk Off are the DLR/CHF, Gold and of
course the bonds. To me it looks like a sure thing that $/Swissie is
going to break par some day soon. That will make for negative headlines.
Gold swooned a bit as the Risk On appetite rose. But have you noticed
that for all of the “noise” from the pundits we are only $10 bucks under
an all time high? That is nothing if we get a hiccup in DLR/YEN. More
headlines.

I am not sure that watching the bond market for correlation trades is
such a wise thing to do any longer. The question I have been pondering
is, “When does the current correlation (Weak Bonds – Strong Equities) change to Weak Bonds – Weak Equities?”
If the pendulum of the correlation is to swing, it is likely to produce
some bad “reads” along the way. “Old Reliable” may not be so relevant.

So If you believe in the FU market theory watch for the next leg to be
‘risk off’ for equities for a bit and we could still see bonds pushing
against the critical 2.85 level. DLR/CHF could break below parity. We
could see new lows for DLR/YEN and EUR/CHF. The one thing I would not
expect? That the market(s) close where they were in NY today on this
Friday. Vol up, belts on.

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Tue, 09/14/2010 - 18:29 | 581871 Rotwang

How can a flight to Swiss Franc be considered a flight to safety?

Eff-tards.

Let that VWbeetle tow that stranded Kenworth 18wheeler to safety.

Tue, 09/14/2010 - 18:29 | 581747 michigan independant

http://farmlandgrab.org/15493

"In Your Face" Market Time Bomb

http://greenworldinvestor.com/2010/09/10/lack-of-governance-leads-to-massive-food-inflation-in-india-even-as-grain-stocks-get-eaten-by-rats/

http://farmlandgrab.org/5646

http://www.organicconsumers.org/Monsanto/ten-things-monsanto.pdf

http://www.cftc.gov/OCE/WEB/index.htm

I am no advocate, but all politics is local. And try as a Consumer to avoid issues.

Tue, 09/14/2010 - 11:45 | 580780 Panafrican Funk...

Just wanted to point out Bruce's correct calls on gold and USD/CHF. Flight to safety is the undercurrent here, and I think that's going to accelerate in October.

Tue, 09/14/2010 - 11:06 | 580651 Mad Mad Woman

I see GDP for Q3 at 1.2% and coming in just under 1% for Q4. We'll see what happens.

Tue, 09/14/2010 - 10:48 | 580597 liberal sodomy

the vampire squid, the exchanges, and the clearers have everyones' positions and trade against the aggregate longs and shorts all day and all night.

Tue, 09/14/2010 - 11:22 | 580701 liberal sodomy

who's the dick sucking faggot that junked this?

I'm fucking right.

Tue, 09/14/2010 - 16:36 | 581646 CashCowEquity

probably some CNBC vaginas or something...

Tue, 09/14/2010 - 14:53 | 581377 Bankster T Cubed

hell yes you are right

on both counts

Tue, 09/14/2010 - 10:34 | 580549 kaiserhoff

Nice work, and some solid comments as usual. Of course, bond money is dumb money, but as Tyler pointed out a few weeks ago, maturities keep getting shorter. That's the time bomb for banks, governments, pension plans, insurance funds, etc.

Tue, 09/14/2010 - 10:19 | 580495 Hunch Trader

http://www.consumerindexes.com/

Note how Consumer Leading Indicators have plunged to the level of March 2009 already.

Tue, 09/14/2010 - 10:08 | 580476 viator

Some recent Albert Edwards: "The current situation reminds me of mid 2007. Investors then were content to stick their heads into very deep sand and ignore the fact that The Great Unwind had clearly begun. But in August and September 2007, even though the wheels were clearly falling off the global economy, the S&P still managed to rally 15%! The recent reaction to data suggests the market is in a similar deluded state of mind. Yet again, equity investors refuse to accept they are now locked in a Vulcan death grip and are about to fall unconscious."

"I love the delusion of the markets at this point in the cycle. It bemuses me why investors cannot see what is clear as the rather large nose on my face. Last Friday saw the equity market rally as August’s 67k rise in private payrolls and an upwardly revised July rise of 107kbeat expectations. But did I miss something? When did we switch from looking at headline payrolls to private jobs? Does the fact that government is shedding jobs not matter? Admittedly temporary census workers do mess up the data, but hey, why not look at nonfarm payroll data ex census? Why not indeed? Because the last 4 months run of data looks notably weaker on payrolls ex census basis than looking only at the private payroll data (ie Aug 60k vs 67k, July 89k vs 107k, June 50k vs 61k and May 21k vs 51k). But these data, on either definition, look dreadful compared to the 265k rise in April and 160k in March (ex census definition). If someone as pathologically lazy as me can find the relevant BLS webpage after a quick call to the BLS, why can’t the market? Because it is bad news, that’s why."

http://www.nakedcapitalism.com/2010/09/albert-edwards-market-still-delud...

Tue, 09/14/2010 - 10:02 | 580456 AccreditedEYE

I think it is hysterical how people try to pile on to expected news that comes out to push their agenda and, in turn, try to push the market up. Basel III (market rallies on regulation doing nothing) Warren B. knows Basel announcement and how the market will react, thus he comes out with his little blurb about the double dip. (clearly not talking his book... it would suck to have to deliver on those put options wouldn't it big guy?)

As Bruce points out, what changed? Nothing. Unemployment remains high and the consumer and small business continue to deleverage. And don't talk to me about cap ex... if you were in a position to buy and saw the stars aligned as they are, wouldn't you wait knowing better prices are in the cards for next year? This rigged game is getting pathetic. To those trading from the long side: stay sharp and hedge!

Tue, 09/14/2010 - 09:12 | 580328 99er

Chart: DX

I see USD futures going from 82.17 now to 84.50. Good luck!

http://www.screencast.com/t/MzBkNDVjNzY

Tue, 09/14/2010 - 08:59 | 580308 orangedrinkandchips

I love this shit with Warren G buffet....BUY AMERICAN! I AM...of course you are you fucking dope...you are 80 years old and have 10B in cash personally! WTF do you have to lose? why in THE HELL should we listen to you?

You will not be around much longer and you have billions to lose! Shut the fuck up Warren....give me a breaK!

Tue, 09/14/2010 - 11:09 | 580540 Widowmaker

The second you listen to that fuckface Buffet is the second he takes all your money in a taxpayer bailout sponsored by market-losers {pussies} at Goldman Sachs.

Perhaps Mr. Bullshit Buffet would like to explain the decline in the American family, and moral/ethics/employment because of his kind. Perhaps he would comment on the takeover of the middle class by corporate welfare because of fraud he supports whoring for money he didn't earn.

No, he won't because money is his master, the rest of us can eat cake while crony-corporatism steam-rolls 99.9% of Americans.

The sooner that guy croaks the better for the American portfolio.

Buffet = Failure rewarded dripping with socialism. He's the best known example of inaction to support the common good forefitted in lieu of a taxpayer-buck, just like the whores masquarading as best and brightest [frauds].

Tue, 09/14/2010 - 12:18 | 580893 Ace Ventura

But....but....Grandpa Warren is one of us! Look! He lives in the same house, eats cheesburgers and drinks diet coke! Regular guy!

Oh yeah, he donated $30 bil to the Gates Foundation. Funny thing, those foundations. Lots of 'Count Dracula rich' types form them, and dump mass chunks of cash in each other's organization. Not only can these types now musical chair their money away from taxes, but they can now legally use that money to come up with (foundation think tanks) all sorts of new ways to tell US how we should live our lives. Print up fancy report, send to cognizant puppets in the District of Criminals, and voila! More bennies for the lordships, more rules for the proles.

Regular guy my ass. More like consummate insider coffin-dweller.

Tue, 09/14/2010 - 10:00 | 580452 ZackAttack

I frankly don't understand why that guy would be long something with more duration than a bag of green bananas.

Tue, 09/14/2010 - 08:43 | 580290 ZackAttack

My belief is, so what if the Fed can make the markets go up and down like a yo-yo? It's only meaningful to a small class of rentiers. They're going to get destroyed as part of the endgame for all this, anyway.

The median private retirement account in the US has $8000. You'd have to move the S&P by a factor of 100 to make a meaningful difference in the retirement prospects for these people. Unless they work until the day they die, they're going to be eating rats and bugs when the SS trust fund fails.

The only meaningful thing the Fed can reflate is wages.

Tue, 09/14/2010 - 13:56 | 581222 hbjork1

Zack,

What sort of median age is attached to that $8000 median number?

Age distribution vs $ account number would indicate extent of urgency.

Tue, 09/14/2010 - 08:07 | 580254 Bankster T Cubed

as for when will it be a "weak bonds , weak stocks" period....

when the banksters do the rug pull

and I know you all sense that a massive rug pull is part of their grand plan

crisis will continue to work for them so long as they orchestrate it

or so they think

Tue, 09/14/2010 - 07:57 | 580248 Bankster T Cubed

funny....what is "in your face" about this market is the obvious interventions designed to keep prices where the central command fucktards think they need to be

equities shot higher because there was/is far more supply than demand. yes that is right.

same with bond prices. - higher yields will collapse the current mirage, so VOILA - in the face of HUGE SUPPLY - yields miraculously collapse

IN YOUR FACE

Tue, 09/14/2010 - 07:20 | 580217 old_turk

Bruce,

You didn't mention the freakishly high correlation of all equities in the market.

If that isn't a FWMD warning ... Financial Weapon of Mass Destruction ... it'll be a first.

That and the continuing skimming operations of the HFT algos.

It's a recipe for disaster.

Tue, 09/14/2010 - 07:19 | 580216 ColonelCooper

Thank you once again, Bruce.

Please keep up the good work.

Tue, 09/14/2010 - 06:21 | 580184 pachanguero

I'm always waiting for a free market, for economic justice, for this other shoe to drop, but to tell the truth, as long as extend and pretend goes on, these stocks ARE bonds.""

Very good point. And manipulation is the name of the game.

Most Americans have learned that stocks are just a tool for the banksters to rob you. Does your 401K let YOU short?

Hell no! That's their trade.

Tue, 09/14/2010 - 06:27 | 580188 Kreditanstalt

But it's not only, or even mainly, manipulation: it's a buy-and-hold for yield strategy.

I follow VNO and SPG, both big CRE stocks, shorting them from time to time. Mostly I lose out. They don't drop as far as the general market, they rebound faster and further and they just keep creeping up whatever the economic fundamentals are...teflon stocks.

Not only manipulation...buyers just keep holding and buying more...it's a "safe investment"...

Tue, 09/14/2010 - 08:51 | 580299 Dollar Bill Hiccup

Yield buyers in equities are not retail. Look at equity outflows. The yield rush occurred with a very rapid sector rotation after the April highs. Utilities suddenly broke out, telecoms, etc., while the crowded clean balance sheet Tech trade has been annihilated even with valuations absurdly low against historical comps. The speed of this rotation was brutal. This is HF (and some long only fund) work. The top 10% of yielders on the SPX is over 6% on average. For HFs who are underwater versus the SPX, afraid to short and afraid to be too long because they have gotten sliced and diced, that yield is nice insurance. If long end UST yields back up, whoosh they just moved 40bps in couple of days on the 10yr, general yield seekers and a burned retail bond investor may be forced into equity dividends and the HFs are front running.

When they get out in front with capital gains on top of their carry, I don't think they are going to hold. Greater fool, where art thou?

Tue, 09/14/2010 - 06:38 | 580193 AUD

Does CRE mean commercial real estate?

Are not (government backed) MBS's currently at record high prices (low yields)?

The 'stocks' you mention could be trading off of that. If they pay dividends all the better.

Tue, 09/14/2010 - 05:58 | 580173 Kreditanstalt

But most people still don't get it: there isn't simply a flight out of stocks and into bonds.

Take a look at the 112 stocks which now make up 50% of the index. See any smaller issues? See any down-and-out stuff waiting for 'bottomfeeders'? See many commodity producers or industrials?

Nope...most of them are dividend-payers and interest paying financial instruments. In effect the flight into the 'safety' of bonds extends into the stock markets too...it's a desperate grab for ANY yield. Remember, these are not TRADERS, they're of necessity buy-and-hold fixed income 'investors'.

It's no use shorting consumer or retail or real estate or CRE: they face no pressure to sell! Look at the volume.

What can derail this? Cuts in dividends. A general market slump or crash. Redemptions by fundholders. A currency crisis in the dollar, or in more than one currency against gold or commodities.

I'm always waiting for a free market, for economic justice, for this other shoe to drop, but to tell the truth, as long as extend and pretend goes on, these stocks ARE bonds.

Tue, 09/14/2010 - 06:42 | 580194 nmewn

"What can derail this? Cuts in dividends. A general market slump or crash. Redemptions by fundholders. A currency crisis in the dollar, or in more than one currency against gold or commodities."

I thought this was a curious development going along your line of thinking;

"Microsoft Corp. is planning to sell debt this year to pay for dividends and share repurchases because too much of its cash is held overseas, according to a person familiar with the matter."

http://www.bloomberg.com/news/2010-09-13/microsoft-is-said-to-plan-debt-...

They would rather create new debt than repatriate earnings for buybacks and dividends. That this could even be a viable option...I could just scream.

Tue, 09/14/2010 - 08:47 | 580291 hamurobby

Ah, you know the amount of debt you have shows how wealthy you are. It looks like expansion and shows strength, not weakness, thats how its spun anyways.

Tue, 09/14/2010 - 18:12 | 581835 nmewn

Yeah, it's spun to buy the equity...which isn't even there...LOL.

Tue, 09/14/2010 - 06:19 | 580180 AUD

All stocks are bonds, just the junkiest of the junk. They are 'securities', nothing more.

The distinction between 'equity' & debt (for the 'equity' holder), is obfuscation.

As an equity holder you are merely an unsecured creditor, which would make equities what, fff? Even with a dividend paying, blue chip stock you are 'guaranteed' nothing.

The 'equity' market is part of the broader money markets & behaves accordingly.

Tue, 09/14/2010 - 06:18 | 580179 lewy14

+100bps.

Tue, 09/14/2010 - 05:25 | 580164 Young

Kinda funny how German Zew totally missed expectations (-4.4 vs 10.7) and no news site is reporting about it. German Zew has been the only positive thing for the EUR lately and all of a sudden Bloomberg pulls their article about how it may have softened. This is ridiculous.

Tue, 09/14/2010 - 06:20 | 580183 RoRoTrader

Agree.

Part of the problem trading this 'market' is that interventions by the FED and other central banks have come to the point where interventions from the implied to the distorted to the verbal to the real have become so invasive and frequent that the market is now beginning to resemble a body with the appearance of on the verge of being overwhelmed by a cancer as the disease spreads from one part to the next.

A read like the one you mentioned from German ZEW was not so long ago a literal no brainer short.

As I caught the print a bit late I hestitated to sell with the thought lurking in the back of my mind of the trolls and the FOMC meeting next week with the possible risk of a full frontal double lobotomy for the US dollar.

So far the price looks to have stalled out at around 1.2840 and for a print that negative a 40 to 50 pip/point drop from the 1.2900 is just not that big of a deal, at least to me.

The point being that the interventions have become treacherous for natural price discovery.

Tue, 09/14/2010 - 05:56 | 580169 arnoldsimage

it's back up.

Tue, 09/14/2010 - 04:47 | 580149 Strongbad

Will the Swiss allow their currency to ride high for any length of time? Do they have much control either way?

Being an advocate of sound money, a strong currency would seem good to me, but you never know if some central banker or politician will declare it "bad for exports".

Tue, 09/14/2010 - 05:06 | 580155 Popo

Swiss exports. Lol.

Tue, 09/14/2010 - 06:16 | 580177 Strongbad

Chocolate, watches, and cheese :)

Tue, 09/14/2010 - 08:31 | 580280 ZackAttack

Don't forget cuckoo clocks! And those little multifunction knives! Those will be in big demand after things go Mad Max.

Tue, 09/14/2010 - 09:13 | 580331 reload

A strong Swissy is a nightmare for the commercial swiss banks seeking to import loan interest and repayments from busted eastern europe and the baltic states. The central bank will likely contine to sell into a strengthening currency, but the overall effect will be negligable. They will not alter the price for long, just add some chop to the charts. Thans Bruce, I do enjoy reading your musings.

Tue, 09/14/2010 - 04:24 | 580139 Young

There's no doubt in Mr Youngs mind, we have a rather large hourly bullish flag in the T:s (10s and 30s). This rascal isn't collapsing at the moment. It's catching its breath.

Tue, 09/14/2010 - 01:13 | 580019 AUD

"Stocks catch a bid and bonds take a tumble"

Which bonds do you mean? Governments &/or government backed? Corporates? Both?

I see only a slow but more or less steady decline in corporate bond yields. This is why I've said several times on this website that those expecting a market 'bust' are mistaken.

Corporate yields are falling (in $ terms). 'Equities' tend to rise (in $ terms) when there is a steady decline in corporate yields.

Tue, 09/14/2010 - 00:53 | 580007 whatsinaname

But WB said there is no chance of a double dip !!

so why will risk be off ? party on !!

Tue, 09/14/2010 - 09:27 | 580362 Translational Lift

WB is now and has been a tool (read that either way) of the Admin..........

Tue, 09/14/2010 - 06:27 | 580189 Lord and Master

I take exception to the use of the term "double-dip" by Warren Buffett and all others who say it. The concept of the"double-dip" is obviously a term being used very disingenuously by everyone who publicly uses it. Obviously the economy never had a real recovery of any kind-- it was only various asset markets that saw an appreciable bounce in 2009. As we all know, asset markets bouncing does not a recovery make. The issue is that we began asset real-value deflation in 2007 or 2008, and that has not stopped (except for those commodities and assets which are strongly inverse-dollar plays-- gold etc). Buffett knows that currency devaluation is a sort of very devious economic phenomenon, in the sense that it allows well informed investors to reap enormous profits at the expense of the general population. Its a well-informed investor's wet dream-- who buys when theres blood in the streets etc etc. Buffett smells the blood, as he did last year burlington railroad he bought. I'd expect to see Buffett make further purchases. BUffett will look to get california for a song-- things like that. He is an awkward chuckling adolescent at heart-- never grew out of that phase. He plays at wise old ever-optimistic Grandpa to 300 americans, while he plays along with the enormous wealth transfer from the millions of american savers to the relatively few speculators and investors who will be on the right side of the trade. Hes a deceitful beady-eyed old man. His statement that came out on Bloomberg today was a shameful lie. With it he was saying "F*CK YOU! Once and for all, F*Ck you americans!" ...There is nothing good going on in america and hes doing this dumbass schtick of playing all-knowing benevolent and optimistic Grandpa to americans again, when he has the heart of a petty thief, the spirit of a shoplifting teen. He is one of the more fraudlent figure in finance today. In an interview I saw recently (i believe it was Chrlie Rose) -- Rose asked where he say the value of the dollar in a 5 or 10 years... WB said it would be "worth less", though it would still be an important currency or The most important currency... i forget which he said... Rose said "worthless?" and Buffett said "no, worth less -- not worthless!"... after which he chuckled awkwardly at the pun and said " [chuckle chuckle chuckle] You gotta watch out for that one! [i.e. saying worthless, when you mean worth less]" .... Yeah you do have to watch out for that one, dont you punk....

Tue, 09/14/2010 - 12:16 | 580878 hbjork1

L&M,

The perspective from Michigan agrees with the view that the economy is still in the first dip. There has been no real recovery. What we have seen is perturbiations in the spending patterns due to some of the government programs. IMO, as predicted by many responsible comentators, the recovery is going to take years, not months.

Tue, 09/14/2010 - 09:42 | 580405 deadparrot

Double dip for the stock market, not the economy. MSM preaches that DOW = economy, so no double dip in the DOW means no double dip in the economy.

"In Your Face" Market

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