Nic Lenoir throws down the gauntlet and takes on Goldman Sachs directly following their recent upgrade of the EURUSD target to 1.40: "Not that many layups or exciting trades in the G10 out there with equities in a slow melt up and the long end in Fixed Income stuck in a range for the last month. If you missed out on the sell-off in metals or did not have the UK GDP data ahead of the market don't despair just yet, we have a very interesting set-up to sell EURUSD here...We stand below the 61.8% of the sell-off since the November highs, the hourly divergence is staggering also. I strongly favor shorts here. Less convinced traders traders can wait for the break of the trend support which comes around 1.3640. Given the recent advance I think we should see a retracement back to at least 1.34 even if we are to utlimately advance further. I am bearish EUR as I don't believe this currency has a place in this world anymore, but even raging bulls should be cautious here."
Markets have remained range bound since the start of the year in Fixed Income and very little conviction seems to be present. Equities have been grinding higher but a lot of technical signs are flashing red and volumes are anemic so participation is minimal. Finally in FX the USD has also been range bound with the dollar index stuck between 77.5 and 81.5. Last week was another example, with slightly higher yields and weaker USD, but overall not much worth expanding on in the G10. However emerging markets took a beating from Wednesday onwards. Mexico & Brazil's stock markets are posting worrying technical patterns, following Asia which has been leading the way south. AUDUSD is sitting just above the 01/12 lows and the 100-dma and a break would confirm a move lower towards at least 0.95. The market broke the trend since last May on Wednesday while a retest pf the trend line as resistance is customary we would only look for selling opportunities here. This is in line with poor trading in emerging market bonds of late and China seems to be experiencing a liquidity crunch with the Shibor experiencing a lot of volatility. - Nic Lenoir
My entire focus right now is on the commodity complex. The reason why is simply because I believe the post-dotcom economy is completely unsustainable, and this is not only starting to be very much apparent to the general public but also fiscally very expensive to maintain. However, governments are inventing all sorts of accounting trickery, legal vehicles, and running the printing presses overtime in order to preserve the status quo. Maintaining this situation, which is quite the opposite of an equilibrium (consumers don't produce, structural deficits, unfunded liabilities, pegged currencies preventing the markets to rebalance trade etc...), will lead to bubbles and complete mispricing of financial assets. Only when financial markets are taken to extremes that provoke public anger turning into violence will politicians be forced to actually think of the structural issues without having the luxury of hoping that the next one in the seat will be the one facing the task. If bonds sell-off riskier assets will be repriced lowed to reflect higher rates in turn provoking greater demand for bonds. So the most likely culprit for the end game will be commodity prices since nobody will ever complain if stocks rise 400% (a 10% drop is a national emergency). Only when commodity prices are high enough that they put the entire system at risk will we be forced to let nature take its course, companies and governments default, and experience the deflationary shock that we cannot ultimately avoid. This reflection became much more concrete than theoretical when I watched on the news cops dressed as civilians being lynched by the Tunisian mob over the weekend. - Nic Lenoir
The data calendar is very light this week. The most of important piece of data is the Empire manufacturing survey which will or will not confirm recent uptick in industrial production. Claims will be of note as well after last week's uptick. We are still far from seeing a trend confirming the job market is on stable footing. If this continues we will end up with yet another disappointg NFP headline and lower unemployment rate as the participation rate in the active population keeps dropping. Most of the focus will be on the international scene: food riots in Algeria and Tunisia where it led to the ousting of the president are not without reminding me of those observed in 2008. As I was in France over the weekend I did get much closer to the situation with Tunisian protesters creating havoc in Paris and gruesome scenes of violence. The level of public anger is scary and there is little doubt that this is something a lot of political leaders around the world should watch and reflect upon: it could happen to any of them faster than anyone thinks. - Nic Lenoir
I should have embraced the corruption and policies I cannot stand rather than keep too bearish a focus, which only thankfully to careful tactical considerations based on technical observations did not turn into a complete disaster. So while we did overall a good job looking for technical opportunities to express our views, I will need to be much more cynical when it comes to assessing potential government intervention in the economy...I am however convinced that no real positive societal growth will be possible in the West without addressing entitlement programs, pension issues, the cost of production in developed economies whether it is via currency revaluation or protectionism, and a more responsible management of the world's natural resources should probably make the list too. Can we continue inflating this mercantilist world economy without an absolute collapse in the value of Western currencies? The answer is not "maybe not", it's not even close: we can't and it's obvious...So with all that said, I would like to close the circle and close the discussion with what I think is possible for 2011. - Nic Lenoir
Data this week is relatively light given and it's a holiday week. 3rd Quarter GDP at this point has no informative value regarding current and future economic activity. The slew of housing data is also inconsequential. Everyone knows housing is in a double dip so any slight improvement will be used by pundits to talk up the economy but fundamentals remain in the dumpster. Continuing claims is probably the most important piece of data this week given that durable goods is such a volatile series. As a result I feel the markets this week will be mainly driven by sentiment and price action rather than news flow, especially given thin late December markets. Here are some of the key elements I am watching. - Nic Lenoir
Nic Lenoir On Why The Euro Is About To Crash And Burn, And Why His Concern For The "New Normal" Is Not Slow Growth But Civil WarSubmitted by Tyler Durden on 12/15/2010 17:45 -0500
Today 6 countries in Europe were the theater of riots. I highlighted in the past that voting turn-out has been on the rise in the past 8 years after a steady decline the 3 previous decades. During the credit boom fat and happy citizens had no time to vote, too busy producing or even more so consuming. Now with unemployment through the ceiling and poor economic perspectives people have started voting again. The next step is that they realize that no one in the political spectrum currently has any guts or brain and therefore no one offers a real credible fair solution, at least for now. When they do they burn things up. Because things are a little worse in Europe economically, and because the people there actually do realize the people in power are monkeys, they have now reached that stage of realization where burning things up is the logical response. Don't think the US will remain immune to this symptom of the new normal (unlike El Erian I have not revised up my forecast, and my concern is not slow growth but civil war).
Alan Greenspan did get a little heat for admitting that higher stocks is the best way to drive economic growth, though in my opinion not nearly enough, but he was retired when he said it. That is in my opinion the one mistake made by Bernanke in the implementation of his evil plan. Coming out and making that unnecessary statement will draw political backlash from all those who criticize his policies precisely for their very direct consequence: boosting asset prices while having little impact on the economy. Doctor Bernanke goes to extrapolate that higher stock prices will lead to second hand spending... so as I said the other day high-end hair salons will offer free manicures while you get your hair done so you can drop a nice $20 tip to your hand-massage therapist on your way out. Meanwhile the next sign of trouble in the economy all those jobs disappear and we will revert to the structural unemployment rate which keeps getting higher by the minute. Amusingly the Fed Chairman does mention that the Fed alone cannot control the economy. I can't wait for the tea-party fanatics to put a bounty on him slapshot-style. - Nic Lenoir
I think what the Fed does will be irrelevant in terms of economic impact, and the more I talk to people about it the more I realize most share this view. The market is solely focused on the Fed and not the election as it is relatively understood that politicians are useless even though the list of tasks to fix our economy should in theory provide them an opportunity to make themselves useful. Given they will not rise to the challenge and will keep failing to deliver any concrete measures that could lead to progress, and that rates are at 0, as Bill Gross said the only thing for the Fed to do (OR NOT) is QE. I see no value but since they have made it their mandate to target inflation and now GDP I suppose Mr. Bernanke is at least consistent within his delusion. It is interesting however that even Bill Gross has joined the bandwagon. The ECB has also said the Fed is going in the wrong direction even though I bet they would be hard pressed to explain who is buying all these Spanish, Portuguese, Irish, Greek bonds and other turds they are trying to keep afloat. In that sense their only saving grace is that they sterilize their purchases, but they too are engaged in asset price fixing aiming at controlling GDP. Fighting a structural deficit and unemployment printing money is a bit like taking a leak in the ocean to warm it up, and you have to be careful because if the wind comes at you it can backfire. - Nic Lenoir
Today is absolutely key if the market is to turn anytime soon. Let me first summarize the global macro economic picture before we get into technical considerations. The economic cycle has turned as the effects of stimulus wane and the boost of inventory rebuilding abates. Regarding inventories in fact the expected contribution to GDP is expected to be negative in the next 2/3 quarters and Mr. Ore who runs ISM said that if recent inventory building was not fully voluntary we might have a very serious problem. ISM has rolled in the US, following Japan and Australia where it last printed 47. Sovereign credit spreads are hovering around the recent highs they made in peripheral Europe were default is pretty much a given at this point. Central banks are pretty much all with the notable exception of the ECB (which hiked in June 2008... no further questions your honor) intervening in the FX markets or launching additional/fresh quantitative easing programs in a devaluation race as demand is insufficient and exporters fight for a competitive advantage. Congress is voting laws to tax Chinese imports, and public relations between Japan and China are at rock bottom. Recently the entire mortgage foreclosure process in the US has come to a halt as it has come to light that most foreclosures were not backed by any documentation of ownership of the mortgage loans. There are talks about a potential moratorium on foreclosures. US states' CSD keep trading very wide and default is almost a given for a few states, including Illinois or California. - Nic Lenoir
After observing the price action a bit more and reflecting on the patterns, I have come to the conclusion that the market will top between 1,155 and 1,164. In that zone we have in order the top of the channel (120-minute chart) guiding the consolidation since July, the 61.8% retracement of the sell-off since April's highs, the resistance joining the 2007 tops and the 2010 tops, and the C=A of the correction start in July (daily chart). I add to that relatively convincing divergence and the incapacity of daily 21-RSI to bypass 60 which is an excellent confirmation of a correction in bear market and not a new bullish impulse. Gathering all that and adding to it the VIX signal we had early in September, the economic mix which is turning very sour, the start of trade wars, the ever present sovereign default crisis in Europe, the common knowledge that bank balance sheets are marked to solvency and the housing double dip, and I think it's fair to say the pricing for the major equity indices is rather generous. I did say yesterday that it all starts and ends with the USD. Well, the attached chart says that based on M2 EURUSD is headed back to 1.10 or even parity, and USD bullish sentiment according to CFTC is pretty much 0%. We also had Fed speakers on the air today saying that more Treasury purchases may not be the answer. - Nic Lenoir
A brief word on stocks: Ever since the VIX posted a reversal outside the lower Bollinger band I am very cautious and bearish on stocks. We tested this morning the key upside level in S&P and so far rejected it. I have included the chart of the Nasdaq here to show that a weak trading session Monday would complete an evening star on important levels. The Shanghai composite is also sitting on a the 50- and 100- DMA ad a break would be very bearish. So I stick to my bearishness and will look for a break of 1,105 in S&P futures to confirm downside acceleration. - Nic Lenoir
It's always good to walk in with markets up over 1% for absolutely no reason knowing that the move for the day is behind us and there is nothing to look forward to all day. Good news range from "Banks are going to face tougher capital requirements but have 8 years to comply" aka they are broke but don't have to admit it just now, to dismissal to double dip theory based on one data point out of China. Leaving aside the obvious lack of credibility of any number coming out of China, it's interesting to note how the market learned its lesson from the Madoff debacle. 11% return every year like clock work? Sure no problem. +9% to +10% GDP annually like clock work anyone? Maybe a little similarity here no? Not even a bit? The top of the Chinese miracle must be close when Michael Douglas is out there touting he made all his money back after a rough 2008 by buing AUD bonds. He is to AUDUSD what Gisele or Jay-Z were to EURUSD. Watch CAC open tomorrow to see if today's rosy mood is here to stay as the chart attached looks a bit like an abandoned candle on the highs...
There are the usual market observations (no volume - shocker), but, for once, Nic Lenoir is getting angry: "People started voting a bit more, and it seems all they want is change, but change they are not getting. You want change? Well how about the truth for a change: we are bankrupt, your investments are in their totality worth 35 cents on the dollar including your house, you need to move in with your parents because we are slashing their pension payments and you can't afford a home. Now start from scratch! To me it sounds better than 4-day school weeks in Oregon where we are not educating the future generation so they can be even angrier and counter-productive revolutionary protesters when they grow up."
Until I send a more complete market overview tomorrow, there are a few things I want to point out: The market data is atrocious and yet we fail to accelerate lower. I have highlighted the past two weeks how the 1,040/1,050 are should provide strong support here and so ar so good. We remain core short from 1,126 but feel rather pleased to be out of tactical positions so the chopping around the lows does not give us any headaches. I still believe we should see 1,085/1,100 at the minimum before selling off more aggressively.