What ails Japan, the United States, and many other countries is financial deleveraging. Much talk about “Japanification” over the past year or so because the Federal Reserve response to deleveraging has been to compress BOJ policies into a shorter overlapping timeframe… giving the scenario a look and feel of the Japanese experience. Aside from this policy compression, there’s nothing new in the policy brew. The monetary policy compression and fiscal insanity has arguably made the next step—a tax increase—even more imminent than when Japan instituted their consumption tax.
Central banks can salve financial system wounds, but they must heal on their own. The problems of the financial sector reflect adjustments going on at the household level. This implies that these problems will be resolved organically by debt reduction, capital losses, and rescaling of capacity.
Oil prices were higher again on Friday, in a renewed frenzy of risk appetite, as Fed Chairman Ben Bernanke gave investors the signal they had been looking for. Speaking from Jackson Hole, Wyoming, he essentially told investors that the Fed will step in if the economic recovery appears to be in serious trouble. As a result of his comments, traders and investors dumped the US dollar, which is considered a “safe haven,” and they bought equities and commodities, including oil. The fact that prices were still oversold and near support certainly did not hurt. Traders saw buying oil as a low-risk purchase, and then the Fed seemed to guarantee it. - Cameron Hanover
While no one can say when the big spike in gold will occur, one can say accurately that, given the systematic frailty, it could literally happen on any given day. That’s what happens when scams are unveiled. Remember Bernie Madoff? How many people do you think tried to give him money the day after he was arrested, versus desperately scrambled to get their money out of his sticky web? The answers are “No one” and “Everyone” – that’s what happens when people lose faith in a currency.
This week's CFTC Commitment of Traders action, presented in visual form. Some highlights: net spec long positions in wheat futures on the CBOT and the KCBOT hit fresh records, at 36.7k and 67.6k: is more food inflation on the immediate horizon? Net spec shorts in US Treasury Bonds, and LT Us Treasury Bonds, while still just negative at -5.8k, and -2.6k, respectively, are at the highest they have been in 2010: keep an eye on this metric as a positive inflection point may be the contrarian signal to sell. At least those concerned about the price of chocolate may rest easy: Cocoa ICE futures dipped to the lowest net spec total for 2010, at 8,092k. In currencies, the JPY posted the second highest net long exposure for 2010 at +51,069 Net Spec, an increase of 1,000 from a week prior, and a far cry from the -55.7k recorded on April 13. EUR net positions also droppe notably, after hitting a 2010 high of -3,731k, the net spec contracts have declined to -21.6k as of August 24.
RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 27/08/10
In this week's update on technical chart formations, Goldman's John Noyce has nothing optimistic to tell clients. Noyce observes that while the market may have entered a short-term consolidation period with the 1,038-1,045, "looking further out the setup on the weekly charts of the S&P and the VIX, plus those for broader asset markets - fixed income in particular – make us think that a sustained bounce is unlikely and that broader risks remain on the downside." Yet the most interesting chart formation is the imminent flattening of the 2s30s... not here, but in the UK. Will the Julian Robertson "suicide" trade shift across the Atlantic?
Selling the opening rally worked again. How easy is this becoming? The bears were on their way to the bank after the Intel pre-announcement but I don’t think they stayed on the Fidelity green path. Everyone got short and then the Bernanke prepared statement said the Fed stands ready to act. When traders realized that INTC was going to reopen flattish, the buyers came back in a big way. Did anyone notice that the key 1040 level held on the S&P 500? How about that VIX? It held below Wednesday’s peak. What’s next? There are overhead down trend lines that have to be taken out in
order to change the short-term trend.
In this week's Big Interview, the WSJ's Simon Constable interviews Robert Shiller who flat out says that an economic double dip may be "imminent." This compares to his earlier warning that he saw the chances of a double dip at over 50%. Guess that probability has now doubled. Notably, Shiller also believes that when the NBER looks back at the data, Q3 of this year will mark the beginning of the second dip of the recession. Ironically, since up to now the previous recession has never actually officially ended, very soon the NBER will merely confirm that the recession which started in December 2007, will have continued for three years, in what is possibly the longest recession on record. Furthermore, those looking to sell houses are advised not to listen to the interview, as the co-creator of the Case-Shiller Home Price Index also added that he is worried housing prices could decline for another five years. He noted that Japan saw land prices decline for 15 consecutive years up to 2006. Following up on this week's weakest new home sales data in history this should probably not come as a big surprise to most. Also for bond fans, Shiller confirmed Rosenberg's view that bonds are not in a bubble. Hopefully Mr. Shiller bond prophecying skills in bonds are better than in houses, where it was mostly in hindsight in early 2007 when the bubble had already popped.
Presumably this is in response to the ongoing lock out of Michael Mayo, who as Fox Business previously reported claims Citi is cooking its books by misreporting its deferred tax assets, by Citi management. We assume the letters are of a congratulatory nature, and commend Citi management on alleged ongoing fraud, also sharing tips on how the firm's HFT traders can flash dash its worthless stock to a few trillion/share, guaranteeing that unlike in daily isolated flash crashes none of the transactions will be D/K'ed.
David Rosenberg has provided his typically succinct summary of the day's heavy dataflow, starting with the GDP number, parsing though Bernanke's speech, and concluding with a broad overview of where the market is heading, which is now so disconnected form a bond-implied FV in the upper 700s it is no longer funny.
RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 27/08/10
While there is nothing to suggest a fundamental improvement in the economy, and judging by the latest batch of data the economy is in fact continuing to deteriorate, we have so far seen a substantial sell off in bonds across the curve, with the 2s10s steepening by 11 bps (just in time for the bull flattener bandwagon to enjoy some out-of-steepener rotation pain). So what is the catalyst for the selloff? Francesco Garzarelli's note to Goldman clients titled "Forecast Reached, Risks Now Balanced", in which he implicitly advises to take profits on USTs, sent earlier may provide some clues...
A major campaign is in process to attempt to push stocks higher via the AUDJPY, whether in cooperation with the BOJ and FRBNY, and Europe close or not, as the spread between the ES and the AUDJPY suggests that stocks are materially lagging (10-15 ES points). The trade right now, which takes advantage of Mr. Sack's generosity with taxpayer capital, is to buy ES and sell the AUDJPY as broken market provide numerous convergence opportunities.
The ECRI Weekly came in at an annualized -9.9%, once again straddling the critical -10% boundary. Of course with two previous downward revisions, it appears the index' creators have taken up the government's favorite data fudging ploy of downward revising prior data, as the past week's -10% now ends up being -10.1%. No doubt next week this week's -9.9% will be revised to a worse number. But by then all the beneficial impact of the better number will be long forgotten.
Market Response To Negative Data Glut: Serrated Edge, With FRBNY's Brian Sack Rushing To Scene To Cauterize BleedersSubmitted by Tyler Durden on 08/27/2010 10:18 -0400
Update: LOL - Intel is now up after cutting guidance. We are done here. Central Banks of the world: market is sold to you.
What do you get when you flood the market with an Intel downward guidance update, a disappointing money printer dictate, and a drop on consumer confidence? In a word - total market insanity. Risk is now moving straight line up or down: the AUDJPY (and its derivative the stock market) has lost all semblance of normalcy and is now up or down in 30 pips increments with no rhyme or reason, as dogs and cats chase their respective tails, in what can only be defined as a perfect sawtooth pattern. Have fun trading: Brian Sack will gladly be on the other side off all your sell orders.