Russell 2000

Because live is better than dead. And just in case he lets one slip just what his price target for the Russell 2000 (aka the US GDP) is and how much gold the Fed will secretly lease. As a reminder, from Alan Greenspan testimony to Congress in July 1998: "Central banks stand ready to lease gold in increasing quantities should the price rise."

Update: $1700

Presented with little comment, Gold is now at $1693, about to take out $1700 and the best performing asset class of the year: YTD: Gold +8.2%, S&P +4.9%, 30Y TSY price -1.44%. Furthermore, since this FOMC statement implies more easing imminent, it simply delays full blown LSAP so its "effectiveness", read max Russell 2000, peaks with Obama's reelection campaign.

America's loss is China's gain. In the aftermath of the Keystone XL fiasco, which will see not only a number of jobs "uncreated" but a natural source of crude lost, Canada is already planning next steps. Which will benefit Shanghai directly and immediately. As Bloomberg reports, "Prime Minister Stephen Harper, in a telephone call yesterday, told Obama “Canada will continue to work to diversify its energy exports,” according to details provided by Harper’s office. Canadian Natural Resource Minister Joe Oliver said relying less on the U.S. would help strengthen the country’s “financial security.” The “decision by the Obama administration underlines the importance of diversifying and expanding our markets, including the growing Asian market,” Oliver told reporters in Ottawa." Ironically, it is diversifying away from the US, with its ever soaring, politically-predicated uncertainty, that is a source of stability and diversification. But it is not only crude. Wonder why no jobs are being created? Wonder why despite record low mortgage rates there is no bottom in sight for housing? Simple - nobody can plan one month, let alone one year ahead for any US-based venture or business. The political risk is simply too great - whether it is contract law (see GM and Chrysler) or simple solvency (see record high levels of cash hoarded by companies), it is there, and as long as it is there, there will be no hiring, no capex spending, no growth, and no real improvement in the economy, the real economy, not that defined by where the Russell 2000 closes on any given day.

We discussed the bullish themes (and Nomura's skepticism) earlier today but as the S&P 500 cracks 1300 once again and banks (GS cost-cutting sustainability?) and builders (NAHB Index? context please) are off to the races once again, we thought it might be appropriate to see just how well the worst of the worst has outperformed the market. Using our standby GS index that tracks the most shorted names in the broad market, we see that year-to-date, the most-shorted names are up 5.8% against the Russell 3000 which is only up 4%. Furthermore, since late yesterday, the most-shorted names have doubled the market's performance (+2.1% vs +1% from 1430ET yesterday).

When it comes to the fabled President's Working Group on Capital Markets, also known as the Plunge Protection Team, the myths about the subject are certainly far greater than any underlying reality. To be sure, vast amounts of popular folkflore has been expounded into the public arena, with most of it being shot down simply due to it assuming conspiracy theories of such vast scale that the human mind is unable to grasp the complexity, and ultimately the inverse Gordian Knot makes an appearance with the claim that vast conspiracies are largely untenable simply because it is impossible to keep a secret from so many people for so long. Yet what if the secret is not a secret at all but is fully out in the open, and is only a matter of interpretation, and contextualizing? Why just 3 years ago it would appear preposterous to allege the capital markets are a ponzi and that the Fed does everything in its power to keep stocks higher. Well, what a difference three years make: now the Chairman himself in a Washington Post OpEd has admitted that the sole gauge of Fed success is the loftiness of the Russell 2000, neither unemployment nor inflation really matter now that the Fed's third mandate has been fully whipped out. Furthermore, Keynesian economics, and the entire top echelon of the educational system have also been accurately represented as a paradigm which merely perpetuates the status quo as the alternative is the realization that the whole system is a house of cards. As for the global capital markets being nothing short of a ponzi, we merely point you to the general direction of Europe, the ECB and the continent's banks, where the monetary interplay is nothing short of the world's biggest pyramid scheme. Yet the PPT, or whatever it is informally called, does not exist? Consider further that only recently did it become known that the former SecTres Hank Paulson himself was exposed as presenting material non-public information to a bevy of Goldman arb desk diaspora hedge funds, headed by with none other than the head of the President's Working Group on Capital Markets Asset Managers committee David Mindich. So, if contrary to all the evidence that there is some vast underlying pattern, if not a conspiracy per se, one were to take the leap of faith and take the next step, where would one end up? Well, most likely looking at the Exchange Stabilization Fund, or ESF, which Eric deCarbonnel has spent so much time trying to unmask. Is it possible that the ESF, located conveniently at the nexus between US monetary policy, foreign policy and last but not least, a promoter of the interests of the US military-industrial complex, is precisely the  organization that so many have been trying to expose for years? Watch and decide for yourself.

When you combine these patterns with the light volume that has occurred throughout this latest move upwards as well as the fact it’s moving on rumors (seriously, Eurobonds? You think Germans are going to support this?), we’re very likely going to see a reversal in the near future culminating in new lows for the year.

This week's key themes presented by Goldman's David Kostin: "The weak fiscal condition of federal, state and local governments, and corporate tax reform dominated our discussions this week with hedge fund and mutual fund portfolio managers. So far, 207 firms in the S&P 500 have reported 4Q results (55% of total cap). 45% of companies reporting have beat consensus earnings estimates by more than one standard deviation (above the historical average of 41%) and 9% have missed estimates (vs. average of 14%). The average EPS surprise has been nearly 10%, above the 4% historical average. Excluding Financials, there are fewer positive surprises (44%) and fewer negative surprises (6%)." For now Kostin is still sticking to his 1,500 forecast: "The S&P 500 rose 1.5% this week. Industrials was the best-performing sector (+3.0%) while Consumer Staples was the worst-performing sector (-0.5%). We expect the S&P 500 to rise to 1500 in 12 months (+15%)." We give this forecast three months max. After all, the path for QE3 must be paved with good intentions. And the kicker: "We expect a  combination of 8% sales growth and 30 bp of net margin expansion to 8.8% will combine to boost EPS by 14% to $96 per share." Ongoing margin expansion as most companies are prewarning about maring collapses... This is beyond painful. 

What goes up must come down. And what goes up 3x as fast as the market market, will, eventually go down by a comparable or higher rate of change. With the market having entered its topping formation, China on the verge of a fresh bear market, and liquidity around the world scarce courtesy of a few food-price based revolutions here and there which do more for cash printing resolve than anything else, the HFT algos are starting to be rather concerned just when Chaircreature Ben will announce the QE 2+ expansion (if ever). Below, following up on our new series of fundamentally driven ideas, we present a list of the 41 companies that have a (two year) beta of over 3.0x. Look for the companies to be the biggest casualties on the margin if indeed the Fed is starting to consider its "surging" food price inflation stimulating tentacles from the market.

Something dramatic happened in the past 2 days: fundamentals came back with a thud, quite literally, for those momo traders who believe that they can always top tick a stock and sell just before it. Instead now they are caught in a toxic spiral of doubt when to take profits, hoping for a return to previous highs, even as stocks continue to descend ever lower. Of course, it is preposterous to assume that the Fed will allow a return to full normalcy: as we have written since oil passed $90, this is merely the Fed's ploy to kill the surge in commodity prices. Soon enough, WTI will get back to levels that are acceptable to the Fed, at which point the whole reflation trade will start grinding higher again one more time. In the meantime, the "normalcy return" could last one day, one month, or more. Additionally, keep in mind that the Fed will have to create an "unexpected event" ahead of June, which will be the trigger for QE2+, which leads us to believe that there will be at least two pronounced major distribution events: the current correction, and the next, and far more potent one, before the end of Q2. As such, we will once again commence looking at securities in a way that makes sense from a fundamental basis (as opposed to buy because it is green). Below, in our first foray back into normalcy after a long absence, we present the most hated stock in the world: these are the 28 names on the Fed favorite Russell 2000 which have a short interest as a percentage of float of more than 30%. They are hated with a passion, and for good reason. That said, in times when the Fed steps back from the limelight, these are the companies that should likely trade alongside a dropping market. Alternatively, due to their high beta nature, they will likely surge as soon as the Fed decides the break from executing its third mandate (and the populations of developing nations) is over.

Sorry but this is really worth a post. The last time the market actually dipped more than 0.001% was on November 26, as such this is a historic event (in a country whose attention span is +/- about 15 minutes). The Russell 2000, which his Chairness indicated is the only metric tracked by the Fed's third mandate, is down. And since the Fed controls (insert best Tepper voice) everything, this can only indicate that the Bernank is finally starting to get concerned about those food riots he has been reading all about in assorted fringe blogs.