Tuesday, November 9, 2010

TBTF November 9, 2010 - PIIGS

‘It’s finally here, It’s finally here, Oh, Oh, Oh, They Called me Pig, When I was a baby,  I was so happy, I played with my friends in the mud’ (Weezer – 2008).

With QE2 out in the open the debt market seems to have shifted it’s attention back to the perils in Europe’s peripheral countries, the so called PIIGS. PIIGS stands for Portugal, Ireland, Italy, Greece and Spain (the acronym obviously not ordered by economic weakness). Back in the spring of this year when Greece almost collapsed under the weight of their immense budget deficit the EU had to come to their rescue. Yields on the 10 year Greek bonds had passed 12% while the yield on the shorter 2 year maturity had even surpassed 18%! The EU and IMF put together a hefty 600 billion Euro rescue package which brought back some relative calm to the markets.

With the unveiling of a renewed stimulus package in the US, rates in the PIIGS shot up again. Probably on the one hand because a weakening of the $ will mean less economic growth in the already fragile export-driven euro zone, while on the other hand Spain is exhibiting weaker than expected growth, Portugal and Ireland are having troubles getting their budget for 2011 in order, while strikes against pension and other budgetary reforms broke out all over Europe.

Germany in the mean time reiterated their stance to ‘not bail out’ anymore countries should they come begging for money. According to Markel and Schaeubele, it is time for bondholders to take a haircut, in other words: the buck stops here, partial default of euro countries is now an option. Germany can’t and won’t shoulder any more of the financial problems created by lax fiscal policies and corruption in the outer euro zone countries.

An illustration of how bad the situation on the European debt markets is right now can be seen from the following graphs displaying the spread between PIGS 10 year yield and Germany’s 10 year long bond yield:




As you can see yields in Greece and Spain have almost reached pre-spring-crisis levels, while the situation in Portugal and Ireland (the 2 countries that are having trouble with their budgets for the coming year) has dramatically deteriorated, with yield at new all-euro-time highs.


On the shorter end of the yield curve the movement has also been on the upside, with the spread on Irish-German bonds reaching a new all time high:



Both the Irish and the Portuguese can stay away from the capital markets until Q2 2011, but then they will have to start raising fresh money at some point.

Budget deadline in Ireland is December 7th. Something new to look forward to!

In the mean time ….

Happy Hunting & Let’s Be Careful out there!!!

Sunday, November 7, 2010

TBTF November 8, 2010 - Rise, Rise, Rise


‘Rise, Rise, Rise, Keep on risin’ Rise, Rise, Rise, Yeaheaheaheah’ (Soul Providers – 2007).

Over the weekend Bernanke defended the Fed’s expansion of record stimulus at a conference in Jekyll Island, Georgia, as he has done over the past 4 days, ever since the announcement of QE2. Instead of commenting on the supposed merits of the program Bernanke should take his cue from Ex-Fed President Gary Stern, who eloquently described what must be the prevailing opinion amongst the Fed policy committee members:

“I would have voted in favor of it mainly because I think it’s worth a try and might have marginally positive effect on the rate of growth of the economy and unemployment”

In other words, why not, if it doesn’t help it won’t hurt. And that is exactly where I strongly disagree with the Fed at the moment, in my view it will hurt because it will spark uncontrollable inflation. Bernanke actually made some comment on inflation during a panel discussion:

“I have rejected any notion that we are going to raise inflation to a super-normal level in order to have effect on the economy…, our credibility must be maintained, it’s critical for us to maintain inflation at an appropriate level. Our purpose is to provide additional stimulus to help the economy recover and to avoid potentially additional disinflation which I think we all agree would be a worse outcome”

Obviously Mr. Bernanke doesn’t see inflation as a problem, he probably feels he can always raise interest rates to contain inflation, inflation that is as of yet nowhere to be seen according to the Fed Chairman.

I disagree with him on both points. If  inflation starts to become a problem he could very well be able to raise interest rates, for that to be a possibility it means all his stimulus must have worked, economic growth will have to be at or above average levels and unemployment must be down, for if not he will stop any economic recovery in its tracks. The federal deficit will also have to be brought down to sustainable levels, else a raise in real-interest rates will only aggravate the financial burden this administration is transferring upon the shoulders of the next generation. So, even though Ben might be convinced inflation won’t become a problem I don’t share his optimistic view.

The one thing Mr. fed and I will be disagreeing on even more is the gauge for inflation. According to him inflation is too low at the moment and there are no signs that inflation will rise to his target of 1.8% - 2% in the near future. I will make the bold statement right here and now that inflation is already here, it’s not going anywhere and it will get worse, much worse. How can we have such different views on inflation you might ask, I can explain it very easy, Mr. Bernanke looks at the Core-CPI and I say that the core-CPI is not a real measure of real-inflation, but an easily manipulated index devised to make the lives of Central Bankers easier.

What exactly is the CPI and how does it measure inflation. On the website of the Bureau of Labor Statistics, the government agency that calculates the inflation gauge, we can find that the CPI is the “Change in prices paid by urban consumers for a representative basket of goods and services”. So far, so good.

The goods and services in the CPI index are categorized in the following 8 groups:

1.      Food and Beverages
2.      Housing
3.      Apparel
4.      Transportation
5.      Medical Care
6.      Recreation
7.      Education and Communications
8.      Consumer Expenditure

These 8 groups are then each assigned a weight within the Consumer Price Index and this is where the first interesting observation can be made. The group with the highest weight is Housing 42% of the CPI (within the Housing group Fuels and Utilities in and around the home makes up for 5% of the 42), next come Food & Beverages 15%, New and Used Motor Vehicles 6% and Motor Fuel 4.5%

As you can see, Housing, which has seen prices slide or stabilize in the last 2 years has an almost 40% impact (if you take out heating oil and electricity) on the CPI. Used Motor Vehicles, a big ticket item, not something consumer go out and by again and again each month weighs for 6%. So, almost 50% of the CPI is made up by items that do not change much in value in normal economic times, and have certainly not been going up in the last 2 years.

Volatile goods like Fuel and Food & Beverages make up for only 20% of the index and this is what people have to buy week in week out, year in year out.

So it seems there is a mismatch in what the CPI says the prevailing Inflation-Rate is and what people feel in their wallet. The $1.500 in rent or mortgage payments is not what make inflation, it’s what you can do with the money that is left after you paid for the roof over your head. Can we still get food on the table, can we fill up our car this week or are we going to have to take public transportation to go to work.

To make matters even worse, central bankers and politicians around the world don’t use the CPI as the measure of inflation, but the Core-CPI, the CPI number excluding Food and Energy because these components are too volatile. So when gas doubles at the pump it’s not real inflation for the theorists among us, but it hurts in my pocket anyway, it hurts a lot.

I can understand that politicians and central bankers cannot adjust their chosen policies anytime someone corners the Wheat- or Oil markets, but if and when commodities have been rising steadily but surely over a prolonged period of time it seems rigid and wrong to hold on to the perception that inflation can be measured by Core-CPI. And this exactly what has been happening ever since QE1, QE-lite and now QE2 have been announced. Raw goods have been rising in price steadily, they have had an impact on the Producer Price Index (+4% YoY in September and expected to be up 4.6% in October versus 1 year ago), but because we are still in a recession (that’s a disagreement I have with Mr. Bernanke that will have to wait until another time) producers haven’t been able to pass those elevated prices on to consumer, just yet.

The following graph shows just how much prices of basic raw materials have risen since March 2009 (when QE1 was announced), through the latest round of QE. It takes not much imagination to see that this huge run up in raw goods will raise inflation numbers sooner rather than later. We can only hope the good Dr. Bernanke won’t be stuck in his simplistic view of inflation, as measured by the CPI-ex Food & Energy, or the man in the street will be victim of ‘Zimbabwian-esque inflation, before the Fed chairman acknowledges inflation has crept up past the 1.8% - 2% target and will proudly announce his master-plan has worked and QE15 will begin to be unwound.



Happy Hunting & Let’s Be Careful out there!!!

Wednesday, November 3, 2010

TBTF November 4, 2010 - Nothing left to say

‘When there’s nothing left to say, And the conversation is over, The silence just gets in the way’ (Staind – 2008).

Wednesday has come and gone and there is nothing left to say. Everything is out in the open. The market knows what it wanted to know, got what it wanted to get and can go back to sleep….

Tuesday we had mid-term elections in the US. As expected, the Republicans took over the House of Representatives while they gained in the Senate, but did not get a majority. So Obama will have to govern the last 2 years of his Presidency (I never thought he would be a 2-term President and now his chances are even slimmer) with a Republican Congress. This means he will have to move to the right to get anything done. So he will probably extend the Bush Tax-cuts, be less strict with new financial regulation, run a tighter fiscal budget and perhaps make changes to Medicare. All of this can be explained favorable for equities. We will know more in the coming weeks.

Yesterday was the most anticipated FED-meeting in the history of the FED, it was like the moment Neil Armstrong set foot on the moon, when the Berlin Wall came tumbling down, a landmark moment and we can tell our grandchildren that we were there! We were there when Mr. Ben drove the last nail in the coffin of the once ‘almighty’ Greenback.


·         Further purchase of $600 billion of longer-term Treasury securities by the end of Q2 2011, about $75 billion per month
·         Reinvestment of principal payments, a total of about $250 billion to $300 billion over the same period, about $35 billion per month
·         Taken together this will amount to a total of between $850 billion and $900 billion or roughly $110 billion per month
·         Assets purchased will have an average duration of between 5 and 6 years
·         The current per issue-limit of 35% will be temporarily relaxed
·         The program will be adjusted as needed to best foster maximum employment and price stability

There is actually not much news in there. By announcing a headline number of $600 billion, Bernanke gave the markets just about what was expected on the low side of QE2 and by re-investing principal payments he satisfies those who were looking for $1 trillion (so I guess only Goldman Sachs was disappointed today). All in all it seems it is just a little more than the markets expected, but not much. As a result equities rallied just a bit, Gold came back from it’s lows, but still closed in the red, the Oil rally continued, the Euro and Yen strengthened against the $, volatility got hammered and the yield curve steepened, with the 30yr losing ground while the shorter end of the curve strengthened somewhat. So it seems for the first 115 minutes of trading Bernanke got just what he expected.

Will he still be so satisfied with himself 6 months down the road, only time will tell!

So what can we say about the markets in the near term, apart from the obvious fact that they will be underpinned by 1 trillion freshly printed dollars. Let’s take a look at some charts:

The S&P, after having rallied 150 points from sep 1st, has 17 more points to go before it sets new highs for the year, which were set back in April. Should they break this resistance, 1.300 will be the next level. If they fail to take out new highs, 1.140 is the first support zone.


Gold has been in an uptrend since the beginning of 2009, when QE1 was first suggested. It is trading right in the middle of it’s trading band, with $1.325 as a short term support and $1.250 being the lower end of the range. As long as the $ keeps sliding versus most major currencies Gold has room to go up and it will.


The DAX has already been making highs for the year and is rapidly approaching the 7.000 mark which could be psychological resistance. Remember, 8.100 is the all-time high for the German Index. It’s hard to believe we are trading just 18% below those levels.


So far this year Germany has been outperforming most other European indexes this year. It might be because of the composition of the DAX but I think it’s more a safe haven play then anything else. Just as people want to be invested in Bunds they favor the DAX over, for example, the CAC.

All in all, QE2 should underpin equities and commodities well into next year, we have some room to continue going higher, but we are nearing resistance levels and if the economy does not start to show signs of growth it will be difficult to break through these barriers, as far as I can tell.

After the markets digested the outcome of the elections and Ben’s renewed liquidity boost equities managed to eke out a gain:

Dow +0.24% SP500 +0.37% Nasdaq +0.27% EUR$ 1.412 WTI 84.9 Gold $1348.5

Financials were the strongest sector +1% as hopes for less strong regulation and the hopes of a steeping of the yield curve attracted fresh money. Basic Materials ended the day softer -0.38% as commodities were subject to profit taking in the wake of the QE2 announcement.

Now that QE2 has been established there is a chance investors will actually start looking tat corporate earnings and economic data again. In Europe the financial sector is starting to report Q3 numbers, but the next highlight of the week will be the Non-Farm Payrolls report on Friday. Yesterdays ADP showed unexpected growth in the number of jobs, which might bode well for Fridays numbers. Then again, the correlation between ADP and NPF is statistically not relevant.

For now, I go back to sleep….

Happy Hunting & Let’s Be Careful out there!!!

Monday, November 1, 2010

TBTF November 2nd, 2010 - Wake me up before you go go

‘Wake me up before you go go, Don’t leave me hanging on like a yo yo, Wake me up before you go go, I don’t want to miss it when you hit that high’ (Wham! – 1984).

Is it Wednesday yet? Please someone wake me up when it’s time. I can’t take this anymore… If the most important news of the day comes courtesy of E-Online: Kim Kardashian's Latest Non-Hookup: LeBron James! Then we know we are in trouble.

What headlines did we take for granted today, while we are in a FED-watch induced coma:

Wake me up when it is Wednesday….

The upside to having so much free time (as there’s no trading to be done) is that I can think. Granted, it doesn’t always lead to something sensible, as was the case with today’s mental exercise. I dubbed it the ‘I am Ben and I have a plan’ mental gymnastics event of the day:

Will Ben know, by now, what he is going to do come Wednesday?

I imagine him walking around the house, talking to his dog Lewis (no idea if he has one, but hey…these are my thoughts), asking him for advice about the wording of the accompanying text of his QE2 announcement. He wanders over to his next door neighbor, Mr. Jamie D., while chatting about the weather he slips in a question about the ideal duration of QE2. Next he goes to the bakery on the corner where the owner Mr. Lloyd B. tells him he should buy 3 loafs of bread instead of 1, because you can never have enough bread!!! He hesitates a bit, but decides Lloyd is usually right and buys 3 big loafs of bread. Walking back home he almost gets run over by a skateboarder. It’s the nasty kid from 3 houses down, Tyler D. who shouts at him he should be more careful, “Carrying around all that bread is blocking your view of the sidewalk, it just might be your downfall”, Kids these days….. When he gets home he retires to his bedroom but he is afraid to go to sleep. He has been having these nightmares lately, about growing economies, shrinking economies, deflation, run-away inflation, jobs, jobs and even less jobs and no matter what, he can’t seem to get a handle on things while he’s asleep. It’s better to stay awake; at least he’s in charge of the world in his waking hours. He turns on his bedside lamp, opens up his 1st edition of ‘The General Theory of Employment, Interest and Money’ and reassures himself everything will be ok. Ben has a plan, Ben has a plan, Ben has a plan, Ben should have a plan by now…..

Wake me up when it’s Wednesday….

Mid-term elections 2 days away, QE2 3 days!

Happy Hunting & Let’s Be Careful out there!!!

Sunday, October 31, 2010

TBTF November 1st, 2010 - Forever Autumn

‘The summer sun is fading as the year grows old, and darker days are drawing near, the winter winds will be much colder, now you’re not here’ (Justin Hayward & Jeff Wayne – 1974).

Here in Europe we said goodbye to summer(time) 2010 and stepped into autumn. More rain, more wind, lower temperatures, a lit fireplace and since the clock went back one hour over the weekend, it will be dark one hour earlier than last week as well. Darkness is descending over Europe, and I’m not only talking about the nearing economic depression. It also implies that the time difference between Europe and the US East Coast is only 5 hours this week, so QE2 will be announced at 19:15, not the usual 20:15, this Wednesday (unless Bernanke comes to his senses…..yeah right!).

It was also Halloween weekend and this started off with quite a scare. For a brief moment the mid-term elections and QE2 were pushed to the background by Friday’s news that 2 bombs were found inside printer cartridges on planes from the middle-east en route to Chicago. One bomb was intercepted in Dubai, while the other was caught in London. No one knows as of yet if those 2 bombs were the only ones bound for the US, let’s hope they were. On the markets there was NO reaction at all, the S&P traded in a tight 6-point trading range all day. Apparently terrorist threats have become part of our everyday lives, which is scary in itself, or maybe QE2 is believed to be anti-terroristic as well. We choose to believe everything fairy tale Bernanke tells us anyway.

So here we are, 2 ½ trading days before what will be a game-changing event: QE2. The chance that there will be QE2 of some magnitude is 99.9%, so the bigger question is: what will happen after it has been announced, in 3 months, 6 months or even 2 years down the road.

The answer is: NOBODY knows. The only thing that is clear is that the risks, introduced in the economy, are growing as a result of monetary easing and it’s not clear if the FED can counter those risks in the future. It’s a tightrope that Bernanke is walking and the risk of falling off a cliff left or right is extremely high.

On the one hand QE2 might achieve nothing which almost certainly means the US will follow down the path of Japan, where the economy has not been growing in the last 15 years. On the other it might introduce inflation, a lot of inflation, but inflation itself will not stimulate the economy, the mechanism that takes care of that is the ‘velocity of money’. This has been hit hard by the deleveraging in the economy, on the banking side as well as on the consumer side. Introducing more liquidity (as if there is a liquidity shortage at the moment) won’t increase the velocity of money if on the other side de-leveraging still continues. But it does have an inflationary impact through a lower dollar. If this is the case, higher inflation without a higher velocity of money and therefore a still sluggish economy, then what can the FED do to stop inflation from spiking higher and higher? They won’t be able to do what they always do: raise rates, they will drive the economy into a deep depression if those measures are taken. So we will have runaway inflation with no means to hold it back, not a pretty picture at all.

Gonzalo Lira, on his blog this weekend, calls for a steadily increasing CPI averaging 30% by the end of 2012 culminating in the collapse of the $ and the US economy. Just in time for the end of the world, as predicted by The Mayans. Goodbye money, goodbye earth. Maybe that’s why Bernanke is not looking for a real solution to these problems at hand, we won’t last long enough anyway. (Don’t go throw away all your hard-earned cash just yet, because some scientist figured out that the Mayan calendar doesn’t stop in 2012, but in December 2208, good thing I did not go see that movie after all.)

The markets ended the week just like they had been trading all along, unchanged. October 22nd the S&P500 closed at 1.183,08 while this Friday it closed at 1.183,26 A whopping gain of 0.18 points! The VIX however closed 2.4 points higher as more and more market participants are trying to insure themselves against a lower than expected QE2 announcement and trade-war tensions keep building.

Dow +0.04% SP500 -0.04% Nasdaq +0.00% EUR$ 1.392 WTI $1.4 Gold $1360

Treasuries ended higher, sending yields on the 10yr lower to 2.60%

We have a lot of economic data this week, ranging from ISM to Non Farm Payrolls, but Wednesday’s FED meeting will be the most watched event of the week.


Mid-term elections 2 days away, QE2 3 days!


Happy Hunting & Let’s Be Careful out there!!!

Thursday, October 28, 2010

TBTF October 29, 2010 - Just ask the lonely

Too Big to Flail
October 29, 2010

‘Just ask the lonely, When you feel that need, To make it all alone, Remember no one is thinking of, Going alone, Just ask the lonely…’ (Four Tops – 1965).

Today it became clear that the FED is not thinking of ‘going alone’, so they asked their Primary Dealers just how much QE2 they expect, what they think the impact will be on yields in the next six months. According to Merrill’s Harley Bassman ‘Four dealers are predicting a $1 trillion+ buy program with a smattering of $900 billion and $600 billion votes tossed in’. I guess it could always be worse, since no dealer went as high as $2 trillion or $4 trillion. The ultimate question is: Is the FED trying to communicate something, or are they really lost and don’t they have any clue themselves as to how big the amount of their “wonder medicine” should be and what impact it will have on rates. Let’s face it, nobody knows, not even the almighty POMO-front-running Primary Dealers of this world.

On the markets it seems as if everyone has gone on an extended summer holiday. Volumes have decreased dramatically the last few months and what most hoped were the summer doldrums have now turned into autumn laziness. I’m sitting here writing this blog, listening to good old Chris Botti blowing on his trumpet, feeling all lazy-rainy-Sunday-morning-y, just like I feel most days at the office. Staring at my intraday charts which flat line 30 minutes into the trading session, reminiscing about the days when volatility was accompanied by volume, when volatility was still there. At the beginning of September we would all say: wait until Labor day has come and gone, then volume will be back, then came Yom Kippur, G20 meetings, jobless data, housing starts, but volume never returned, so now we sit and wait until the Mid-Term elections and QE2 but let’s not forget Santa Claus is making an appearance at the end of December, perhaps he will bring some volume with him from the North Pole, maybe if we all write a letter


To: Santa Claus
Address: North Pole
From: Trader Dutchie


Dear Santa,

I know you have given me lots of presents in the past, almost everything I ever asked. You have always been so generous, even when I asked so much, and I forgive you for that one time when you did not get me that Silver Ferrari California, even though I still find your ‘my sleigh isn’t big enough’ excuse a little lame.

This year I write to you to ask for something non-material, something that I lost. It’s one of my favorite things and I have tried to find it all year long, but no matter how hard I look, I can’t seem to locate it anywhere. I am worried it got scared away by credit-bubbles bursting left and right. That it got thrown out to the curb together with my beloved ‘leverage’ or, and this is my worst fear, that the big bad boys from down the block, the HFT’s, have chased it away with their relentless manipulation. Maybe uncle Ben is keeping it locked down in his basement, you know how he gets when he starts to ramble about deflation and QE2, nothing sensible comes out and he locks the house for months on end. I even thought it might have gotten tired from being around me all those years, I thought it might have found another friend. But no matter who I talk to, they all say the same: NO, we haven’t seen it either.

Dear Santa, please, can you find my ‘volume’ for me, I promise to treat it like a friend, to nurture it as well as I can, to love it and never leave it. Please Santa, without it I feel so lost.

Trader Dutchie

The markets, being in the pre-event holding pattern as they are, were little changed. The risk trade seemed to be on again, even though jobless claims came in better than expected. The survey by the FED about possible QE2, seemed to strengthen the belief the FED won’t do anything to upset the markets next Wednesday and give them exactly what they are expecting. So the $ dropped against the Euro and the YEN, Gold and commodities were higher as were bonds and the equity markets were quiet.

Dow -0.11% SP500 +0.11% Nasdaq +0.16% EUR$ 1.392 WTI $82.15 Gold $1344

Consumer Services and Healthcare were the biggest gainers +0.5%, while Industrials lost a mere 0.33% to end the day as the biggest losers.

Today we have Advanced Q3 GDP (2% exp) and the Chicago Purchasing Managers Index (58 exp) as well as the final University of Michigan Confidence reading (68 exp) on the roll in the US, while in Europe we look at German Retail Sales for September (+0.5% exp) and EuroZone CPI for October (+1.8% exp).


Mid-term elections 5 days away, QE2 6 days!


Happy Hunting & Let’s Be Careful out there!!!

Wednesday, October 27, 2010

TBTF October 28, 2010 - Tell it like it is

Too Big to Flail
October 28, 2010

‘Tell it like it is, Don’t be ashamed to let your conscience be your guide. But I know deep down inside me, I Believe you love me, Forget your foolish pride’ (Aaron Neville – 1966 but I grew up on Don Johnson’s (yes, he of Miami Vice) version – 1989).

And tell it like it is he did. If he was led by his conscious, I doubt that, much more by the smell of money, but boy did he tell it.

Who is he, you will ask? Bill Gross, Chief Investment Officer at PIMCO, the worlds biggest bond investor. And he had this to say:

  • Wednesday is the day when the Fed will announce a renewed commitment to Quantitative Easing – a polite form disguise for “writing checks
  • We are, as even some Fed Governors now publically admit, in a “liquidity trap,” where interest rates or trillions in QEII asset purchases may not stimulate borrowing or lending because consumer demand is just not there
  • Still, while next Wednesday’s announcement will carry our qualified endorsement, I must admit it may be similar to a Turkey looking forward to a Thanksgiving Day celebration
  • Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme
  • Has there ever been a Ponzi scheme so brazen? There has not. This one is so unique that it requires a new name
  • The Fed wants to buy, so come on, Ben Bernanke, show us your best and perhaps last moves on Wednesday next. You are doing what you have to do, and it may or may not work. But either way it will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment
There you have it, Bill Gross, a vigorous supporter of the FED, is expressing his doubts about the next round of quantitative easing, and not only about this round but also about the first round. He admits there is not much else Bernanke can do, but it is, in his own words “the most brazen Ponzi scheme ever” and he plans to NOT be the last one out.

He will diversify his way out, move out of Treasuries and into developing/emerging market debt, leaving only the FED and the Chinese to buy this staggering amount of US Government Guaranteed Debt. If the FED wants to buy, he will sell: “Certain Turkeys receive a Thanksgiving pardon or they just run faster than others! We intend PIMCO to be one of the chosen gobblers

And Bill wasn’t the only one to openly question the sensibility of another round of QE, Peter Orszag (former advisor to President Obama) wrote the following op-ed in the New York Times: Sailing The Wrong Way with QE2? In which he states
“In other words, by perpetuating an artificially low 10-year government bond rate, the Fed may be delaying (even if very modestly, given the modest impact of the action on long rates) the very fiscal policy action that the nation most needs, while doing little to boost an economy whose principal problem is not high long-term interest rates.”
Harsh words indeed.

So after today we have 3 FED governors, the Chinese, the Wall Street Journal, Peter Orszag and Bill Gross vehemently against more quantitative easing. Anyone still believe in a shock-and-awe announcement next Wednesday?

As Abigail Doolittle of Peak Theories Research described in a very well written piece yesterday named QE2: The Bond Bomb? Treasury yields are already creeping up since the beginning of October and if they follow a similar path as after the QE1 announcement, QE2 could very well be the thing to bust the bond bash.

In Portugal the government and the opposition broke off budget talks, ‘agreeing to disagree’, causing yield spreads between Germany and Portugal to widen substantially which in turn had a negative impact on the euro. After Greece’s news yesterday, that GDP will fall by more than expected in 2010, this is the second piece of negative news to come out of the Eurozone. It seems not all is as stable as many had hoped.

As was the case Tuesday we had some strange decoupling within the risk-on/risk-off trade from what we have seen the last 2 ½ months. While the Euro and Yen declined versus the Dollar, Gold/Oil & other commodities fell as expected, the VIX rose, but equities tried and almost managed to rally back to unchanged. Could it be that we were collectively front-running today’s POMO? Something is afoot, that’s for sure.

Dow -0.39% SP500 -0.27% Nasdaq +0.24% EUR$ 1.377 WTI $82.50 Gold $1325.35

Technology and Financials managed to eek out a gain, while Basic Materials witnessed the most severe drop -1.15% as commodities fell across the board.

The yield on the US10yr rose by 8 bps to 2.722%, a rise of 34 bps since October 7th.

Mid-term elections 6 days away, QE2 7 days!

Happy Hunting & Let’s Be Careful out there!!!

Tuesday, October 26, 2010

TBTF October 27, 2010 - 'Cause I've been away too long

Too Big to Flail
October 27, 2010

‘Cause I’ve been away too long, and every day I missed you more. You look like you did before, only prettier. And every day I missed you more, and more and more and more’ (Racoon – 2005)

I’ve been away fro a few days, hence my “Too Big To Flail” has not been published, and by god, the market looked like it did before, only prettier. It seems there is no possibility for the markets to close lower, although we seem to be running out of steam on the rally. Since Sep 1st we have had 10 down days (of which 6 were only slightly lower closings), which is a phenomenal record. I say the rally looks like it is running out of steam because Mondays price action was to the downside most of the day and yesterday made it just barely into the green, and what both days had in common was that the VIX closed higher on both instances. And that is usually a sign that volatility, i.e. down days, are on the horizon.

Is there nothing the markets need to worry about? Well, yes, enough!

  • Economic data that seems to be stabilizing or getting slightly better
  • Corporate Earnings that are not half bad
  • Mid-term elections in just over a week
  • Germany getting fed up with the rest of Europe
  • China talking tough on QE II
  • Which happens to be announced next Wednesday
Economic data in the US and Europe seems to be at least stabilizing if not improving slightly. Industrial production in Europe for one keeps beating expectations. German factories must be buzzing with activity if we are to believe these statistics, but then again everyone believed the Greeks when they said GDP would grow this year and look how that turned out so far. But, as long as we are getting better macro-economic numbers QE II has less of a chance to get implemented and seeing as the market is expecting a lot of $1, $5 and $10 bills being thrown at it, that is not a good sign.

Same goes for corporate earnings. They might be improving, from very low comparables, but at this time it is not good for the market. That is the paradox we live in nowadays, a world where the FED’s expectations game has more impact on valuations than earnings and revenue.

The mid-term elections are coming up in a week, more seats are up for grabs or heavily contested than in the last few mid-term elections and perhaps it’s because tea-party candidates are making a stronger showing than expected, but we don’t seem to hear an awful lot about it. Wall Street seems to want a house and senate in gridlock. An environment in which new regulations will be either voted out by republicans, or vetoed by Obama. And who said ‘Change it Good’?

The most interesting rhetoric came from Europe this morning, where German government officials were making threats against their European brethren. They said ‘Germany won’t back the Euro stability fund after 2013’, ‘EU needs treaty change to avoid Euro crisis’. Just like Weber versus Trichet, German politicians seem to take a stand against their European colleagues. They want to clean up this mess, while the rest of Europe wants to sweep everything under the rug and pretend nothing ever happened. Question of the day is: will Germany make good on their threats at the end of the day, or will they soften their stance in the coming weeks/months, or is this all just a way to soften the Euro. It seems everyone ‘wants’ a strong currency these days, yet does their best to be the first to really weaken it.

China is getting more and more vocal about Mr. Bernanke cranking up the printing presses next week. After threatening to lower the exports of ‘rare earth minerals’ to the US, the Chinese commerce minister yesterday said “Dollar issuance by the United States is out of control, leading to an inflation assault on China”. Of course, if they really wanted to make a statement they would just dump more treasuries on the open market than the FED can buy, but as with most politicians, they can talk the talk, but walk the walk?

QE II. The expectation of the amounts of fresh, crisp, new money to be printed next week, is reaching laughable heights. If $700 billion - $1 trillion wasn’t high enough, there are now rumors circulating of an unimaginable $2 - $3 trillion. If true, I guess DOW 36.000 will be reached before the end of the year. The above number is highly doubtful of course, since no one on this earth can possibly be happy about the sudden, but all to true, collapse of the US Dollar. Not Europe, Not Japan, Not China and Not even Ben Bernanke himself. I think the markets are setting themselves up for a fall and the risk/return on a short trade just before the announcement of the amount of QE II seems to be getting better as the days go by.

The markets ended flat as previously mentioned. Noteworthy though was the lack of correlation between the $ and the other asset classes. With the $ substantially against the Euro and the Yen we would have expected to see Gold, Oil and the markets to end in the red, but all asset classes staged a late day rally to end the day virtually unchanged. Too much of a coincidence for my taste.

Dow +0.05% S&P500 +0.00% Nasdaq +0.26% EUR$ 1.386 WTI $82.50 Gold $1340

Happy Hunting & Let’s Be Careful out there!!!

Wednesday, October 20, 2010

TBTF October 21, 2010 - Slip sliding away

Too Big to Flail


October 21, 2010


 “Slip sliding away, slip sliding away, You know the nearer your destination, the more you slip away, Whoah and I know a man, he came from my hometown, He wore his passion for his woman like a thorny crown, He said Dolores, I live in fear, My love for you is so overpowering, I’m afraid that I will disappear” (Paul Simon – 1977)

And so went the $, slip sliding away. Gone were the fears over the Chinese rate hike that strangled the markets yesterday, gone were the fears of the FED not delivering on QE II and so, back on is the risk trade, with Euro$ higher, Gold higher, stocks higher and commodities higher.

A report by the Melody Think Tank surfaced in the early hours of US trading, stating that the FED maybe on the verge of purchasing $500 billion of treasuries over the next 3 to 6 months with room for an extension of the program for an additional 6 to 12 months. This signaled to the market that the FED may still be starting QE II as early as November so a relief rally followed.

The only significant piece of economic data was the FED beige book and this gave no clear signal as to what to expect November 3rd, here’s a summary:

“Reports from the twelve Federal Reserve Districts suggest that, on balance, national economic activity continued to rise, albeit at a modest pace, during the reporting from September to early October.”

  • - Manufacturing activity continued to expand
  • - Housing markets remained weak
  • - Input costs rose further
  • - Prices of final goods were mostly stable as higher input costs were not passed on to consumers
  • - Retailers said consumers are slowly regaining confidence, but remain price-conscious and  were largely limiting purchases to necessities and nondiscretionary items
  •  - Sales of new vehicles were steady or rose. Used car prices rose

 Mortgage/Foreclosure-mess wise, Goldman came out with a report on Bank of America, stating their estimated put-back loss for BAC is $24.9 billion (this comes to an after-tax loss of $11.6 billion). The company already lost $17.1 billion on the foreclosure issue, so they conclude BAC is actually a BUY based on these calculations.

This same Bank of America is suing the FDIC (Federal Deposit Insurance Corporation – the government institution that takes failing banks into receivership) for $1.75 billion. Bank of America is trustee for notes, issued by Taylor Bean’s Ocala Funding LLC unit, sold to Deutsche Bank and BNP Paribas. Taylor Bean ceased a majority of its operations on August 5, 2009 as federal prosecutors said a multi-billion dollar mortgage fraud took place. Bank of America said that the FDIC is legally required to cover these valid claims, and that the agency’s only explanation for denying the claims has been they have “not been proven”.

In suing, BofA, in its role as trustee, is doing exactly what a group of investors is doing to them, trying to reclaim money lost on faulty mortgages. And BofA is giving the same rebuttal as the FDIC: the claims are not valid, we do not have to pay. Isn’t it ironic, don’t you think.

US Markets ended higher, underpinned by a weaker $. The DOW ended up +1.18% S&P500 +1.05% Nasdaq +0.84% EUR$ 1.3960 WTI $82.50 Gold $1346

As commodities rallied, so did commodity related shares, Basic Materials was the biggest gaining sector +2.25% while Consumer Goods rose the least +0.69%

After hours E-Bay beat on EPS ($0.40 vs. $0.37 Exp.) and revenues ($2.249 bln vs. $2.18 bln Exp.) its stock trading up +8.5%

Today we will see the likes of CSFB (€0.97 EPS), Novartis (€1.25 EPS), Gemalto, Akzo (€1.0 EPS), Danone, Pernod Ricard, Publicis, Umicore and Nokia (€0.097 EPS) reporting, while Saint Gobain, Valeo and L’Oreal report after the close. In the US we will look at AT&T ($0.55 EPS on rev $31.247 bln), Caterpillar ($1.09 EPS on rev $10.477 bln), Eli Lilly ($1.15 EPS on rev $5.806 bln), McDonald’s ($1.25 EPS on rev $6.228 bln) and UPS ($0.88 EPS on rev $12.375 bln).

Just like autumn, earnings season is upon us in full force.

Happy Hunting & Let’s Be Careful out there!!!

Tuesday, October 19, 2010

TBTF October 20, 2010 - Another day, Staring out of my window

Too Big To Flail


October 20, 2010


“Another day, Staring out of my window, Thinkin’ bout tomorrow, Wishing things would clear, No need to rush, I ain’t gonna worry, Any moment my sorrow, Is bound to disappear” (Buckshot Lefonque – 1997)

Oh how we equity traders wish things would clear, how do we long back for the days when all price action was simple and straightforward, when good news was good and bad news was bad, when we weren’t caught in this new paradigm. Well, it seems we might just get our wish and isn’t it true that you have to be careful what you wish for?

The worry is back, after weeks of simmering in the main stream media, today they finally got the message where this foreclosure mess will really hurt the banks: on their balance sheets. Bloomberg and CNBC earlier reported that ‘Pimco, Blackrock and the New York Fed are said to seek Bank of America mortgage putbacks’.

Pacific Investment Management Co., BlackRock Inc. and the Federal Reserve Bank of New York are seeking to force Bank of America Corp. to repurchase soured mortgages packaged into $47 billion of bonds by its Countrywide Financial Corp. unit, people familiar with the matter said

As this and various other blogs have been reporting over the past few weeks, faulty appraisals, invalid or incomplete loan documents or bad foreclosure procedures, can lead to so called putbacks, where bondholders will try to sell their ‘underwater’ financial instruments back to the issuing companies, not at market value, but at par. JPM Morgan put the total putback risk at between $80 billion and $145 billion:

We estimate putback risk to be approximately $23-$35bn for agency mortgages, $40-80bn in non-agency and roughly $20-30bn for second liens and HELOCs. However, there are a number of reasons why these estimates are on the high end, including losses already taken and loss reserves established” (Click here for the full report on Scribd or scroll down to the end of this blog)

Bank of America was quick to come out with a statement saying “Not responsible for loans hurt from bad economy, Doesn’t think breached obligation as servicer”, but the fact that none others than Pimco, BlackRock and the FED are trying to get their money back in such a high-profiled way leads me to believe they are in fact responsible in some way.

Meanwhile the FED-members came out with conflicting views on QE II. Evans, Lockhart and Dudley (Chicago, Atlanta & New York) said that QE II is necessary and will need large scale buying of securities, while Fisher (Dalls) and Kocherlakota (Minneapolis) continued to express skepticism about the efficacy of further asset purchases.

Especially Fisher had some harsh remarks on the subject: (from his speech in New York)

- There is abundant liquidity in the economy

- Efficacy of further accommodation “not all that clear”

- Sees ‘moderate’ growth after third quarter

- The reality of fiscal and regulatory policy inhibiting the transmission mechanism of monetary policy is most definitely present and is vexing to monetary policy makers. It is indisputably a significant factor holding back the economic recovery

- In my darkest moments, I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places

And from the ensuing Q&A:

- Hoenig’s dissenting views ‘worth listening to’ (remember, Hoenig is the only Fed President that keeps voting against keeping interest rates at these extremely low levels)

So what did this all mean to the market. Conflicting FED signals, financials under pressure (even after better than expected numbers from State Street, Goldman and Bank of America) because of rising CDS prices on the back of these putback stories and technology in the dog house after Apple and IBM numbers Monday after hours, made the markets pull back over 1%. It seemed the risk trade was definitely off today as the $ advanced and Gold gave back more than 2%

Dow -1.48% S&P -1.59% Nasdaq -1.76% EUR$ 1.373 WTI $79.49 Gold $1332

On the back of the $ strength Basic Materials and Oil&Gas were the main losing sectors -2.5% While Utilities were down the least -0.66%

After hours Yahoo is trading up +1.5% after beating eps but missing on revenue.

Last but not least, it seems the trade/currency war heated up just a little more yesterday with China halting Rare Minerals exports to US and Europe according to the New York Times. China mines 95% of the world’s rare earth elements, like Rubidium, Tantalum, Beryllium and Neodymium, many of which have shot up a few 100% in price this year as they are being used in virtually anything these days, from cars to wind turbines and guided missiles.

A few rare earth shipments to the West had been delayed by customs officials in recent weeks, industry officials said, but the new, broader restrictions on exports appear to have been imposed Monday morning. They said there had been no signal from Beijing of how long rare earth shipments intended for the West would be held at the docks by Chinese customs officials. Nor is it clear if occasional shipments are still being allowed out of the country, or if all shipments have now been suspended.”



Let’s hope this is not a presage to an escalating trade/currency war.



Happy Hunting & Let’s be careful out there !!!




Monday, October 18, 2010

TBTF October 19, 2010 - Eleanor Rigby

Too Big to Flail
October 19, 2010

“Eleanor Rigby picks up the rice in the church where a wedding has been, Lives in a dream, Waits at the window, wearing the face that she keeps in a jar by the door, Who is it for? All the lonely people, Where do they all come from? All the lonely people, Where do they all belong?” (Beatles – 1966)

I chose a Beatles song, as opener, today because Apple was the main news last evening. (Apple records was founded by the Beatles in 1968). The problem with choosing a Beatles song is that you can never get the perfect one. There are too many good songs, not too mention all the better and really, really good songs! I could’ve gone with Sgt. Pepper’s Lonely Hearts Club Band, I should’ve gone with Helter Skelter, I really would have liked to go with Let It Be, but in the end I decided to go with ‘Eleanor Rigby’. I loved hearing this song growing up (no, I am not that old), performed, as a cover, by Bobby Womack.

So, Apple, more anticipated these days than GE, Intel, Goldman and Google combined. They beat estimates by a wide margin, Q4 EPS $4.64, Est. $ 4.10 with revenue $20.34B vs $18.90B, 14.1 IPhones were sold vs an estimate of 11.7 mln (whisper was as high as 13 mln), but there was a dark lining to this golden cloud: there were ‘only’ 4.19 mln IPads sold vs an estimate of 4.81 mln and they gave an almost traditional conservative guidance of $4.90 eps while analysts had expected $5.03. The stock is trading down $16 or 5% after hours. Apple however, always plays down the coming quarter and then comes out and beats expectations by a wide margin.

Big Blue, also down 5% after hours after beating expectations $2.82 vs $2.75. They boosted their full year forecast to $11.40 from $11.25, but this is because of a 15c tax gain, which means they actually come in at the low end of the analyst expectation range.

The Nasdaq future is down 1.35% after hours and the S&P is lower by 0.5% All in all this is the first day that corporate figures actually have more impact than talk about the state of the economy or QE II.

Was there nothing interesting to say today in the land of Macro Economics? Well yes, Europe announced new sanction rules for high-deficit countries, that weren’t really all that new. Instead of the automatic sanctions Germany has called for it was decided that sanctions are to be politicized, much to the dismay of the ECB. No country has been penalized for over-stepping the 3% deficit limit in the 12-year the euro exists. Not even Greece, Portugal, Ireland or Spain, because there was no automatic penalty system and after the current crisis, after months of bickering, it is decided that there will never, effectively, be a penalty.

Trichet today squared off with Weber on the stimulus exit. It looks like Weber, in his quest to become the new ECB President, overstepped his boundaries and is now being reigned in by Jean Claude. This can very well be a signal that the new ECB President won’t be Weber, but a more dovish, moderate one.

How did the US Markets end:

Dow +0.73% S&P500 +0.72% Nasdaq +0.48% EUR$ 1.395 WTI $83.08 Gold $1369
Financials were the best performers after losing more than 3 straight sessions. They were helped by Citi Group’s (+$0.22) better than expected earnings +2.29%, Semi Conductors were the worst performers -0.63%

Just after the close we had another flash crash. They still occur everyday in single stocks, more often than not triggering the curbs that were implemented to prevent a market meltdown. Today’s flash crash happened in the S&P ETF called SPY(der). They traded 9.6% lower erasing $7.9 bln of the value of the ETF on volume of 7.2 mln shares (in 8 seconds!). NYSE Euronext decided to “bust” all the trades as the bad trades ‘resulted from a software release’ This market is becoming a joke with all these computer programs running afoul at will. Perhaps it would be a good idea to stop cancelling trades, so people will become more careful when they ‘upgrade’ their software.

What to expect today: Apple and IBM will probably be a drag on technology stocks in the early going (Nasdaq future down 1.5% after hours). At 11 c.e.t. the al important ZEW in Germany will come out. Housing Starts will be the main US focus at 14.30 c.e.t.

There are no major earnings announcements in Paris or Amsterdam, so the focus will be on Bank of America $0.16 est on $27.154 bln revenue, CocaCola $0.89 on $8.296 bln rev., Goldman $2.28 on $8.089 bln rev and Johnson & Johnson $1.15 on $15.175 bln


Happy Hunting & Let’s Be Careful out there!!!

Sunday, October 17, 2010

TBTF October 18, 2010 - It's all about the money

Too Big to Flail
October 18, 2010

It’s all about the money, its all about the dum dum duh dee dum dum,
I don't think it’s funny, To see us fade away It’s all about the money,
it’s all about the dum dum duh dee dum dum, and I think we got it all wrong anyway (Meja – 1998)

These days it all seems to be about the $ and Í think we got it all wrong anyway’. Every piece of economic data is looked upon ad to how it will impact the FED’s decision on QE II. If it’s QE II positive the $ drops and virtually all other asset classes go up and QE II negative means the $ rises and all other asset classes go down. Friday Art Cashin (head of floor trading NYSE for UBS) said it perfectly on a King World News interview:

the Fed has essentially broken the market: "You used to have markets that were not particularly correlated. The asset classes now seem to be so heavily dominated and in inverse relationship to the dollar, and in direct relationship to the euro... It's frustrating having honed my skills over 50 years to be able to interpret news, and look at a piece of economic data, and try and outwit the rest of the world by figuring out how it would work, and now all you have to do is look and see how the dollar is reacting and know how everything else works. And that huge correlation is not good for people because if everything is correlated in a basket like that, it is very difficult for people to hedge and protect themselves, and therefore when assets move they tend to move altogether.”

For a cash equity trader like me, trading economic news has in essence become very simple: just look at whichever way the $ is going and put on the opposite trade. But there is something worrisome, even scary about all this, the market has discounted such a large sum of QE II already, what will happen when the FED comes in with exactly that number ($500 bln - $ 750 bln) or perhaps a little less. As I mentioned before, the market is calling Bernanke’s bluff, has the FED ‘broken the market’ so much, that even another old stock market saying won’t hold up under these conditions, Buy the rumor, sell the fact. Come November 3rd, 20:15 cet, the market expects something big from the FED and what will their reaction be if it comes in equal or less than expected. My humble guess is that a few puts at these low volatility levels can turn out to be the best investment of the year.

In Europe the French banking sector has been underperforming their European peers all week last week. It is being said that their reluctance to be transparent about their current ratios under Basel III has led many to believe they are in essence undercapitalized and are in more need of fresh capital than other European banks. I came across a simple chart on ZeroHedge that might give an explanation as to why the French banks are more undercapitalized than their Euro peers


France simply has the biggest banking sector in Europe (when measured in Liabilities) and they have not recapitalized enough as of yet.

The major indexes in the US closed mixed on Friday, as the $ strengthened versus the Euro, taking stocks down apart from the tech sector which was massively supported by a 10% gain in Google (they represent 4% of the Nasdaq) after their Q3 blowout numbers the night before. 

Dow -0.29% S&P +0.20% Nasdaq +1.37% EUR$ 1.4010 WTI $81.26 Gold $1368
Technology was the strongest sector in the S&P500 +2.15% while Financials were the weakest yet again -1.61% as Foreclosure-gate keeps getting worse day by day.

It is funny to see how technical analysts are already loading up on an upcoming technical buy signal called “Golden Cross” If the S&P consolidates around 1.175 over the next week, the 50-day moving average (ma) will rise above the 200-day ma, creating the “Golden Cross” signal.

“During the past 20 years, buying the S&P 500 at the time of each Golden Crossand holding until the next death cross would have yielded a 191% profit, according to data that Spinello (Chief Technical Strategist at Jeffries Group) cited in a report today. Eight Golden Crosses happened in the period and the trade would have made money every time.” (BBG October 15, 2010)

Of course technical analysts were vehemently warning about the “Death Cross” (the opposite of the Golden Cross, i.e. a sell signal) over the summer and the anticipation of QE II made that a losing trade. I really don’t think that technical analysis works n a market that is being ‘manipulated’, although a buy signal in this environment will work 100 times out of a 100.

The coming week we will see the following economic data:

United States: Industrial Production, Housing Starts and the Philly FED
Germany: ZEW Survey and IFO Survey
UK: Minutes of the BOE

Happy Hunting & Let’s Be Careful out there!!!