TBTF Sep 30, 2010 - You've abandoned me

Too Big to Flail

September 30, 2010

You’ve abandoned me, Love don’t live here anymore, Just a vacancy, Love don’t live here anymore (Rose Royce – 1978)

I guess yesterday we could have said: “You’ve abandoned me, QE don’t live here anymore”. At today’s 3-month refinancing auction the ECB “Only” lend 104 bln euro. An amount of between 160 – 200 bln euro was expected. This means that excess liquidity to the tune of more than 100 bln was taken out of the market (which basically is all the excess liquidity around) in one single repo-auction. As a result the short end of the interest-curve shot up. 3-month Euribor climbed to 0.886% the highest level since the beginning of the month. The euro also climbed versus the dollar. Is this really the beginning of the phasing out of the QE as some ECB members have been hinting at? It definitely seems that the money markets are getting back to normal with banks lending more to each other and not from the ECB.

The ECB auction did little to show the way or any way to equities. We did not get enough traction early on to break to new highs on the DAX which resulted in a sharp sell off, exacerbated by a news report on Reuters about Spain “Growth slows down, we need to take additional austerity measures” Sadly enough they forgot a rather important word “IF Growth slows down, we need to take additional austerity measures”, but the damage to the equity markets had already been done by then.

So we are still in a holding pattern between 6.000 and 6.350 on the DAX. In the US stocks did not move either. The broad indices were down less than 1/3^rd % by the close, building a further base from which to take out the 1.150 level (at least that’s what I still foresee).

Dow -0.21% S&P -0.26% Nasdaq -0.13% Oil unch EuroUSD 1.3626 Gold 1.310

Sectors were mixed as you can imagine with Oil & Gas being the outperforming one +0.71% and Financials losing -0.76%

After the close there was some interesting and disturbing news:

House Passes Legislation To Somehow Revalue Chinese Yuan

In a bold and stupid move the house of representatives voted 348 – 79 to accept a piece of legislation which “authorizes the Commerce Department to impose duties on imports from countries with undervalued currencies” (I guess Japan doesn’t have to worry J ) Which means that a trade-war with China is now one step closer and boy, that is precisely something that the global economy does not need right now: NO trade wars please, NO further protectionism ! This has gone one step beyond rhetoric and let’s hope that it stays just that, one step, not the beginning of a journey on a road to nowhere…..

For all those conspiracy theorists out there, one truth will be revealed December 1^st. Not who really shot president Kennedy, but what the FED did in terms of providing liquidity to the economy between December 1^st 2007 and July 20^th 2010. Who did they trade with, who got which money, at what terms and how did the repayments go. The Clearing House Association has been trying to stop this information from being made public for quite some time, but lost out in the end. It will be interesting to see why they were so dead set against making this information public and also why they thought it would be the end of the world if the public knew which banks received what liquidity from Mr. Bernanke.

What to expect today: Before we get into our offices this morning there will have been a couple of reports on the state of the Australian economy (the Aussie$ hit a new multi-year high vs the Loonie yesterday) and Housing Starts and Construction Orders for August in Japan will be made public. In Europe PPI, CPI and German Unemployment are the highlights of the economic data during the first hours of trading. Jobless Claims and the Chicago Purchasing Man Index will be the focus in NY.

It’s too early for me to assess what impact this piece of legislation on currency manipulators will have on the markets. If a trade war should result it will obviously be not good, especially since one way of retaliation by China could be NON-Participation in some future Treasury Auctions and that would be really bad.

It’s also the end of the 3^rd quarter today which means some portfolio will have to be rebalanced, some stocks will have to be inflated all for a good report card for funds in this very tough year. I don’t expect the market to begin it’s climb above resistance levels today, but the last few weeks have shown me that the least you expect something the more likely it gets and vice versa.

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