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 22^nd 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!!!

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!!!

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 7^th.

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

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

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 1^st 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!!!

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!!!

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 !!!

Putback Risk

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!!!

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 3^rd, 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!!!

TBTF October 15, 2010 - A little bit of Monica in my life

Too Big To Flail

October 15, 2010

a little bit of Monica in my life, a little bit of Erica by my side, a little bit of Rita is all I need, a little bit of Tina is what I see, a little bit of Sandra in the sun, a little bit of Mary all night long, a little bit of Jessica here I am, a little bit of you makes me your man (Lou Bega – 1999)

It was a little bit of everything in the markets today. A little bit of QE II, as can be witnessed by the EUR$ going through 1.40 and gold ending higher, a little bit of NO QE II, as can be seen in the lower close of the major US markets (there was a rumor going around that China and the US struck a deal whereby China would revalue the Yuan in exchange for the US not implementing QE II) and a little bit of foreclosure-gate, as can be seen in the bank sector ending down significantly and US bank CDS rates shooting up.

A little bit of QE II is still a spillover effect from the release of the FED minutes and Weber still talking tough on rates and lifelines to European countries.

A little bit of no QE II, i.e. the rumor about the Chinese deal could have some truth in it. The last few treasury auctions were marked by Chinese absence. China sees the US trying to devalue their currency by printing large sums of dollars, which for them  means, they are losing on their treasury holdings. If China were to revalue the Yuan substantially, it could have the same effect as another round of quantitative easing, without the printing of money. So it would be in their mutual interest to come to such a deal.  However, China holding the US hostage and vice versa does not bode well for the future of the world economy.

A little bit of foreclosure gate, the lingering problems finally hit the main stream media (I guess more than half of the states shutting down foreclosure proceedings can’t be overlooked). Also some analysts started to give their 10 cents worth. I would urge all readers to go through this presentation which focuses on the possible financial ramifications for Bank of America Merrill Lynch.

So, we have possible QE from the Fed coupled with, so far, better than expected Q3 numbers and yet the market is hesitant to go much higher. I guess US markets, in particular, have been going higher since the middle of September, so a pullback is healthy. Volumes are picking up, be it from severely depressed levels, which means there are people entering the market again. Some people might argue that the market valued in Gold has been declining since the gold price is skyrocketing, but since we are not on the gold standard anymore I cannot agree. Of course you can look at market advances/declines priced in Gold, but we still have a dollar, it hasn’t failed yet, so it is more important and interesting to look at the markets valued in dollars. Once gold becomes the monetary standard again we can look at prices valued in gold, but that moment hasn’t been reached just yet.

Talking about gold, it has been on a tear lately as a result of all this QE II talk, but is it really such a straightforward interaction between gold and the US$. My first reaction is NO. There is no more gold standard, gold is not an inflation hedge and at the end of the day, gold is a commodity, not a means of payment. I haven’t seen gold being accepted in a bakery just yet. So then, why is gold being bid up as the dollar is falling? Since there is a limited supply of gold it has all the earmarks of a ‘corner able commodity’. Hedge funds jumped in last summer and they have enough capital to sustain this rally. Meanwhile gold fever has been fed by the media, like CNBC, it has been set out to be as the currency-of-last-resort. Again, for now, America still is the lender of last resort and so is the $. But only the bravest of men dare to swim against the flow of melted gold, so as long as old keeps going up, you have to be log, or at least not short. There will come a day when shorting gold will be the moneymaking trade of the year, but it doesn’t seem to be that day just yet.

Dow -0.01% S&P500 -0.36% Nasdaq -0.24% EUR$ 1.4050 WTI $83 and Gold $ 1.381

Best performing sector in the S&P was Telecommunications +0.31%, worst performers were financials as fear of more major write downs as a consequence of this foreclosure scandal, rocked the market -1.72%

After hours Google exceeded even the most optimistic estimates, earning $7.64 p/s while estimates were at $6.68. Rev came in $5.48 bln vs estimates of $5.26 bln. A clear blowout number, which we haven’t seen from Google in a long long time. After hours Google traded at $590.50, up $50 or 10% from the close. This should underpin the markets a bit when we open this morning. I have to note that it is expiration today, I have no idea where the important strikes are, but I do know that with these anemic volumes any level can be reached if it benefits the expiration.

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

TBTF October 14, 2010 - Wake up Maggie I think I got something to say to you

Too Big to Flail

October 14, 2010

“Wake up Maggie I think I got something to say to you, It’s late September and I really should be back at school, I know I keep you amused but I feel I’m being used, Oh Maggie I couldn’t have tried any more, You lured me away from home just to save you from being alone, You stole my heart and that’s what really hurt” (Rod Stewart – 1971)

Yesterday October 13, 2010 was the birthday of my childhood love, Margaret Thatcher, who turned 85. I must admit I had forgotten het date of birth and this ode to her should have been in yesterdays morning call, but I could not let it slip by without mentioning. Cheers Maggie!

The day after the important release of the FED-minutes the markets behaved just the way uncle Ben wants them to behave: $ down, bonds, stocks, Gold and every other risky asset up. His communications tactic has been working flawlessly for the past several weeks, such that the market has done his bidding once again without the FED having to pull it’s checkbook. We have come to a point however where Ben can’t backtrack on the expectations he has created and he probably won’t, so starting early November the FED will be buying and buying and buying, so step aside an let the markets go up and up and up. It has the makings of the year-end-rally of a lifetime. With Hedge Funds buying because they are seeking performance in the last 2 months of the year, Bernanke buying because, well because he said he will, shorts covering in panic, what can go wrong?

Well, there are some minor hiccups, but will they be big enough to derail the one thing everyone seems to want these days?

• The foreclosure scandal could put a severe damper on the economy, but only if it becomes a problem for the big financial institutions (major write-offs, lawsuits and capital increases) will it have an impact on the markets (and before that happens we will be well into 2011).
• Foreign participation in treasury auctions has been steadily declining, with yesterdays 10 year auction setting another example. The 2.475% yield came in as the lowest in 2010, but Bid-to-Cover (2.99) and Indirect Participation (41.5% vs 54.7% last time) have started to decline. But for now it won’t be a problem since uncle Ben will simply buy all the treasuries Geithner can put out there.
• It seems the Senate, in all its wisdom, could really be backing the ‘China’ legislation put in front of it by Congress earlier this month. It was widely believed that the Senate would postpone reviewing the bill until after the mid-term elections, but now Senate Finance Chair Mr. Baucus has said that the Senate could very well follow the House in passing the China currency legislation Baucus (D-Mont) said that there is a "very real possibility" that the currency bill could pass, and said government officials that he met here -- who included Vice-Premier Wang Qishan -- took the message on board
• US Domestic Equity Mutual Funds saw redemptions of $5.6 billion in the last reporting week (Oct 6, 2010), which brings the total redemption for the year to $80 billion (Investment Company Institute).

All these small hiccups are probably not big enough to derail the coming QE II induced rally in equities, but perhaps combined they can slow it down…..Nah, we can always print more money, right?

Markets were up across the board. Asia had chalked up wins, which were followed by steep gains in the European indexes (Most notably the DAX, which finally breached 6.350 to end the day at new highs for the year). In the US the DOW +0.69% S&P500 +0.71% Nasdaq +0.96% all ended higher, but off of their highs after a late round of profit taking hit the markets. EUR$ 1.395 WTI $83 and Gold $1.372 also reacted massively to the FED minutes.

What can we expect from today: Assuming the Far East has some positive spillover from the gains in the US we should see continuing strength in Europe. Volumes picked up significantly during yesterdays rally which is a sign either shorts are covering (and since short interest peaked for the year at the end of September) which will be going on for some time to come and/or long positions are being accumulated by alpha-seekers for the remainder of the year. Earnings season is upon us, so there will be plenty of news-driven trading these coming weeks. And last but not least: don’t short to early into the rally J

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

TBTF October 13, 2010 - 7 Seconds away

Too Big to Flail

October 13, 2010

“7 Seconds away Just as long as I stay I’ll be waiting It’s not a second 7 seconds away Just as long as I stay I’ll be waiting” (Neneh Cherry & Youssou N’Dour – 1994)

Today was not about seconds but ‘minutes’, FED minutes of the month September to be exact. From the wording it seems as if QE II is near. Jan Hatzius (Goldman Sachs Chief US economist had the following to say:

"BOTTOM LINE: Minutes of Sep 21 meeting confirm that FOMC was dissatisfied with the performance of the US economy even though most did not expect either renewed recession or deflation. The committee considered a range of options, focusing on Treasury purchases but including the possibility of adopting target paths for either prices or nominal GDP. Most participants appear to have thought that the status quo would justify renewed easing relatively soon, but a few thought more weakening would be required."

Granted, Goldman probably stands to gain a lot from a new QE-round, but no one can argue with the meaning of the following paragraph from the minutes:

“Many participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate or if inflation continued to come in below levels consistent with the FOMC’s dual mandate, it would be appropriate to provide additional monetary policy accommodation”

“Meeting participants discussed several possible approaches to providing additional accommodation but focused primarily on further purchases of longer-term treasury securities and on possible steps to affect inflation expectations”

This was written before the October jobs report which came in worse than expected, so it seems QE II is a foregone conclusion and it will come in the form of renewed Treasury buying in the 7-10 year range.

Some officials said “the economic benefits of further asset purchases could be small in current circumstances”, so it seems there is some hesitancy with regard to the wisdom of printing more money, but ‘many’ will undoubtedly overrule ‘some’. Mr. Bernanke is giving a speech on monetary tools in Boston, Oct 15, he might use the speech as a platform to further massage the markets to expect more QE sooner rather than later.

Pro Quantitative Easing		Against Quantitative Easing
Mr. Bernanke		Mr. Plosser (Philadelphia)
Mr. Dudley (NY)		Mr. Hoenig (Kansas City)
Mr. Rosengren (Boston)
Mr. Evans (Chicago)

His new found thorough communications towards the markets seem to work as the impact of the minutes were felt after their release. The $ which had been gaining ground against the EUR in the early hours of trading (after a report in the FT suggesting Ireland maybe inching closer to impair bank senior debtholders) reversed course and duly dropped leading stocks into positive territory.

The $ will most likely be under more pressure the coming weeks since the discrepancy in European and American monetary policy seems to be growing day by day. Today Herr Weber of the ECB came out with the following (FED opposing) statements:

• ECB's Weber says rates could rise before the phasing out of support measures complete
• ECB's Weber says bond buying programme should be phased out permanently
• ECB's Weber says unwise to postpone relevant considerations on exit measures and rates end of crisis
• ECB's Weber says risks from exiting too late from loose policy greater than exiting too early

Especially the last statement seems to be directed to Mr.Bernanke, highlighting the risks of sustained loose monetary policy over the benefits of such a program. The question of course is if the ECB isn’t over-estimating the power of the European economy, but they at least seem to have an understanding of the dangers of printing unlimited supplies of money.

In anticipation of a further ‘devaluation’ of the $, Goldman today raised their 12-month price target for Gold to $1.650 (from $1.365) changing their recommendation to Buy the precious metal. “We believe that a return to quantitative easing will act as a strong catalyst to carry gold prices to even higher levels”. Silver price target was raised to $27.60. They are also bullish on Corn, Copper, Platinum and WTI..

As mentioned before, the equity markets closed higher today after being rattled earlier on by China raising their reserve ratio requirement for 4 State Banks (for a period of only 2 months).

Dow +0.09% S&P +0.38% Nasdaq +0.65%EUR$ 1.387 WTI $81.7 Gold $1.350

In the S&P500 Financials performed best +1.2% while Utilities closed in the red by 0.32%

After the bell Intel kicked off the earnings season by reporting Q3 EPS USD 0.52 vs Exp USD 0.50 They also upped the midpoint for Q4 rev to $11.4 bln vs $11.3 bln. They see a strong PC market in 2011 and don’t expect a double dip in the economy.

Before the open today JPM will give a first glance as to how the all-mighty financials performed in the last quarter (EPS est $0.87). In Europe we will hear from ASML.

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