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 !!!