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!!!