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 !!!