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!!!