At These Levels

I know the market is acting great, but this bank weakness relative to the rest of equities needs to be closely monitored. I doubt it that the S&P can run while the banks are acting the way they are.

www.stockcharts.com

And, who says there is no inflation? Gold bullion made fresh 27-year highs today yet again. It has never closed above $700/oz. in history on a monthly basis, so this looks to be very meaningful.

www.bloomberg.com

This is what is beginning to come out of the mainstream media. You still think there are many more Fed cuts coming, with the dollar and that move in the resource markets above?

I don't know when this was written, but I know it was emailed to me by the Deutsche Bank PR department on September 10. Since this is meant to be commentary for the 4th quarter, it is still relevant. There is a peculiar discrepancy that I am seeing, but see the DB comments first:

By some fundamental measurements (e.g. purchasing power parity) we believe the yen is undervalued by roughly 25%. However, the fluctuations in the Japanese yen have become less a function of fundamentals and more a function of risk appetite as investors use the yen as a funding mechanism for the carry trade. As markets move higher and investors feel more confident, the yen has tended to fall as investors borrow yen to buy risky assets. The yen reached a low of 124.08 on June 22nd. However, as markets fall and risk appetite wanes, the carry trade needs to be unwound, forcing investors to sell their riskier assets and then buy yen to close out their borrowed positions. Recently this caused the yen to rally to 113.80 by August 17th. In short, the yen continues to be a potential hedge against a meltdown in risky assets.

In light of the recent movements in credit markets and expectations of slower growth in the U.S., we have downgraded GDP in Japan to 2.2% in 2007 and 2008 (from 2.3% and 2.8%, respectively). As growth is expected to be moderately weaker we expect the BoJ will be less aggressive with rate hikes. Therefore, since rates are expected to remain accommodative (lowest of any developed markets) we do not expect the unwinding of the carry trade to be sustained, especially given the attractive interest rate differentials between the yen and other highyielding currencies like the Australian dollar, New Zealand dollar, and South African rand. As credit markets stabilize and risk appetite returns, we expect the yen will weaken as more carry trades are executed (USD/JPY 12-month forecast 120).

Source: DB

The chart above accompanies this commentary. The chart below is what is happening now.

Source: Bloomberg

The strong correlation between the yen and S&P 500 that was with us for all of 2007 has disappeared. Now I really want to know which one is faking investors out?

The good doctor says that if you print money ad infinitum, the market will go up and the dollar will go down. It feels that way.

Insert: Bloomberg

The picture that's worth at least a thousand words. Still think the Fed did us a favor on Tuesday?

Jeff Cooper (whom I read regularly for his puns and trader's insights) is a man that has been bullish when the crowd has been bearish and has been bearish when the crowd has been bullish. More often than not, such contrarian views on the market have worked for him using techniques that I do not understand (but I don't dismiss either):

In hindsight, it appears the market was talking when the pattern diverged from the 55 day panic cycle into September 11/12. I guess if you put a couple of Harvard alums in a room together they can count to 55.

The Street for the most part was shocked on Tuesday. The bears were, in a word, obliterated. But many bears have been waiting for the Fed to take its best shot and will be sharpening their claws on any genuine loss of momentum.

Perhaps there will never be another bear market and we have reached a permanent plateau. It will be interesting to see how the rest of the world votes on dollar-denominated assets in the long run.

Not quite throwing in the towel, but recognizing that when you throw over $400 billion at the problem (ECB, Fed and the rest in total), the market will go up regardless of the fundamentals. In fact, screw the fundamentals if you have that much paper in front of you. Gold and the dollar agree.

FYI, the VIX still thinks the market has bottomed (see Tuesday's post).

So the good doctor thinks about the rate cut -- 15 min. video (gold bullion confirmend that today).

Jim Rogers agrees with the good doctor. -- 19 min. video

Both said that the Fed would cut, but thought the action should have been the opposite. Commentary that "tells it like it is" is rare these days.

This collapse in the Volatility index usually is an indication that there is extreme shorting of out-of-the money options heading straight into options expiration (Friday). Such VIX declines happen after bottoms. The fundaments are not peachy, but the Fed has turned on the printing press full speed ahead. Gold just traded above the May 2006 high, which makes it a fresh 27 year high today. It looks like the mother of all bullion breakouts.

www.bloomberg.com

I have witnessed these lines before, but that was 10 years ago and it was in Eastern Europe. This is the UK…

More on the issue from Doug Kass.

I have been swamped with work this week, so I’ll try to post something this weekend. I did hear two interesting interviews.

How China is an inflationary force in the global economy by former Morgan Stanley star Andy Xie.

And another Morgan Stanley guy whose views are surprisingly non-conformist. (ignore the 15 second commercial before)

The market acted great yesterday (save for small caps, which should tell you something) and the futures are down a lot this am. Neither rhyme nor reason? Or maybe yesterday was a fakeout?

While the EUR/USD exchange rate is not encouraging, this headline does not tell the whole story. The electronic version of the euro has been much higher (back in 1992 it was above 1.45) than the current level above 138.

www.stockcharts.com

This means a) the dollar can fall further and b) things can get more volatile as a result.

Still, I would bet on a dollar rally in a deepening credit crunch.

Telegraph.co.uk:

Almost 20 per cent of the short-term money market loans issued by European banks are due to mature between September 11 and September 19. Senior bankers fear that they will have to refinance almost all of these debts with funds from their own coffers, putting a further strain on bank balance sheets.

Tens of billions of pounds of these commercial paper loans have already built up in the financial system, because fear-ridden investors no longer want to buy them. Roughly £23bn of these loans expire on September 17 alone.

Fears of this impending call on bank credit lines are the true reason that lending between banks has ground to a halt, according to senior money market sources.

Banks have been stockpiling cash in preparation for this "double rollover" week, which sees quarterly loans expire alongside shorter term debts - exacerbating a problem that lies at the heart of the credit crisis.

Cash is king? Or make that gold bullion? And I mean the bars...

 www.stockcharts.com

Last week I was busy getting back to that American Dream after a long overdue break form it, so there was no much time to post anything here. The earth moved on Friday awhile I was crossing the Atlantic with the poor job numbers. A great neighbor and a friend that was waiting to pick me up form the airport was really amused by the spin that is going on at present:” How come housing is coming apart and they keep saying it does not matter? It clearly does.” “They always do that,” was I all I could think of.

They always do (13 min, his greatness, our Treasury secretary).

www.bloomberg.com

The fed fund futures say three rate cuts by December (see the implied yield chart above). But the point that Marc Faber has made so many times should be made again: if this is a problem that arose from easy credit and too low interest rates, how can lowering interest rates help it?

I top-ticked the market with that post on Wednesday morning, eh?

The market either will go up, or will go down. Pretty simple, eh?

Yes, the indexes look like they are trying to bottom, but the market is probably not out of the woods yet. If you can call the end of the credit market rout (which is a huge economic event, not only a financial one), then maybe this may have been a bottom. But I have serious doubts here. I think there are more shoes to drop in the wild world of structured finance. I feel very similarly about the market to this guy, including his long bias described at the end of the story.

www.stockcharts.com 

Financial stocks should stop sinking into an abyss relative to the rest of the market, and as of now there is no guarantee that this slide is over (see chart above).

From a trading perspective at the August lows the market was more oversold on a short-term basis than at any previous trading bottom since the last bull market started in 2003. So if this still is a bull market, the lows should hold.

www.stockcharts.com

If the August lows do not hold, you will get the strongest confirmation that this is a bear market and much more downside should come in due course. There is also a big head-and-shoulders top that breaks if that happens. I have my doubts that we are looking at the second option here, but until those lows hold, we will not know for sure.