TBTF Sep 30, 2010 - You've abandoned me

Too Big to Flail

September 30, 2010

You’ve abandoned me, Love don’t live here anymore, Just a vacancy, Love don’t live here anymore (Rose Royce – 1978)

I guess yesterday we could have said: “You’ve abandoned me, QE don’t live here anymore”. At today’s 3-month refinancing auction the ECB “Only” lend 104 bln euro. An amount of between 160 – 200 bln euro was expected. This means that excess liquidity to the tune of more than 100 bln was taken out of the market (which basically is all the excess liquidity around) in one single repo-auction. As a result the short end of the interest-curve shot up. 3-month Euribor climbed to 0.886% the highest level since the beginning of the month. The euro also climbed versus the dollar. Is this really the beginning of the phasing out of the QE as some ECB members have been hinting at? It definitely seems that the money markets are getting back to normal with banks lending more to each other and not from the ECB.

The ECB auction did little to show the way or any way to equities. We did not get enough traction early on to break to new highs on the DAX which resulted in a sharp sell off, exacerbated by a news report on Reuters about Spain “Growth slows down, we need to take additional austerity measures” Sadly enough they forgot a rather important word “IF Growth slows down, we need to take additional austerity measures”, but the damage to the equity markets had already been done by then.

So we are still in a holding pattern between 6.000 and 6.350 on the DAX. In the US stocks did not move either. The broad indices were down less than 1/3^rd % by the close, building a further base from which to take out the 1.150 level (at least that’s what I still foresee).

Dow -0.21% S&P -0.26% Nasdaq -0.13% Oil unch EuroUSD 1.3626 Gold 1.310

Sectors were mixed as you can imagine with Oil & Gas being the outperforming one +0.71% and Financials losing -0.76%

After the close there was some interesting and disturbing news:

House Passes Legislation To Somehow Revalue Chinese Yuan

In a bold and stupid move the house of representatives voted 348 – 79 to accept a piece of legislation which “authorizes the Commerce Department to impose duties on imports from countries with undervalued currencies” (I guess Japan doesn’t have to worry J ) Which means that a trade-war with China is now one step closer and boy, that is precisely something that the global economy does not need right now: NO trade wars please, NO further protectionism ! This has gone one step beyond rhetoric and let’s hope that it stays just that, one step, not the beginning of a journey on a road to nowhere…..

For all those conspiracy theorists out there, one truth will be revealed December 1^st. Not who really shot president Kennedy, but what the FED did in terms of providing liquidity to the economy between December 1^st 2007 and July 20^th 2010. Who did they trade with, who got which money, at what terms and how did the repayments go. The Clearing House Association has been trying to stop this information from being made public for quite some time, but lost out in the end. It will be interesting to see why they were so dead set against making this information public and also why they thought it would be the end of the world if the public knew which banks received what liquidity from Mr. Bernanke.

What to expect today: Before we get into our offices this morning there will have been a couple of reports on the state of the Australian economy (the Aussie$ hit a new multi-year high vs the Loonie yesterday) and Housing Starts and Construction Orders for August in Japan will be made public. In Europe PPI, CPI and German Unemployment are the highlights of the economic data during the first hours of trading. Jobless Claims and the Chicago Purchasing Man Index will be the focus in NY.

It’s too early for me to assess what impact this piece of legislation on currency manipulators will have on the markets. If a trade war should result it will obviously be not good, especially since one way of retaliation by China could be NON-Participation in some future Treasury Auctions and that would be really bad.

It’s also the end of the 3^rd quarter today which means some portfolio will have to be rebalanced, some stocks will have to be inflated all for a good report card for funds in this very tough year. I don’t expect the market to begin it’s climb above resistance levels today, but the last few weeks have shown me that the least you expect something the more likely it gets and vice versa.

Happy Hunting & Let’s Be Careful out there !!!

Too Big To Flail - The Beginnings

Too Big to Flail

By

Trader Dutchie

Starting today I will do myself a big service: I will take myself serious for once and with seriousness comes responsibility. The responsibility to come up with a good name for my newsletter.

Verb

to flail (third-person singular simple present flails, present participle flailing, simple past and past participle flailed)

1. To beat using a flail or similar implement.
2. To wave or swing vigorously
3. To thresh.

Somethings are too big ‘to flail’ at, some truths too ugly to uncover, some secrets better left untold. “Too Big to Flail” will remind me everyday that I cannot let that happen. I mean, if Don Quixote  could flail at windmills I can certainly flail at Bernanke, Trichet, all presidents and prime-ministers or that mysterious person called “The Hand”. I am bound by my own integrity to tell the truth about all that is going on around us, no matter the depth of the cover-up (Ok, Ok, I am no Bob Woodward yet, but a man is allowed to dream isn’t he).

So uncover, be astonished but most of all enjoy my daily insights in ‘Too Big to Flail’

"Has it maybe ever occurred to any of our glorious regulators that the reason why nobody has any faith left in the stock market, which has become just a teetering house of cards, supported constantly by the Federal Reserve Bank of New York, is due to precisely the kinds of totally nonsensical ramps in the market just as the one we are witnessing right now? Considering that the economic data could hardly be any worse, how is anyone supposed to trade this complete binary gibberish? We realize there are another ten minutes in trading, which means the S&P will likely make another valiant attempt at 1,150 just to get nothing but more algos to do the buying once limits are triggered. Whether it will succeed is irrelevant, as nobody trades any more, precisely for this reason. And the end result will be merely another flash crash, that will drive absolutely everyone out, up to and including the last few vacuum tubes remaining." courtesy of my friends at ZeroHedge.

I must admit, it was like the old days. Bad numbers followed by a miracle reversal and a rally into the close. "The Hand" seems to be back, republican or democrat, "The Hand" is there to protect us.

What does this mean for the short term model I laid out to you yesterday? It kind of validates my theory that we have to do one last leg up before we fall down. The S&P hit 1.150 even today. Precisely the number the whole world is watching so closely, for should that "magic" number break to the upside we will begin our year end rally. It was prolly too much to ask to close above today after the unsettling consumer confidence numbers, but tomorrow there is no real economic data coming out so it might be an ideal day for the FED to push up those futures in the early going and then hope that the underinvested trading community will follow in full force. Sure there is almost nobody left in the market to do any trading, but that said it means there's also no one at the sell side, so up up and awayyyyy !

On the monetary side there are some expiries of LTRO's (Long Term Repo Operation). A 75 bln euro 12 month, an 18 bln euro 6 month and a 132 bln euro 3 month are all due Oct 1st. The ECB is offering a 7-day repo (done yesterday, 166.4 bln which was 12.4 bln more than last week) and a 3 month repo of which the results come out today. Watch them closely, the ECB might say that the "abnormal liquidity measures" will be rolled back... they will be rolled over into "normal" repos with "abnormal" sizes ;-)

When we come in the all important Tankan report out of Japan will have been published. Expectation is that it will show new weakness all over the economy.

So the late day rally helped the major indices close in the green: DOW + 0.43% S&P +0.49% Nasdaq +0.41% EurUSD 1.358 Oil $76 Gold (that's a new one!) $ 1.309

All sectors closed up today with Consumer Services & Healthcare the best 2 performers + 0.9% and Telecom & Tech closing unchanged.

What to expect today: more of the same as we had yesterday. We will try to go higher, try to go lower and in the meantime we are building a base from which we can actually rise as can be seen in this S&P chart

The Dax on the other hand is still caught in a tightening trading range, with the floor now at 6.000 (which coincidentally is also the 200 day MA)

I recommend the same trade as I did yesterday: trade stocks with news, go long some high-beta stocks if the market feels strong but always put BXX underneath. The stronger the market feels the less protection is needed, but always buy the protection, it’s a small price to pay.

That was it for my first edition of “Too big too Flail” I hope you found it useful, enjoyed it and above all are eager to receive nr 2 which will be in your mailbox tomorrow, same time same place.

Happy Hunting & Let’s be careful out there !!!