Einhorn has shorted S&P and Moodies. Some take-aways:
Rating agencies are a “public bad,” not a public good.
We need a systemic change to reject the idea of centralized official ratings.
The market would adjust if we didn’t have them.
On Buffett: “He still made a very nice investment for himself.”
“The brands are ruined.”
The companies may lose their equity in (much-deserved) lawsuits.
Margins during boom reflected compromised objectivity, competing for market share.
Without official ratings the market would adjust to risks itself. Official ratings create an arbitrage opportunity: real credit risk is often higher than ratings imply (look at BP: downgraded by just “1/2 notch or something like that.” Ratings allow sharpies to front-run downgrades or prepare to take advantage of depressed prices following downgrades.
Agencies add little value. Market spreads are a much better indicator of risk.
The precious metals have ambivalent correlations with stocks these days, so I’m not sure what the above means in the scheme of things, other than the commodities echo bubble slowly deflating. Sometimes the metals are high beta, sometimes negative, and sometimes they seem to have no correlation at all.
The dollar index is showing waning strength on advances, and its rally is very long in the tooth. There could be worse times to take a short position on DX. At least there is a clear and close stop price at the highs.
Here’s the 2-hour bar, then the 5-min:
Here’s what ES looks like to me this evening (5-min chart). There’s an upward divergence in RSI, indicating waning oomph on the sell-offs:
I took a long position in CHF and ES (SPX futures) after the close of regular trading today, and I’ve shorted some Treasuries and yen, but I’m still short oil, palladium (added to my position today), copper, silver, gold also added more today) and copper. I’m agnostic about the intermediate-term direction of the risk/inflation trade and just trading what I see: commodities look broken, but stocks still have rebound potential, as do the euro, franc and pound.
This chop and weak rally action in stocks precludes neither a big new rally nor a fall into the abyss. Big rallies like August-October 2007 or Feb-April 2010 have started slowly with chop like this and kept the bears confident. The timeframe for such a rally is limited, however, and if we don’t take off in another week or so momentum will peter out and we can start to roll over. This is what happened in late spring 1930 after the first hard leg down from the top of that post-crash rally.
Last night’s sell-off in risk brought new lows for the euro and Swiss franc, though no other currencies made lows vs. the USD. Now with today’s rally, EUR and CHF have spiked very hard. This jumpiness and the presence of an upslope in RSI bottoms on the hourly chart (and the fact that June would be month 5 of extreme bearishness), suggest that a relief rally could be forming. I would not be surprised by $1.28 for the euro and $.91 for the franc. As usual, I’m not counting on it (the daily chart would look better with a deeper low), but we do have the formula for a short-covering rally.
Here’s the 4-hour chart of the franc. There is a strong buy signal here, as the new low was made with very weak selling according to RSI, which stayed in its uptrend.
You can see on this daily chart that there is no strong RSI buy signal like there was 15 months ago:
A sharp rally here would likely coincide with rallies in stocks and commodities, but I can see the a scenario in which gold and silver do not participate or even fall as everything else rises.
Also, I’m still long-term bearsh on Japanese yen, and this price does not seem like a bad entry for a short (I put one on at $0.01104 this AM, and also shorted Treasury notes for a short-term trade to balance the odds of a rally in stocks & commodities).
The short-term weakness in futures yesterday morning produced a 20 point drop overnight, and also painted a declining pattern in the 1-hour RSI. I covered an ES short in the low 1070s, since RSI is already into oversold territory with a double-bottom:
It would be nice to see a weak rally now to set us up for another big wave down, but we’ll see what happens.
Also overnight, CHF and EUR made new lows. I bought some CHF near the bottom and sold for a quick trade. GBP held up pretty well in comparison, by the way.