We reached a point this week where almost all bears turned short-term bullish at the very least, if they didn’t swear off shorting altogether. Hordes of hobby bears were crushed over the last three weeks, and even hard core bears from before 2008 seemed to adjust their wave 2 targets upward as high as SPX 1200.
I took that as a sign of short-term weakness at the very least, so in addition to my regular purchase of December 2011 puts, I added a few March QQQQ puts and October 09 calls on the 10 year note. This AM I also took another stab at picking a top in copper at 2.60, with a 2.62 stop.
The reaction to GDP so far has been encouraging, with futures traders not buying the BS that the economy only shank at a 1% pace, since the surge in government spending gave it a phony boost. Since there is no P in government, why is government in GDP? GDP can go as high as the Feds want. All they have to do is spend and have the central bank monetize whatever bonds the market won’t absorb. This chicanery, plus inventory replacement, could bring a slightly positive number in Q3, ironically just as TTM S&P 500 earnings go negative for the first time since they started keeping records in 1936.
I see no reason to change my guess that the end of wave 2 is nigh. I have been thinking since spring that 1050 or September, whichever came first, would be the signal that the top was in. It could be in already, but don’t expect things to drop off a cliff right away. A wave of this magnitude rolls over slowly, with plenty of smaller breaks and rallies before the trend has solidly reversed.
Keep an eye on the credit markets. When fear comes back in earnest, corporate bond spreads will break their relentless slide downward, and short to intermediate term Treasuries, if not the 10-year and 30-year, will signal a renewed flight to safety.
Christina Romer is on B-Berg right now with that awful brunette, Dierdre Bolton. She’s saying how lucky we all are that they gave us the stimulus bill, since GDP would have been so much worse without it. How is this a positive talking point? The govt spent money it didn’t have so that a meaningless number looked better. Does this improve the productive capacity and well-being of the nation in any way? Clearly, it does the opposite, since everything the govt spends is taken from someone who actually does produce, through taxation, competing in the credit market, or eroding the value of savings through creating new money.
Jeez, extreme vol today in stocks, relative to recent action. VIX doesn’t reflect it though.
The dollar just crapped out, especially vs. the pound (probably the worst of the major currencies). This should be its final leg down. We’re getting close now to a top in risk appetite. A solid bottom in the dollar will be one more nail in the coffin. Treasury bonds may have already bottomed.
Mish talked about the E-wave counts on the dollar today and got bullish, too. He seems to agree with Daneric’s counts.
http://3.bp.blogspot.com/_TwUS3GyHKsQ/SmziyOYIWyI/AAAAAAAABME/px6Jyi7j-0I/s1600-h/dollar.png
Usually the stock market rallies hard with the dollar tanking this hard. Right now, it seems struggling to hold on to a slight gain. Most people, or should I say every analysts I have read recently, agree that S&P 500 @ 1000 is a sure thing.
Hmm… the picture looks astonishingly auspicious, indeed.
BTW Mike, do you notice the yen’s behavior recently? It used to be the ultimate safehaven currency — one that rallies the most when risk-aversion is rampant, with the dollar being the second. These days it seems to behave differently… sometimes it rallies (although weaker in extent) together with risk/commodity currencies — and tanks together w/ them. Perhaps a change in roles? USD as the new carry trade currency?
I hadn’t checked Mish yet today. Nice to see that he is one the same page.
Also, bonds have had a great 24 hours. Yields have of course lead the way down for many a stock sell-off. I sold my 10-year note calls for a fast 50%, but will buy back on weakness.
Actually, I hadn’t watched the Yen for a while. I’ll take a look, but yeah, the dollar is a carry trade currency. “Borrow cheap, buy anything, make money, pay back debt with cheaper dollars” was the formula for many a fund during the bubble.
Ha! I just heard Bloomberg’s Matt Miller say he was talking to Karl D, and he referenced Market-ticker.denninger.net, “which is pretty cool.”
Here’s to Miller: He and his counterpart Bernie (Wong?) in Hong Kong are the best financial journalists on TV, hands down. And to think I had him pegged him as a cheerleader before the crash because he didn’t understand just how bad things were, and well, because I was biased against guys with tongue rings.
I’m biased against guys with tongue rings–and I’m not the uber-bear you are…
I do believe that the dollar is leading the show right now, and everything else is reacting…
From Casy Research: FASB may reverse it’s rulinf on Mark to Market … guess what is going to do to the credit markets:
“There is a battle being fought behind the scenes, a fight that could set the stage for a very, very big correction in stocks of banks and other financial services companies. During the first phase of economic crisis, the government leaned on the Financial Accounting Standards Board, or FASB as it is usually referred to, to suspend its mark-to-market valuation standards.
Instead of having to value the assets on their books based on something at least modestly resembling reality – reality being defined as what people might actually be willing to pay you for it – once mark-to-market was done away with, financial institutions were able to assign values to assets by the time-honored technique of licking a finger and poking it into the wind. If the wind, blowing from the mouths of management, determined that a certain value should be assessed, assessed it was.
The consequence of this change was that, presto, much of the capital challenges the financial institutions were struggling with just disappeared, and banks could trot out their freshly smudged balance sheets with a satisfied smirk.
That smirk could soon be slapped away if new proposals by the FASB to return to mark-to-market, and even extend it, are again accepted as required practice. If this were to occur, all the unloved and unwanted toxic garbage now masquerading as good capital would overnight go “poof,” leaving ashes in its place.
Quoting our own Olivier Garret, “If this happens, all of a sudden all the financial stocks that did so well in Q1 and Q2 will collapse again, and this time I do not think the Fed will be able to prevent it.”
Why would the FASB reverse itself on this issue? Simply, if accountants are to have any credibility at all – or serve any real purpose – they need to be true to their profession. Otherwise, why would anyone believe in the work they do? Continuing to look the other way while corporations cook the books would be akin to a society of professional home builders adopting a policy to leave out certain crucial support beams. After awhile, the ensuing carnage would discredit the profession entirely.
The FASB has a very powerful incentive to do an about-face on the mark-to-market rule change – a change that was entirely due to heavy political pressure at the time. And that incentive is the survival of their profession.
While this battle over accounting standards has been hugely underreported, Bloomberg did a good piece on it recently, which you can read by clicking here. Progress on the return of mark-to-market is something we’ll be keeping a close eye on, and suggest you do too. “”
Sentiment drives Markets 80% of the time … the rest is a combination of earnings (beat the numbers), econimic signals (GDP, Employment etc.) and Fundamentals … Sentiment is driven from these … right now, everything is being “cooked” to make things look better … There is no way we can spend our way out of this recession. We are creating Money out of thin air (the Feb buys treasuries from their accounts in which they just typed in a Trillion dollars worth of digits using key strokes) and the taxpayers get the bill for this Money that have been monitzed. This quantative easing will lead to massive inflationary pressures driving up the price of goods, services and commodities. So, we will be getting hit with an increased cost of living of 15% and 10% more taxes at the minimum. Are we all going to get a 25% raise? No, ofcourse not. This extra 25% in the cost of living will ahve to be balanced by less spending and as a result, the economy will slow down even more. The Govt. and so callled Financial pundits have just doomed us into a Financial Black Hole. Thus, we have made the problem worse, and delayed an eventual financial collapse. Sorry but not matter what, this is inevitable.
I have no faith left in this system run buy a bunch of egomaniacs and cheats … The American public has nothing but themsleves to be blamed … so, the hype is going to continue for sure for some more time … but we are fast appraoching the 6 month mark of this rally … not sure if parallels to the first beark market rally in the crash of 1929 will work or not but there is a possibility … imo, when there is no more SHORT Interest left out there (or very little) … the markets can tank .. and guess what … then people will start shorting in earnest because that is how it works in the opposite direction .. the same way people piled on hte LONG side in March … the same way there will be a massive buying of puts and shorting stocks … BUT WE HAVE NOT REACHED THERE YET …. Sentiment has to be absoultely POSITIVE …
Last point this AM … the American Financial System is a PONZI scheme …. I am sick of it … I exited my 401K stocks and moved to Cash more than two years ago against eerhyone’s advice (ha! they lost 50% inclusing the company match!!) … when my 401K advisor used to talk to the entire local office he would advise that this is a LONG TERM BUY and HOLD …. now he does not come to the office … it’s a vicious cycle … they trap you by giving you money in earnings, you leverage this cash to take out loans and then you are a slave to these loans until you pay them off but that never happens and you are then a SLAVE to a job for the rest of your life …. in the meantime you are consuming the very same goods and services that are produced by the minions like you somewhere else … then they take your money in your 401K for further leverage, M&A, manipulation and get their EPS to go up while increasing Margins and what do you get? Most companies are not giving out stock options … raises this year are frozen … Arrghh! So, even the the 401K is nothing but a vehicle designed to pull you in with NO guarantee of a return unless you deposit into a Treasury baked Money Market account with 2 or 3% ROI!! Does anyone out there get it? … That’s my rant for the day …
there are some interesting counter-arguments in the newsletter below to many of the key deflation talking points – perhaps could open the door for some interesting discussion.
http://www.amanita.at/docs/open/newsletter-e.pdf
Well, so long as credit continues to contract, and wages, employment and real estate continue to fall, I see no reason to alter my stance that we are in deflation.
After this global stock and commodity bounce collapses, people will have a much better understanding of the deflationary forces at work. But after some years of this, when almost everyone has accepted deflation as reality and expects more of the same, it will end. At the moment, very few still understand that deflation is more than a fleeting state due to the onset of the crash.
We are shifting from deflation to an inflationary environment but may take some time … another 9 months or so from today …. I would not bet against the views of the following two people:
1. Mark Faber (yes, I know he is biased towards to inflation but you need to see this video):
http://moneynews.newsmax.com/streettalk/federal_reserve/2009/07/15/235992.html
2. Kenneth Volpert: Portfolio Manager of a $22 Billion TIPS Fund for the Vanguard Total Bond Market Index Fund:
http://www.thestreet.com/_yahoo/video/10532995/beat-inflation-with-corporate-bonds.html?cm_ven=YAHOOV&cm_cat=FREE&cm_ite=NA&s=1#28301734001
America’s Financial System is a Ponzi scheme and I am in awe over the fact that people do not get it … there is a limit to how long people will tolerate this .. no jobs, Gas at $5, Milk at $5 … it’s going to happen … you can just be blindingly positive (as the majority of politicaly correct psyche dictates) and expect things to be OK but you will have to face the facts at some point … There is simply no way this is a sustainable environment ….
Hi Mike,
Are you approaching this upcoming wave down similarly to the first, or are you treating it differently or acting with more caution?
As you look at long-term puts in the Financials, Nasdaq, S&P 500, etc. do you think counter-party risk one or two years out from now will be significantly greater than it was during the first wave down? If so, are you factoring that into your current plans, perhaps regarding how long you will be willing to hang onto your long-term puts or how much you are investing in them this time around?
Thanks
Hi Bjorn, I replied to this on a later thread. Don’t know if you saw it:
“I will just play it by ear. If all goes according to plan, I’ll sell into major declines a bit at a time, and not try to hang onto everything until the end. Also, as things get rough, I may phase out of options and use futures more.
I do derive some measure of comfort from the circuit breakers at the exchanges and the OCC itself. Also, if we have the kind of grinding decline that we had after April 1930, there won’t be waterfall conditions again, though of course that is what wave 3 of 3 is supposed to be. EWI is calling for a new high in the VIX, after all.