A great read in Business Week entitled the Fed's Mortgage Muddle. It hits on many points that I have been writing and talking about. Thanks Goes to Peter.
Here's a feedback loop that nobody expected: It looks like investors' expectations for an economic recovery could end up delaying that very scenario.
Umm no. At the risk of sounding self promoting I have talked and written about that numerous times. My line is that deflation will lead to inflation. Not inflation fears will lead to inflation or even inflation will lead to inflation. The government has not printed enough money to start hyperinflation. They have shown they are committed to doing so. In the coming years if a major country defaults (i.e. Great Britain or Switzerland) the Fed will print tons of money to try of offset the near term deflationary forces. Or when (I would say when not if) Citigroup is finally nationalized the government will print tons of money to swallow the balance sheet. Those deflationary forces will cause (I should say the Fed will choose incorrectly) the Fed to massively lead to inflationary actions. When the market is crumbling during this time period. That is when you go all in because massive inflation will be close.
Fear of inflation and concerns over the long-term impact of ballooning government debt have been driving up yields on 10-year U.S. Treasury notes, which reached 3.91% on June 8 before easing back to 3.84% the next day.
That is why inflation fears can't lead to inflation. At least not now. It will prevent the inflation from occurring as it will cause the velocity of money to slow further as the economy slows due to higher raw material costs and higher borrowing costs creating more deflation eventually leading to the inflation. Get all that?
The whole article is a good read in understanding how inflation fears will stop inflation though it doesn't word it in this way. Talks about 30 year mortgage rates, refinancing activity, and foreclosure problems.
Wednesday, June 10, 2009
Tuesday, June 9, 2009
Looking Towards the Treasury Auctions
Seemed like a pretty bullish day today and an invisible buyer wasn't even needed. The big 10 year treasury auction is tomorrow. I can't imagine how the Fed doesn't already have it sold. Alot of worry about it and so it is a important auction. I am sure the Fed has worked the phones and will have it oversubscribed which would make it a bullish event for the equity markets. My thought was that we would sell the rumor and buy the news. So be down yesterday and today and up tomorrow. The invisible buyer yesterday messed that up. Like I said pretty bullish day today. Who knows but I would have to say Friday's slam down which made me think a solid interim top was in has been at this point neutralized. We could easily go down but we may go up. What may be a bigger issue is the 30 year treasury auction on Thursday.
IMF to Europe - Get Your House in Order
Why is it that the IMF has been the only logical voice the last couple of months?
From the Telegraph.
The International Monetary Fund has called on eurozone governments to take urgent steps to clean up the banking system as losses mount, and advised the European Central Bank to prepare "all unconventional options" in case the crisis deepens.
"To restore confidence, you need total disclosure of possible losses," said Dominique Strauss-Kahn, the IMF's managing director. "Not only losses which are linked to the original sub-prime crisis, but also the losses linked to the slowdown in the economy, and impaired assets. There are lots of things that still have to be disclosed," he said, adding that credit mechanism remained jammed.
That should be obvious but every goverrnment in the world seems to be trying to limit disclosure not maximize it.
This does not surprise me at all though the first I have heard about the German elections.
There are widespread concerns that Germany in particular is hiding bank problems until after the September elections, using its "bad bank" scheme to keep "zombie institutions" alive.
From the Telegraph.
The International Monetary Fund has called on eurozone governments to take urgent steps to clean up the banking system as losses mount, and advised the European Central Bank to prepare "all unconventional options" in case the crisis deepens.
"To restore confidence, you need total disclosure of possible losses," said Dominique Strauss-Kahn, the IMF's managing director. "Not only losses which are linked to the original sub-prime crisis, but also the losses linked to the slowdown in the economy, and impaired assets. There are lots of things that still have to be disclosed," he said, adding that credit mechanism remained jammed.
That should be obvious but every goverrnment in the world seems to be trying to limit disclosure not maximize it.
This does not surprise me at all though the first I have heard about the German elections.
There are widespread concerns that Germany in particular is hiding bank problems until after the September elections, using its "bad bank" scheme to keep "zombie institutions" alive.
Who is Buying Driving the Market Up at the End of the Day?
Let me first say, I don't know. So if your looking for a concrete answer you can stop reading now. This does not happen every day but has happened alot from the beginning of April and classically occurred yesterday.
I am addressing this issue because I have received alot of questions concerning it.
Their are two potential candidates who are pounding the futures higher, some government entity or a large (or group) institutional fund(s). (there may be other possibilities but those in my mind are the most likely)
In general I work very hard not to be a conspiracy theorist and argue that the government is trying to manipulate something. Most people who fall in this camp are arguing this as an excuse because there on the wrong side of the trade. The market is going up and they are caught short. So they find an escape goat. Even if they are right, it is dangerous psychologically because it prevents you from assessing the situation and considering that you may be wrong. An investor can become mentally locked in and just blame an invisible hand missing an actual change.
With that said, I also do not cast a blind eye that the government can't be involved like many talking heads on CNBC want to do. It would make complete logical sense if they were. Think about it. They are trying to manipulate (and failing) the biggest markets in the world. They are open and honest about this. What markets? The treasury and mortgage market. They are buying to try to keep rates down. This market is multiples the size of the equity market. The government has always been involved in manipulating the market in some form or fashion so why could they not be in the futures market? Investors who immediately dismiss such a possibility are equally as blind as those who automatically assume it has to be the government. Remember the Fed and the Obama administration has gone on a full blitz to try to convince everyone that everything is okay. They are trying to play a game of perception change and so what better way to do that then for the equity market, which is flashed on every local news channel at the end of the day, to go up.
If it is the government, the game will end. Major market manipulations always end in tears but they can last a long time.
If it was the government, what vehicle are they using? My guess is it wouldn't be the Fed but some entity underneath the Treasury. My guess is it would be more computer based so very few people would have to know about it. My guess is it would be programmed to kick into buy under certain circumstances. Alot of speculation centers on some TARP money that may have been diverted away to buy S&P 500 futures.
What if it is not the government? That is possible and I would say almost equally likely. Big funds, think big pension funds, macro funds, $20 billion plus hedge funds, often times get exposure through S&P 500 futures and then will work through buying individual stocks or indexes later. So if one or several very large funds decided they are now bullish on equities and want to change to overweight from underweight over several months this would involve billions upon billions of dollars. They would try to allocate additional money every day and would hit the futures market to make sure they got this exposure. As volume has disappeared they are becoming a bigger and bigger part of the market forcing these late surge spikes.
In my mind, one of the biggest arguments against big funds is the trading appears sloppy. This guys should have in place the ability to mask big purchases and get good prices. These spikes at the end of some days appear sloppy with more the purpose to move up the markets versus buying at a good price.
Regardless, it doesn't matter from my perspective. If it is truly manipulation, I believe it will end in tears so I try not to worry about that scenario. I try to worry about managing my risk and not lose to much money since I have a very short bias. At the same time I try to determine if I am wrong. Is there really something underlying the the system that supports more and more buying.
Be aware of the possibilities, understand what is going on but focus long term on the fundamentals. At the end, even the strongest government in the world can't override that.
I am addressing this issue because I have received alot of questions concerning it.
Their are two potential candidates who are pounding the futures higher, some government entity or a large (or group) institutional fund(s). (there may be other possibilities but those in my mind are the most likely)
In general I work very hard not to be a conspiracy theorist and argue that the government is trying to manipulate something. Most people who fall in this camp are arguing this as an excuse because there on the wrong side of the trade. The market is going up and they are caught short. So they find an escape goat. Even if they are right, it is dangerous psychologically because it prevents you from assessing the situation and considering that you may be wrong. An investor can become mentally locked in and just blame an invisible hand missing an actual change.
With that said, I also do not cast a blind eye that the government can't be involved like many talking heads on CNBC want to do. It would make complete logical sense if they were. Think about it. They are trying to manipulate (and failing) the biggest markets in the world. They are open and honest about this. What markets? The treasury and mortgage market. They are buying to try to keep rates down. This market is multiples the size of the equity market. The government has always been involved in manipulating the market in some form or fashion so why could they not be in the futures market? Investors who immediately dismiss such a possibility are equally as blind as those who automatically assume it has to be the government. Remember the Fed and the Obama administration has gone on a full blitz to try to convince everyone that everything is okay. They are trying to play a game of perception change and so what better way to do that then for the equity market, which is flashed on every local news channel at the end of the day, to go up.
If it is the government, the game will end. Major market manipulations always end in tears but they can last a long time.
If it was the government, what vehicle are they using? My guess is it wouldn't be the Fed but some entity underneath the Treasury. My guess is it would be more computer based so very few people would have to know about it. My guess is it would be programmed to kick into buy under certain circumstances. Alot of speculation centers on some TARP money that may have been diverted away to buy S&P 500 futures.
What if it is not the government? That is possible and I would say almost equally likely. Big funds, think big pension funds, macro funds, $20 billion plus hedge funds, often times get exposure through S&P 500 futures and then will work through buying individual stocks or indexes later. So if one or several very large funds decided they are now bullish on equities and want to change to overweight from underweight over several months this would involve billions upon billions of dollars. They would try to allocate additional money every day and would hit the futures market to make sure they got this exposure. As volume has disappeared they are becoming a bigger and bigger part of the market forcing these late surge spikes.
In my mind, one of the biggest arguments against big funds is the trading appears sloppy. This guys should have in place the ability to mask big purchases and get good prices. These spikes at the end of some days appear sloppy with more the purpose to move up the markets versus buying at a good price.
Regardless, it doesn't matter from my perspective. If it is truly manipulation, I believe it will end in tears so I try not to worry about that scenario. I try to worry about managing my risk and not lose to much money since I have a very short bias. At the same time I try to determine if I am wrong. Is there really something underlying the the system that supports more and more buying.
Be aware of the possibilities, understand what is going on but focus long term on the fundamentals. At the end, even the strongest government in the world can't override that.
Monday, June 8, 2009
Future Buyers Only
So another day and it is getting so easy to recognize when the big buyer steps into the future market and what the end result will be. The cash market had its slowest day yet. Only 1,077,228,000 shares traded on the NYSE today. Normal volume since like January has been about 1.7 billion and normal for the month of May may have been around 1.4 billion ish. There is no trading interest in the market. As more and more market participants realize they don't want to buy because stocks have run so much without much economic improvement but they also don't want to sell because someone somewhere is stepping in through the futures market to drive the market higher, the actual market is becoming a ghost town. I know that applies to me. I have barely traded in the fund at all for weeks. I refuse to short against this invisible buyer but I don't want to buy anything either because it seems all smoke and mirrors and valuations have surged. Friday to me still looks like a short term top and the market action acted like it today also until the big futures buyer stepped in at 2:20. There is little or no buying interest. There hasn't been for weeks. This game can't last forever. Until it comes to end though, I will continue to play spectator.
There was one difference today compared to the normal rocket ship in the futures. Higher beta stuff like the Russell 2000 ETF IWM did not participate. This may or may not be significant. Shows fewer traders were willing to jump in other areas of the market when the S&P 500 futures were getting pushed higher.
There was one difference today compared to the normal rocket ship in the futures. Higher beta stuff like the Russell 2000 ETF IWM did not participate. This may or may not be significant. Shows fewer traders were willing to jump in other areas of the market when the S&P 500 futures were getting pushed higher.
Weekend Recap
Wow - what a weekend. I literally slept 1.5 hrs Friday night (actually probably less, I laid down for 1.5 hours), 4 hours Saturday night and about 5 hours last night. Running on fumes to say the least. What was I doing? Having a blast!! Swimming, dancing, socializing, eating, going out in Austin Friday and Saturday night, latenight at my buddy's 8000 square foot house on Lake Austin they are renting, debating the markets non stop, and everything in between. At its peek, I think the reunion had about 70 people or so which was the main event the lobster fest Saturday night. One of the best weekends of the year.
The 2:20 Buyer
Huge buyer just hit the futures market. Volume is going beserk. This is turning almost predictable.
Friday, June 5, 2009
Weekend of the Year
I am out headed to Austin for the Texas A&M Titans Lobstorfest/Reunion that occurs every year. I believe there like 65 Titans scheduled to convene at Britt Harris house (CIO of TRS) tonight into tomorrow. It will be awesome, catching up with friends, talking markets, being goofy, swimming in Lake Austin, and having a grand time.
The market didn't quite roll over like I thought they would. The close will be interesting. Futures are finally back to a more normalized volume but amazingly NYSE volume is again really really light. It is incredible how few market participants are out there. I still think today's top was probably an interim top. Maybe a few days, maybe a few weeks. It is possible that was a long term top. That is what tops look like but I remain doubtful about that. Either way I still think 900 to 910 will likely be seen before 950. Next week will tell the tale.
The pound has been getting crushed the last couple of days after being on a rocket ship higher. Eastern Europe could be a big story next week also. Any move on yields higher should also put a stop on stocks. My guess is this is now looked at as a negative versus a green shoot.
Have an awesome weekend. I will!! :)
The market didn't quite roll over like I thought they would. The close will be interesting. Futures are finally back to a more normalized volume but amazingly NYSE volume is again really really light. It is incredible how few market participants are out there. I still think today's top was probably an interim top. Maybe a few days, maybe a few weeks. It is possible that was a long term top. That is what tops look like but I remain doubtful about that. Either way I still think 900 to 910 will likely be seen before 950. Next week will tell the tale.
The pound has been getting crushed the last couple of days after being on a rocket ship higher. Eastern Europe could be a big story next week also. Any move on yields higher should also put a stop on stocks. My guess is this is now looked at as a negative versus a green shoot.
Have an awesome weekend. I will!! :)
Very Bearish
For those of you not understanding what is going on all you have to do look is look at the 10 year treasury. The market is finally noticing this. It broker higher just like the S&P 500 did last Friday. Same technical pattern.
The jobs number was a very bearish number. How?? All of a sudden the talk is going to flip to the Fed raising rates or pulling liquidity.
I have said numerous times that deflation will lead to inflation. Not inflation will lead to inflation or inflation fears will lead to inflation. What is happening is the rise in yields will completely choke off any recovery. This will choke off commodity usage. Gold slaughtered, oil down, soft commodities down. The inflation talk in the market for America is actually a good thing. It will force the economy down and continue its clensing process. Now the Fed will mess this up and some point pumping more money into the system (I am talking months or even a year out) and the deflation will lead to the inflation.
We failed at 950. I think the market is heading lower. We may see 900 in the next few days.
The jobs number was a very bearish number. How?? All of a sudden the talk is going to flip to the Fed raising rates or pulling liquidity.
I have said numerous times that deflation will lead to inflation. Not inflation will lead to inflation or inflation fears will lead to inflation. What is happening is the rise in yields will completely choke off any recovery. This will choke off commodity usage. Gold slaughtered, oil down, soft commodities down. The inflation talk in the market for America is actually a good thing. It will force the economy down and continue its clensing process. Now the Fed will mess this up and some point pumping more money into the system (I am talking months or even a year out) and the deflation will lead to the inflation.
We failed at 950. I think the market is heading lower. We may see 900 in the next few days.
Thursday, June 4, 2009
Cases Where Inflation Fears are Warranted
Good column in the Wall St. Journal on why there should not be inflation fears unless...then it goes on to list four reasons why inflation may be a concern sooner rather than later.
Not so long ago, we were warned about the prospect of devastating deflation, a widespread decline in wages and prices. Today, we hear equally dire warnings of an outbreak of inflation. It's like preparing for an epochal drought and suddenly being told, "Never mind! Get ready for a flood of Biblical proportions."
and
An immediate outbreak of inflation is improbable. Consumer prices in industrialized countries have risen less in the past year (0.6%) than in any 12 months since the Organization for Economic Cooperation and Development began keeping records in 1971. In the U.S., unemployment is at 8.9%, and forecasters see it hovering above 9% into 2011. American industry is operating further from full capacity than at any time since the Fed began keeping track in 1948.
and
But what would have to happen for inflation to soar above the 2% target that most Fed officials set for their favorite gauge?
It then goes on to list four things that could bring on inflation.
Not so long ago, we were warned about the prospect of devastating deflation, a widespread decline in wages and prices. Today, we hear equally dire warnings of an outbreak of inflation. It's like preparing for an epochal drought and suddenly being told, "Never mind! Get ready for a flood of Biblical proportions."
and
An immediate outbreak of inflation is improbable. Consumer prices in industrialized countries have risen less in the past year (0.6%) than in any 12 months since the Organization for Economic Cooperation and Development began keeping records in 1971. In the U.S., unemployment is at 8.9%, and forecasters see it hovering above 9% into 2011. American industry is operating further from full capacity than at any time since the Fed began keeping track in 1948.
and
But what would have to happen for inflation to soar above the 2% target that most Fed officials set for their favorite gauge?
It then goes on to list four things that could bring on inflation.
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