What a great morning!
Well, if you are a futures bull anyway. We keep telling you that's where the action is. Last Thursday we gapped up 100, Friday another 50 and Monday another 50. Wow, what a market right? And where did we close a week ago Wednesday? 10,337. And where did we close yesterday after 200 points of futures gains? 10,452. So we LOST 80 points during real trading hours and gained 200 when no one was looking – yet no one is being arrested – go figure…
I already made my skeptical note to Members this morning as the pre-market action tacked on another 50-point gain that pretty much started at 3am on the dot as the Hang Seng threatened to fail 21,500, which would have been a serious breakdown on a triple test over 5 days. It still looks to me like the Hang Seng will be looking at a 10% correction in the very near future but the pump crowd aims to put off that day of reckoning for as long as possible.
The Nikkei, on the other hand, had their own gap up, back over our 10,200 target (we went long on EWJ again yesterday) but failed to hold it and closed at 10,177, up 1%. Once the Nikkei closed, the dollar was allowed to drop back to 89.5 Yen and the Euro was jammed up from $1.451 to $1.458 but that was nothing compared to the Pound, which went from $1.623 at 3:45 to $1.636 at 6:45 – a spectacular move that allowed copper to get back to $3.17 (up 1% from yesterday's close) along with 1% gains in Silver ($17.50), Gold ($1,135) and Oil ($71.50) all of which made great futures shorts at those prices.
The dollar is being jammed down on whispers in Europe that the Fed will announce today that the US Economy is much improved BUT they have no intention of raising rates in the foreseeable future. This enables the burgeoning dollar carry-trade to continue and, as John Carney points out at Clusterstock, it allows the Fed to keep buying Mortgage Backed Securities from the Banks as fast as they can turn them over.
The Fed can do this with confidence because the MBS's are, in turn, guaranteed by FRE and FNM who are, in turn, backed by the US Government – leaving US, the taxpayers, on the hook for Trillions of dollars of additional bank debt while the banks use their crap MBS paper to pay back our TARP loans. What a deal – we gave banks cash when the dollar was high, they give us loans they can't collect, we give them more cash, they inflate the cash and pay us back while the dollar is worthless. No wonder GS scrambled to be declared a bank last year!
Meanwhile, actual lending activity by the top 22 TARP recipients fell ANOTHER 1% in October, the 7th straight month of declines for the group that we bailed out so they could keep lending to the American people. Instead they continue to pull money away from the American consumers by reducing home equity loans, lines of credit, credit card loans and even commercial real estate lending was down. Driving down available credit while driving up commodity prices is a recipie for disaster right out of the Summer 2008 play book but la di dah, the markets just move along as if they couldn't be bothered to think of such ancient history because, after all – THIS time it's different.
Maybe it is different this time. Next week, Congress will vote to expand our debt ceiling to $14Tn, almost 40% higher than it was in 2007 – now THAT's an expanding economy, right? Let's think about this in terms of your own family's finances. You are broke but your Uncle Sam has been bailing you out. To do so, he has gone so far in debt that it will take him 5 years of every cent he earns to pay it back. You start getting worried that he won't be able to bail you out any more and consider whether or not you really need that new Hummer but then Uncle Sam comes over for Christmas and announces the bank is going to let him go ANOTHER 40% deeper into debt, enough to last him all the way until next Fall! Well I don't need to tell you what a great Christmas will be had by all as we celebrate Uncle Sam's (and our own) good fortune – everything is just going to be just fine…
"Just fine" is NOT the title of the latest Moody's report on the outlook for 2010 as the credit rating agency raised the prospect that future tax rises and spending cuts could trigger social unrest in a range of countries from the developing to the developed world. It said that in the coming years, evidence of social unrest and public tension may become just as important signs of whether a country will be able to adapt as traditional economic metrics. Signalling that a fiscal crisis remains a possibility for a leading economy, it said that 2010 would be a “tumultuous year for sovereign debt issuers”. Moody's added that the sheer quantity of debt to be raised by Britain and other leading nations would increase the risk of investor fright.
According to the report- Even if countries reached agreement on the depth of the cuts necessary to their budgets, they could face difficulties in carrying out the cuts. The report, which comes amid growing worries about Britain’s credit rating, said: “In those countries whose debt has increased significantly, and especially those whose debt has become unaffordable, the need to rein in deficits will test social cohesiveness. The test will be starker as growth disappoints and interest rates rise.” It said the main obstacle for fiscal consolidation plans would be signs not necessarily of economic strength but of “political and social tension.” Greece, where the government has committed to drastic cuts in public expenditure, has suffered a series of riots over the past year which are thought to have been fuelled by economic pressures.
Not to worry though, that angry mob of protesters is clearly in the minority according the the Bloomberg Professional Global Confidence Index, which fell to 58.9 this month from 60.3 in November but is still very close to the all-time high reading of 61.7 so everything MUST be fine. The confidence gauge for Western Europe rose to 50.9 from 47.7 last month, exceeding 50 for the first time. Bloomberg users in Spain remained the most pessimistic in Europe even as its confidence index rose to 24.5 from 17.7 in November. Spain accounted for almost half of the Euro region’s increase in unemployment over the past year. Sentiment dipped in Japan on concern the yen’s rise to a 14-year high against the dollar will threaten profits and market share for companies including Sony Corp. The confidence gauge for Japan dropped to 29.5 from 29.9, while Asia’s index rose to 76.2 from 76.
Don't be fooled by the pre-market smack-down of the Dollar. The Euro hit $1.45 in yesterday's trading, the lowest level since last October, when the dollar was 10% higher, and the Dollar briefly punched through that critical 77 line we've been expecting all month (by the way, investing in leveraged FOREX as it goes up 5% in a single month based on our pick is the kind of play that made George Soros a Billionaire!) as we get into the sqeeze zone that should take us up to about 80 again. Sadly, we are not FOREX traders but we do have our UUP and our TBTs so we're pretty happy with the unfolding dollar story (and it doesn't hurt our commodity shorts either).
The dollar bears are counting on the Fed to keep the spigot wide open, keeping the dollar in check, but there is little that Bernanke can do or say to loosen monetary policy any further than he already has. If anyone can do it though, Bernanke can, as he's just been selected Time's Man of the Year for putting lipstick on this pig of an economy. The last 30-year note auction had to be somewhat of a splash of cold water for the Fed though as notes hit 4.5%, which means the crack-spread on mortgages is down from 3% to 1.5% this year and, if there's one thing you can count on the Fed to do – it's to protect bank profits at all costs. So the Fed may surprise us and say that they find it "necessary" to raise rates sooner rather than later but, more likely, they will try to talk the long bonds back down first as banks are concerned people simply won't buy mortgages with rates over 6% and then what are they going to do with all the homes they are repossessing?
We got our CPI report today and, as expected, we were up 0.4%. Keep in mind that yesterday's PPI report was up 1.8% so even if that 0.4% number were taken at face value, it means Producers were unable to pass through 1.2% of their increased costs to consumers in November. The reality is that the core CPI was 0%, DOWN from 0.3% in October and 0.2% lower than expected. This is TERRIBLE for Q4 corporate earnings and I THINK we do still buy stocks for earnings, not just because some monkey on TV tells us to BUYBUYBUY, right?
Energy costs were up a whopping 4.1% for consumers in November so it's no surprise they didn't have any money left to pay for anything else. That is nearly triple the 1.5% increase in October, merry Christmas from Goldman Sachs' commodity department to you! Don't worry though, average weekly earnings went up 0.1% so it will only take 41 months of wage increases for people to get caught up to this month's commodity gains – everything is "just fine."
We're already all nice and cashy for the holidays so consider these comments from the sidelines but the bets we are placing are more and more bearish every day. Of course they are not working, but we play the market during the day and during the day is when the market goes down. What we have neglected to do is play the futures pump for the past week as we keep expecting something very bad to happen and boy would we feel silly if we were just 55% bearish when this house of cards comes tumbling down.
We'll see what the man of the year has to say for himself this afternoon. Usually we play both sides of a Fed meeting and we thank the pumpers for giving us a cheap entry on the DIA puts to get started.