Just Another Manic Monday – $1.25Tn ESM Edition

Good morning! 

We've got to respect $3.5Tn and let's use our Futures lines as bullish jumping points.  They work out to roughly Dow 13,200, S&P 1,400, Nas 3,075, NYSE 8,250 and RUT 840.  No point in over-thinking it, it's MORE FREE MONEY and really, if all these guys (because none of this is set – just rumors) do what the MSM is trying to convince you they will do – That's over 6% of the ENTIRE PLANET'S GDP in additional stimulus and then we're on our way to Dow 1,600 and S&P 1,600.  

So the DDM trade from last week, our last 10 bullish trade and a few more will be appropriate – IF we hold these levels but, IF we fail them – then what can possibly stop the market slide if $3.5Tn in new QE promises isn't going to do it?  

That means that, this morning, despite the bullish turn of events (which we anticipated last week) we're more inclined to cash out our bullish trades into the excitement and press our bear bets and TOMORROW, if we're still over our levels – THEN we will scramble to add some aggressive bullish trades to our virtual portfolios.  

 Again, I cannot stress enough that CASH is my preferred position because this market is tough to call and you need to be very flexible and very nimble to trade it.  Since most people are not – my general recommendation is to stay in cash until a more obvious set-up presents itself.  This is more like an inflection point, where we could go up or down in either direction – very quickly and for no particular reason.  

It's very hard to trade this way but if you want to buy low (bullish) and sell high (bearish) then you have to learn to take unpopular stands against the crowd.  You also have to learn when to quit, which is why we set these lines (generally our 7.5% lines on the Big Chart) where you take your loss and walk away – until we get to the next cross that we think may be rejected.  Keep in mind that, if true – there's no possible way to fight a $3.5Tn injection of capital.  If not true, all the gains we're seeing this morning and the rest of the week can be erased in a day.  

Our DDM play last week was the May $70/75 bull call spread at $2.10 for the Dow over 13,200 and you can sell puts against anything you want to own for $2 to drop the next to .10 on the $5 spread with DDM now at 70.24.  This trade isn't going anywhere – there's no rush.  It's easy to get more bullish if the move isn't BS.  What's hard is getting these cheap entries on bearish positions when the market is jammed up in the morning and the VIX is below 15 – these are the opportunities to buy low, not chasing bullish positions.  

Did you all catch StJ's AAPL vs Tech sector chart this weekend?  Don't forget those Tech earnings INCLUDE the AAPL partners who are also doing great.  They INCLUDE PCLN, NFLX, BIDU, LULU and all those other "great" momentum stocks who, as a group, are DOWN SIGNIFICANTLY in total earnings from last year.  

This is every all theater and nothing more – as Shakespeare warned us 400 years ago:  

Life's but a walking shadow, a poor player

That struts and frets his hour upon the stage

And then is heard no more: it is a tale

Told by an idiot, full of sound and fury,

Signifying nothing.

At the open: Dow +0.69% to 13171. S&P +0.78% to 1408. Nasdaq +0.73% to 3090.

Treasurys: 30-year -0.15%. 10-yr +0.03%. 5-yr +0.07%.

Commodities: Crude +0.05% to $106.92. Gold +1.05% to $1682.35.

Currencies: Euro +0.34% vs. dollar. Yen +0.34%. Pound -0.52%.

Market preview: Dow and Nasdaq futures build on early gains on the merest whiff of more possible QE from Ben Bernanke, although the S&P Benchmark is -0.35% and the dollar takes a fall. Lions Gate (+3.6%) gives back some of its gains made following theroaring box office success of the "Hunger Games." Later: Pending Home Sales, Dallas Fed Manufacturing Outlook 

Key to Bernanke's view of the economy is his belief cyclical rather than structural issues are behind the weakness in the labor market. "If this assessment is correct, then accommodative policies  to support the economic recovery will help address this problem." S&P 500 +0.6%, Gold +1%, Crude +0.2%, Copper +1.3%. UUP-0.3% premarket.

Long-term Treasury yields remain higher as Bernanke hints at additional Fed ease – saying faster growth will be necessary to lock in and add to recent labor market improvements. The long bond +4 bps to 3.35%, the 10-year +3 bps to 2.26%.

Philadelphia Fed President Plosser tells a German conference central banks should not have unfettered ability to expand their balance sheets and the Fed's partaking of such could erode fiscal discipline. Plosser considers price stability the Fed's "core mandate," a view the Chairman doesn't seem to share. 

The Fed is likely to hint at QE3 in its April meeting, tweeted Bill Gross over the weekend. The opinion is at odds with the Fed's last policy statement in which it upgraded its view of the economy. Pimco's Total Return Fund has boosted its holdings of MBS, likely to benefit from more QE as the paper would be a target of Fed purchases.

"It looks like they have crossed the Rubicon," says former BOJ member Eiji Hirano of the bank's decision to expand QE and set a positive inflation target. Far from filling the output gap, Hirano envisions a "nightmare scenario" of a weaker yen, stocks, and JGBs as the central bank is viewed as financing government spending.

Feb. Chicago Fed National Activity Index: -0.09 vs. +0.33 prior (revised from +0.22). The index's 3-month moving average increased to +0.30% – marking its highest level since May 2010.

Feb. Pending Home Sales: -0.5% to 96.5 vs. +1% expected; +2.0% prior and +9.2% Y/Y. "The spring home buying season looks bright because of an elevated level of contract offers so far this year," NAR's Lawrence Yun says.

Irish house prices are steepening their decline, down 17.8% Y/Y in February, against a 17.4% drop in January, and 10.8% a year ago. The official data has prices off 49% from the peak, and Davy chief economist Conall Mac Coille believes the bottom won't come until they've declined 65-70%. 

Angela Merkel confirms an earlier report that she favors boosting the eurozone's firewall by allowing the €200B left in the EFSF to "run parallel" to the €500B in the ESM "until it has been paid back by the program countries." Such a move would enable Merkel to avoid the need to seek domestic approval for increasing Germany's bailout exposure.

The EU "core" gets reduced as Citi's Jorgen Michelsremoves the Netherlands from the group of rock-solid credits. While the government has just a 66% debt/GDP ratio (vs. 88% EU average), the nation's highly leveraged consumers are sucking wind from tight financial conditions and Dutch banks are increasingly reliant on ECB liquidity. EWN +10% YTD. 

Last week's Dow and S&P slide should be viewed as a "reality check," Josh Brown writes, as China concerns mount and housing data turns negative, plus we're nearing the "sell in May" time of year. “If what we’ve just seen since last Monday represents the start of a new [broad] trend, it will be hard for the buyers to maintain their excitement,” Brown says.

Here's the beginning of wage inflation:  As concerns about a Chinese slowdown mount, the country's rising wages also have foreign investors on edge. Double-digit annual wage growth is now a fact of life for many firms, and consulting firm InterChina believes China's wages will surpass Mexico's in 5 years. Making matters worse are very high turnover rates, as workers prove happy to jump ship upon seeing a slightly better offer. (also) 

One of my old projects:  Technology to harness the power of the ocean to meet energy needs struggles to meet the high expectations of the EU. Funding constraints threaten progress toward commercial deployment, while analysts say meeting a goal of creating gigawatts of energy from wave and tidal sources by 2020 is unlikely. Still pushing forward is Siemens (SI), with its expectation to eventually meet 3%-4% of the world's global energy demand through the nascent technology.

"TVIX only $6.50 above fair value," tweets a wise guy as shares in the leveraged ETN are hammered again this morning, -8.4%to $6.56, bringing the decline to 55% in less than 3 days. ETN pricescan vary widely from NAV, leading to excessively high premiums when shares become dear, and then the correction when the issuer prints up more.

People began queuing for entrance on Friday, but no this isn't an Apple product launch, but Supreme Court hearings on the constitutionality of Pres. Obama's healthcare overhaul, which are due to start today. The case could have implications for dozens of companies, and could define the limits of Congress' power. A ruling is expected in June.

From ZHedge:  

 

While it appears to us that Bernanke's message was loud and clear, there are those who need validation and peer-confirmation. Such as that from the firm whose alumni run the Fed, namely Goldman Sachs. Below is Jan Hatzius' take on the "surprising" Chairman speech which essentially said QE can and will come at any time there is a downtick in the market, masked by the unemployment rate rising to its fair value, as estimated by Gallup, somewhere around 9%.

From Goldman Sachs:

BOTTOM LINE: Fed Chairman Bernanke argued that the outperformance of labor market indicators recently may reflect a “catch-up” from unusual weakness in jobs during the recession. By implication, continued declines in unemployment will require faster GDP growth in the future. He also continued to argue that most of the increase in long-term unemployment is cyclical rather than structural in nature. Chairman Bernanke’s read on the state of the labor market was consistent with an accommodative stance for monetary policy—though he did not directly call for additional easing.

MAIN POINTS:

1.    Federal Reserve Chairman Ben Bernanke spoke on recent labor market developments before the annual meeting of the National Association for Business Economics (NABE) today. His comments focused on two aspects of the current debate on the labor market: (1) the outperformance of labor market data relative to GDP growth; and (2) how much of the increase in long-term unemployment reflects cyclical rather than structural factors.

2.    Chairman Bernanke discussed three alternative explanations for the better performance of labor market indicators recently. First, the surprisingly large drop in the unemployment rate may reflect statistical noise, and that GDP could be revised higher in the future. However, he said that there is no specific evidence to support this conclusion at this point, and in fact Gross Domestic Income (GDI)—an alternative measure of aggregate activity—was weaker than GDP over the last year. Second, the decline in the unemployment rate could be overstating the improvement in the labor market, as the drop partly reflects potential workers exiting the labor force. However, Chairman Bernanke argues that the decline in broader measures of labor underutilization (he cites the BLS’s U-5 measure) casts doubt on this explanation. Third, the large decline in the unemployment might reflect “a catch-up from outsized job losses during and just after the recession”. Chairman Bernanke ultimately finds this argument most compelling, and presents some simple supporting evidence.

3.    The chairman’s comments on the recent decline in the unemployment thus cut two ways. On the one hand, the drop in the unemployment rate is likely a real and encouraging development. On the other hand, because the outperformance compared to GDP likely reflects a catch-up from past weakness then, in Chairman Bernanke’s words, “further improvements in unemployment will likely require faster economic growth than we experienced during the past year”.

4.    The second portion of the Chairman’s speech focused on whether the increase in long-term unemployment reflected cyclical or structural factors. Consistent with his existing views, Chairman Bernanke argued that elevated structural unemployment is mostly a cyclical phenomenon, and that structural factors can explain only a small (and possibly temporary) part of the increase.

5.    On monetary policy, the Chairman said that faster growth—perhaps needed to see further declines in unemployment—“can be supported by continued accommodative policies”. He also argued that because the increase in long-term unemployment was primarily cyclical, “then accommodative policies to support the economic recovery will help address this problem as well”. These statements were not necessarily calls for additional easing, but they clearly supported the Fed’s current accommodative stance.