Sunday, September 30, 2012

Fed Myth Dispelled

Time and again, traders are told "don't fight the Fed". But how can one not fight the Fed, when there is fighting inside the Fed itself? Lacker, Fisher, Plosser, Bullard, and George, all came out in the last few weeks publicly opposing QEInfinity. The latest economic numbers are staring the Fed right in the face with increasingly obvious confirmation of its mere impotence. Fed cannot revive a weak end demand, cannot replace a lack of pro-growth policies, cannot stop an upcoming recession. Yes, I am looking for a recession to revisit our great nation, and Fed cannot do a darn thing about it. Q2 GDP grew just 1.3%, Mfg ISM report tomorrow may show fourth straight month of contraction, and durable goods orders growth is all but gone.

click on chart to enlarge

Wednesday, September 26, 2012

The Real EZ Crisis

I said here way too many times, that EZ economy will deteriorate and cause the next phase of crisis.
Yesterday's anti-austerity protest in Spain is one more example of things yet to come. With PIIGS unemployment reaching catastrophic levels, there will be even more angry folks (with ample time on their hands) on the streets voicing their discontent with politicians.
I am sure Mr. Draghi will try to make us believe that things are stabilizing in EZ. Maybe he can also explain to us why the chart below keeps on making new highs?

cick on chart to enlarge

Friday, September 21, 2012

Last Gasp Higher?

Stock market "is climbing a wall of worry". But the following chart may just be too much to overcome. Look at the divergence between Dow Industrials, Dow Transports, and Crude Oil. Transports are not only signaling Dow Theory Non-confirmation, but are now also breaking down in concert with Oil. Traders, this is a big deal!
click on chart to enlarge

Monday, September 17, 2012

Put/Call At Support Again

Contrarian indicators work only when there are no Central Planners involved. Nonetheless, Put/Call ratio is at 0.50 support. Equity longs are not advised at this level, unless Ben and Mario are on your side.
click on chart to enlarge

Sunday, September 16, 2012

AAPL - Scary Chart Comparison

This universally loved stock just keeps on making new highs. The fundamentals are strong, and there seems to be no reason for a major pullback.

But something on its weekly chart caught my eye...

click on chart to enlarge

Friday, September 14, 2012

Trying To Keep Sane

Fed Lunacy is creating euphoria in inflation protection strategies. It looks like portfolio managers are grabbing everything that is not nailed down. Commodities and stocks are in heaven, while long-term bonds are sliding with yields rising. Wait!!! Say what? Let's exhale and remember what was intended in Fed's heroic actions of QEInfinity. They are supposedly buying the long-term securities in order to keep their yields down, thus providing low-rate financing for housing, while allowing purchasers to qualify for higher balances on mortgages, and therefore theoretically increasing the prices of homes.

So take a look at some charts below. 5-yr UST-TIPS breakeven inflation rate is breaking out. There is a rout going on in the treasury market - bond investors are screaming "inflation" at the top of their lungs.

But after QE1, 2, and Twist, in which Fed bought over $2T of government securities, Case Shiller HPI 10 and 20-city composites rose a measly 0.1% and 0.5% respectively YoY in June of 2012.

Fed is pushing on a string.

click on charts to enlarge

Thursday, September 13, 2012

Fed Lunacy - Larger Training Wheels

We all had to learn how to ride the bicycle with training wheels at first. It was a great practice and a confidence booster. After we grew into the age, when we no longer needed the training wheels, our parents took them off. While it was a little wobbly in the very beginning, we regained the balance shortly and rode the two-wheeler without a problem ever since.

Today, Federal Reserve decided to increase the size of the training wheels, and essentially made them the main wheels for as long as U.S. economy cannot ride without them. When and how exactly the training wheels will come off is anyone's guess. With very little credible evidence of benefit to the economy from previous QE, one has to wonder how long it will take the market to figure out that we are on a clear path towards a wreck. The wheels, which where put on today, are so oversized that the bicycle itself will tip over, thus defeating their purpose of help and serving as a source of an accident for the rider - the economy.
Let's get off the bike and walk through what exactly happened today.

Fed announced that it will purchase MBS in the open market, $40B of them a month, open-ended.  Supposedly this will keep the mortgage rates very low and let the housing market stay energized, while creating new jobs and wealth for American consumers, who will in turn spend more and keep the economy growing, or even make it grow faster. What a brilliant plan!!
So what exactly will consumers get out of the QEInfinity? Because MBS market is not as liquid as treasuries, let's assume that Fed gets a bigger bang for its (or more correctly, OUR) buck and rates on 30-yr. mortgage will instantly drop by 50 bps from the current level. This will result in savings of roughly $66 a mo. for qualified home purchasers and refinancers, based on the median 2012 U.S home mortgage application size of $235K. Hurray!
But what Federal Reserve will not tell you is that today, since the FOMC announcement, gold futures went up $40 per oz., and oil futures touched the highest level since April and are now just a dollar away from the century mark per barrel. Are you getting the picture yet? $40B of newly printed money every month will have to find its home in commodities and other hard assets - due to risk of inflation. So those monthly mortgage savings will be more than eaten up by higher prices at the gas pump and the grocery store, and by higher home utilities costs!

So much for extra disposable income to grow the economy. Or perhaps Fed assumes that we will ride our bicycles with training wheels to work?

Wednesday, September 12, 2012

DIA vs IYT - Divergence

How much longer can Dow Industrials go up without Dow Transports?

click on chart to enlarge

Tuesday, September 11, 2012

SOX vs NDX - Decision Time

We have been here once before. We are here again. History repeats itself.

click on chart to enlarge

Monday, September 10, 2012

Friday, September 7, 2012

Just Be Quiet!

An official STFU is in order to myself. I have been too preoccupied with the negatives and missed a simple fact - there are too many traders like me out there, who are too negative on everything. We (shorts) worry about world-wide economic collapse, intelligently digest every piece of new negative data, try to predict the next protracted downturn in corporate earnings, identify every non-confirming fundamental and technical signal, which should stop the rally - all with complete dismay, as the market demolishes our positions and takes out our stops. We underestimate the will and power of our politicians, central bankers, and CEOs to prop up the market any possible way they can. This is the time to yield to two longs, who have more money than all shorts combined - ECB's Mario and Fed's Ben. Preserve the capital and live to fight another day - the rules of trading survival. I will remain quiet for the time being, as the ideas in my head are still the same - this rally is the result of CB's liquidity infusion, and is highly suspect due to lack of many fundamental and technical underpinnings.

Wednesday, September 5, 2012

Market Update - ISM and FDX

I wanted to quickly update my readers on two very important developments in the market today.

At 10 am eastern, we got a confirmation of global manufacturing contraction. Back-to-back monthly sub-50 reading on ISM Mfg PMI is the first since U.S. recession ended in 2009. There is still some room for disappointment, as you can see from the chart below, index has oscillated mainly between 45 and 60 for the last 30 or so years.
click on chart to enlarge
More importantly, I would like to point out the employment component. Printer-in-chief (Bernanke) is worried about stubbornly high unemployment, and is getting ready to fire up the printing press. He cut rates 10 times in 2007 - 08, and it still took years to reinvigorate the growth in employment back then. As the Fed Funds Rate is at 0% at the moment, I am finding it very hard to believe that his new efforts are going to pay off. ISM Mfg Employment Index is trending lower again, and it may influence NFP lower over time.
click on chart to enlarge
After the bell, FDX warned, as it pre-announced first earnings drop in three years. I quickly decided to plot it over IYT (Dow Jones Transportation Average ETF), and DIA (Dow Jones Industrial Average ETF). As you can see, the Transports are not confirming the new highs in the Industrials. This is called a Dow Theory Non-confirmation signal, and usually leads to a broad market sell-off.
Read FDX commentary on the reasons for the miss, and you will understand why the stock market is currently in the hands of a few puppet masters.
click on chart to enlarge

Saturday, September 1, 2012

China Mfg PMI In Contraction

On Friday night, after Fed Printer-in-chief gave us another QE hint, we received one more warning about China's economic slowdown. CFLP Mfg PMI is in contraction for the first time since Nov of 2011.

I pointed out in my post on April 3rd how CFLP Mfg PMI has topped out in March or April in four out of the last five years. It looks like this year will not be an exception.
click on chart to enlarge
You can see how Shanghai Composite and FXI follow China Mfg PMI very closely. Chinese stocks are breaking down.
click on chart to enlarge
I really think that China's economic slowdown is going to pose more threat to U.S. economy and stock market than many expect.